Royal Caribbean Cruise Lines 2007 Annual Report Download - page 23

Market risk associated with our long-term fixed rate debt is the
potential increase in fair value resulting from a decrease in inter-
est rates. At December 31, 2007, our interest rate swap agreements
effectively changed $350.0 million of fixed rate debt with a
weighted-average fixed rate of 7.25% to LIBOR-based floating
rate debt, and €1.0 billion of fixed rate debt with a weighted-
average fixed rate of 5.625% to EURIBOR-based floating rate
debt. We have cross currency swap agreements that effectively
change €300.0 million of the €1.0 billion floating EURIBOR-
based debt to floating LIBOR-based debt. (See Foreign Currency
Exchange Rate Risk for further information). The estimated fair
value of our long-term fixed rate debt at December 31, 2007, was
$5.0 billion using quoted market prices, where available, or using
the present value of expected future cash flows. The fair value of
our associated interest rate swap agreements was estimated to be
an asset of $23.4 million as of December 31, 2007 based on the
present value of expected future cash flows. A hypothetical one
percentage point decrease in interest rates at December 31, 2007
would increase the fair value of our long-term fixed rate debt, by
approximately $99.5 million, net of an increase in the fair value of
the associated interest rate swap agreements.
Market risk associated with our long-term floating rate debt is the
potential increase in interest expense from an increase in interest
rates. A hypothetical one percentage point increase in interest
rates would increase our 2008 interest expense by approximately
$19.3 million, assuming no change in exchange rates.
Market risk associated with our operating lease for Brilliance of
the Seas is the potential increase in rent expense from an increase
in sterling LIBOR rates. As of January 2008, wehaveeffectively
changed 50% of the operating lease obligation from a floating
rate to a fixed rate obligation with a weighted-average rate of
4.76%through rate fixings with the lessor. A hypothetical one
percentage point increase in sterling LIBOR rates would increase
our 2008 rent expense by approximately $2.2 million, based on
the exchange rate at December 31, 2007.
Foreign Currency Exchange Rate Risk
Our primary exposure to foreign currency exchange rate risk relates
to our ship construction firm commitments denominated in euros.
We enter into euro-denominated forward contracts to manage
this risk. The estimated fair value of such euro-denominated
forward contracts at December 31, 2007, was a net unrealized gain
of approximately $413.7 million, based on the present value of
expected future cash flows. At December 31, 2007, approximately
7.7%of the aggregate cost of the ships was exposed to fluctua-
tions in the euroexchangerate. A hypothetical 10% strengthening
of the euro as of December 31, 2007, assuming no changes in
comparative interest rates, would result in a $620.3 million increase
in the United States dollar cost of the foreign currency denomi-
nated ship construction contracts. This increase would be largely
offset by an increase in the fair value of our euro-denominated
forward contracts.
As discussed above, we have cross currency swap agreements
that effectively change €300.0 million of floating EURIBOR-
based debt to $389.1 million of floating LIBOR-based debt at
December 31, 2007. (See Interest Rate Risk for further informa-
tion). The estimated fair value of these cross currency swap
agreements at December 31, 2007, was an asset of approximately
$54.0 million based on the present value of expected future
cash flows. A hypothetical 10% strengthening of the euro as
of December 31, 2007, assuming no changes in comparative
interest rates, would result in an increase in the fair value of the
€300.0 million of floating EURIBOR-based debt by $43.8 million,
offset by an increase in the fair value of the cross currency swap
agreements of $44.7 million.
Also, we consider our investments in foreign subsidiaries to be
denominated in relatively stable currencies and of a long-term
nature. We partially address the exposure of our investments in
foreign subsidiaries by denominating a portion of our debt in our
subsidiaries’ functional currencies (generally euros). Specifically,
we have assigned debt of approximately €466.0 million, or
approximately $679.9 million, as a hedge of our net investment
in Pullmantur and, accordingly, have included approximately
$64.0 million of foreign-currency transaction losses in the foreign
currency translation adjustment component of accumulated other
comprehensive income (loss) at December 31, 2007. A hypothetical
10% increase or decrease in the December 31, 2007 foreign currency
exchange rate would increase or decrease the fair value of our
assigned debt by $68.0 million, which would be offset by a
corresponding decrease or increase in the U.S. dollar value of
our net investment.
Fuel Price Risk
Our exposure to market risk for changes in fuel prices relates to
the consumption of fuel on our ships. Fuel cost (net of the finan-
cial impact of fuel swap agreements), as a percentage of our total
revenues, was approximately 8.9% in 2007, 9.2% in 2006 and 7.5%
in 2005. We use fuel swap agreements to mitigate the financial
impact of fluctuations in fuel prices. As of December 31, 2007,
we had fuel swap agreements to pay fixed prices for fuel with
an aggregate notional amount of approximately $223.9 million,
maturing through 2009. The estimated fair value of these contracts
at December 31, 2007 was an unrealized gain of $68.6 million.
We estimate that a hypothetical 10% increase in our weighted-
average fuel price from that experienced during the year ended
December 31, 2007 would increase our 2008 fuel cost by approxi-
mately $57.4 million. This increase would be partially offset by an
increasein the fair value of our fuel swap agreements maturing in
2008 of approximately $20.8 million.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS continued