Royal Caribbean Cruise Lines 2007 Annual Report Download - page 22

As a normal part of our business, depending on market conditions,
pricing and our overall growth strategy, we continuously consider
opportunities to enter into contracts for the building of additional
ships. We may also consider the sale of ships. We continuously
consider potential acquisitions and strategic alliances. If any of
these were to occur, they would be financed through the incur-
rence of additional indebtedness, the issuance of additional
shares of equity securities or through cash flows from operations.
Under the Brilliance of the Seas operating lease, we have agreed
to indemnify the lessor to the extent its after-tax return is nega-
tively impacted by unfavorable changes in corporate tax rates,
capital allowance deductions and certain unfavorable determi-
nations which may be made by United Kingdom tax authorities.
These indemnifications could result in an increase in our lease
payments. We are unable to estimate the maximum potential
increase in our lease payments due to the various circumstances,
timing or a combination of events that could trigger such indem-
nifications. Under current circumstances we do not believe an
indemnification in any material amount is probable.
Some of the contracts that we enter into include indemnification
provisions that obligate us to make payments to the counterparty
if certain events occur. These contingencies generally relate to
changes in taxes, increased lender capital costs and other similar
costs. The indemnification clauses are often standard contractual
terms and are entered into in the normal course of business. There
are no stated or notional amounts included in the indemnification
clauses and we are not able to estimate the maximum potential
amount of futurepayments, if any,under these indemnification
clauses. We have not been required to make any payments under
such indemnification clauses in the past and, under current
circumstances, we do not believe an indemnification in any
material amount is probable.
Other than the items described above, wearenot party to
any other off-balance sheet arrangements, including guarantee
contracts, retained or contingent interest, certain derivative
instruments and variable interest entities, that either have, or
are reasonably likely to have, a current or future material effect
on our financial position.
FUNDING SOURCES
As of December 31, 2007, our liquidity was $1.4 billion consisting
of approximately $0.2 billion in cash and cash equivalents and
$1.2 billion available under our unsecured revolving credit facility.
(See Note6. Long-Term Debt toour consolidated financial state-
ments.) We have contractual obligations of approximately $2.0 bil-
lion due during the twelve-month period ending December 31, 2008.
We anticipate these contractual obligations could be funded
through a combination of cash flows from operations, drawdowns
under our available unsecured revolving credit facility, the incur-
rence of additional indebtedness and the sales of equity or debt
securities in private or public securities markets. Although we
believe our existing unsecured revolving credit facility, cash flows
from operations, our ability to obtain new borrowings and/or
raise new capital or a combination of these sources will be suffi-
cient to fund operations, debt payment requirements, capital
expenditures and other commitments over the next twelve-
month period, there can be no assurances that these sources
of cash will be available in accordance with our expectations.
Our financing agreements contain covenants that require us, among
other things, to maintain minimum net worth, fixed charge cover-
age ratio and limit our Net Debt-to-Capital ratio. We were in
compliance with all covenants as of December 31, 2007.
If any person other than A. Wilhelmsen AS. and Cruise Associates,
our two principal shareholders, acquires ownership of more than
30% of our common stock and our two principal shareholders, in
the aggregate, own less of our common stock than such person
and do not collectively have the right to elect, or to designate for
election, at least a majority of the board of directors, we may be
obligated to prepay indebtedness outstanding under the majority
of our credit facilities, which wemaybe unable toreplace on
similar terms. If this were to occur, it could have an adverse
impact on our liquidity and operations.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
FINANCIAL INSTRUMENTS AND OTHER
General
Weareexposed tomarket risk attributable tochanges in interest
rates, foreign currency exchange rates and fuel prices. We manage
these risks through a combination of our normal operating and
financing activities and through the useof derivative financial
instruments pursuant to our hedging practices and policies. The
financial impacts of these hedging instruments are primarily offset
by corresponding changes in the underlying exposures being
hedged. We achieve this by closely matching the amount, term
and conditions of the derivative instrument with the underlying
risk being hedged. We do not hold or issue derivative financial
instruments for trading or other speculative purposes. We monitor
our derivative positions using techniques including market valua-
tions and sensitivity analyses. (See Note 13. Fair Value of Financial
Instruments toour consolidated financial statements.)
Interest Rate Risk
Our exposure tomarket risk for changes in interest rates relates to
our long-term debt obligations and our operating lease for Brilliance
of the Seas.At December 31, 2007, 58% of our long-term debt was
effectively fixed and 42% was floating. We enter into interest rate
swap agreements to modify our exposure to interest rate move-
ments and to manage our interest expense and rent expense.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS continued