Royal Caribbean Cruise Lines 2011 Annual Report Download - page 91

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ROYAL CARIBBEAN CRUISES LTD. 87
changed $350.0 million of debt with a fixed rate of
7.25% to LIBOR-based floating-rate debt plus a margin
of 1.72%, for an interest rate that was approximately
2.49% as of December 31, 2011. Additionally, during
2011, we entered into interest rate swap agreements on
the $420.0 million fixed-rate portion of our Oasis of
the Seas unsecured amortizing term loan. The interest
rate swap agreements effectively changed the unam-
ortized 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%.
These interest rate swap agreements are accounted
for as fair value hedges.
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. During 2011, we entered into forward-starting
interest rate swap agreements 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% (inclusive of
margin). These interest rate swap agreements are
accounted for as cash flow hedges.
The notional amount of outstanding debt and on our
current financing arrangements related to interest
rate swaps as of December 31, 2011 and 2010 was
$1.3 billion and $350.0 million, respectively.
Foreign Currency Exchange Rate Risk
Derivative Instruments
Our primary exposure to foreign currency exchange
rate risk relates to our ship construction contracts
denominated in euros and our growing international
business operations. We enter into foreign currency
forward contracts and cross currency swap agreements
to manage portions of the exposure to movements in
foreign currency exchange rates. Approximately 43.3%
and 2.2% of the aggregate cost of the ships under
construction was exposed to fluctuations in the euro
exchange rate at December 31, 2011 and December 31,
2010, respectively. The majority of our foreign exchange
contracts and our cross currency swap agreements
are accounted for as cash flow or fair value hedges
depending on the designation of the related hedge.
During 2011, we implemented a strategy for benefiting
from anticipated weakness in the euro exchange rate.
As part of that strategy we terminated our foreign
currency forward contracts for Project Sunshine to
allow the exchange rate to float within a predeter-
mined range, essentially creating a floor and a ceiling
around our exposure to the euro-denominated cost of
the vessel. We may adjust the range over time as we
feel appropriate. We effected the termination of a
portion of the contracts by entering into offsetting
foreign currency forward contracts. Neither the origi-
nal nor the offsetting foreign currency forward con-
tracts are designated as hedging instruments. As a
result, subsequent changes in the fair value of the
original and offsetting foreign currency forward con-
tracts are recognized in earnings immediately and are
reported within other income (expense) in our consol-
idated statement of operations. We paid $8.7 million
to terminate the remaining contracts and deferred a
loss of $19.7 million within accumulated other compre-
hensive income (loss) which we will recognize within
depreciation expense over the estimated useful life of
the Project Sunshine ship.
At December 31, 2011, we maintained cross currency
swap agreements that effectively change €150.0 mil-
lion of our €1.0 billion debt with a fixed rate of 5.625%
to $190.9 million of debt at a fixed rate of 6.68%.
Consistent with our strategy for benefiting from antic-
ipated weakness in the euro exchange rate and to
further increase the portion of our €1.0 billion debt
that we utilize as a net investment hedge of our euro-
denominated investments in foreign operations, during
2011, we terminated €250.0 million of our cross cur-
rency swap agreements. Upon termination of these
cross currency swaps, we received net cash proceeds
of approximately $12.2 million and we deferred a loss
of $3.5 million within accumulated other comprehen-
sive income (loss) which we will recognize within
Interest expense, net of capitalized interest over the
remaining life of the debt.
During 2011, we entered into foreign currency forward
contracts to minimize volatility in earnings resulting
from the remeasurement of net monetary assets and
payables denominated in a currency other than the
United States dollar. On a weekly basis, we enter into
an average of approximately $262.0 million of these
foreign currency forward contracts. These instru-
ments generally settle on a weekly basis and are not
designated as hedging instruments. Changes in the
fair value of the foreign currency forward contracts are
recognized in earnings within other income (expense)
in our consolidated statements of operations.
The notional amount of outstanding foreign exchange
contracts including our cross currency swap agree-
ments as of December 31, 2011 and 2010 was $0.9
billion and $2.5 billion, respectively.
Non-Derivative Instruments
We consider our investments in our foreign opera-
tions to be denominated in relatively stable currencies
and of a long-term nature. We partially address the
exposure of our investments in foreign operations by
denominating a portion of our debt in our subsidiaries’