Royal Caribbean Cruise Lines 2011 Annual Report Download - page 59

PART II
ROYAL CARIBBEAN CRUISES LTD. 55
payments in excess of any new financings for the past
four quarters. Our minimum net worth and maximum
net debt-to-capital calculations exclude the impact of
accumulated other comprehensive (loss) income on
total shareholders’ equity. We are well in excess of all
debt covenant requirements as of December 31, 2011.
The specific covenants and related definitions can be
found in the applicable debt agreements, the majority
of which have been previously filed with the Securities
and Exchange Commission.
DIVIDENDS
In July 2011, our Board of Directors reinstated our
quarterly dividend which had been discontinued
beginning in the fourth quarter of 2008. We declared
and paid a cash dividend on our common stock of
$0.10 per share during the third quarter of 2011 and
declared a cash dividend on our common stock of
$0.10 per share in December 2011 which was paid the
first quarter of 2012.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
FINANCIAL INSTRUMENTS AND OTHER
General
We are exposed to market risk attributable to changes
in interest rates, foreign currency exchange rates and
fuel prices. We manage these risks through a combi-
nation of our normal operating and financing activities
and through the use of 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 valuations and sensitivity
analyses. (See Note 13. Fair Value Measurements and
Derivative Instruments to our consolidated financial
statements under Item 8. Financial Statements and
Supplementary Data.)
Interest Rate Risk
Our exposure to market risk for changes in interest
rates relates to our long-term debt obligations, includ-
ing future interest payments, and our operating lease
for Brilliance of the Seas. At December 31, 2011, approx-
imately 40% of our long-term debt was effectively
fixed and approximately 60% was floating. We use
interest rate swap agreements to modify our exposure
to interest rate movements and to manage our inter-
est expense and rent expense.
Market risk associated with our long-term fixed-rate
debt is the potential increase in fair value resulting
from a decrease in interest rates. We use interest rate
swap agreements that effectively convert a portion of
our fixed-rate debt to a floating-rate basis to manage
this risk. At December 31, 2011, we maintained interest
rate swap agreements that effectively changed $350.0
million of debt with a fixed rate of 7.25% to a LIBOR-
based floating rate equal to LIBOR plus 1.72%, cur-
rently approximately 2.49%. Additionally, during 2011
we entered into interest rate swap agreements on the
fixed-rate portion of our Oasis of the Seas unsecured
amortizing term loan. The interest rate swap agree-
ments effectively changed the unamortized balance
of the unsecured term loan, which was $350.0 million
at inception of the hedge, with a fixed rate of 5.41%,
to LIBOR-based floating rate equal to LIBOR plus
3.87%, currently approximately 4.48%.
The estimated fair value of our long-term fixed-rate
debt at December 31, 2011 was $4.3 billion using
quoted market prices, where available, or using the
present value of expected future cash flows which
incorporates risk profile. The fair value of our fixed to
floating interest rate swap agreements was estimated
to be an asset of $65.6 million as of December 31, 2011
based on the present value of expected future cash
flows. A hypothetical one percentage point decrease
in interest rates at December 31, 2011 would increase
the fair value of our long-term fixed-rate debt by
approximately $59.1 million, net of an increase in the
fair value of the associated fixed to floating interest
rate swap agreements, assuming no changes in foreign
currency exchange rates.
Market risk associated with our long-term floating-rate
debt is the potential increase in interest expense from
an increase in interest rates. We use interest rate swap
agreements that effectively convert a portion of our
floating-rate debt to a fixed-rate basis to manage this
risk. A hypothetical one percentage point increase in
interest rates would increase our 2012 interest expense
by approximately $38.0 million, assuming no change
in foreign currency exchange rates. During 2011, we
entered into forward-starting interest rate swap agree-
ments that beginning April 2013 effectively convert
the interest rate on the Celebrity Reflection unsecured
amortizing term loan balance for approximately $627.2
million from LIBOR plus 0.40% to a fixed rate of 2.85%