Royal Caribbean Cruise Lines 2012 Annual Report Download - page 60

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PART II
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, 2012 and December 31, 2011,
we maintained 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 inter-
est rate on the balance of the unsecured term loan,
which was $315.0 million as of December 31, 2012,
from a fixed rate of 5.41% to a LIBOR-based floating
rate equal to LIBOR plus 3.87%, currently approxi-
mately 4.42%. These interest rate swap agreements
are accounted for as fair value hedges. In addition,
during 2012, we terminated our interest rate swap
agreements that effectively changed $350.0 million
of debt with a fixed rate of 7.25% to LIBOR-based
floating rate debt in order to manage our percentage
of fixed rate debt. Terminating the swaps did not
result in a gain or loss. Upon termination of these
swaps, we received net cash proceeds of approxi-
mately $60.6 million. A $60.1 million increase to the
carrying value of the debt is being amortized to reduce
interest expense over the remaining life of the debt.
The estimated fair value of our long-term fixed rate
debt at December 31, 2012 was $4.5 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 $5.7 million as of December 31, 2012,
based on the present value of expected future cash
flows. A hypothetical one percentage point decrease
in interest rates at December 31, 2012 would increase
the fair value of our long-term fixed rate debt by
approximately $51.5 million, net of an increase in the
fair value of the associated fixed to floating 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. 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 forecasted 2013
interest expense by approximately $31.6 million,
assuming no change in foreign currency exchange
rates. At December 31, 2012 and December 31, 2011,
we maintained forward-starting interest rate swap
agreements that beginning April 2013 effectively con-
vert the interest rate on approximately $627.2 million
of the Celebrity Reflection unsecured amortizing term
loan balance from LIBOR plus 0.40% to a fixed-rate
(including applicable margin) of 2.85% through the
term of the loan. These interest rate swap agreements
are accounted for as cash flow hedges. In addition,
during 2012, we entered into forward-starting interest
rate swap agreements that hedge the anticipated
unsecured amortizing term loans that will finance our
purchase of Quantum of the Seas and Anthem of the
Seas. Forward-starting interest rate swaps hedging
the Quantum of the Seas loan will effectively convert
the interest rate for $735.0 million of the anticipated
loan balance from LIBOR plus 1.30% to a fixed rate
of 3.74% (inclusive of margin) beginning in October
2014. Forward-starting interest rate swaps hedging
the Anthem of the Seas loan will effectively convert
the interest rate for $725.0 million of the anticipated
loan balance from LIBOR plus 1.30% to a fixed rate of
3.86% (inclusive of margin) beginning in April 2015.
The fair value of our floating to fixed interest rate
swap agreements was estimated to be a liability of
$55.5 million as of December 31, 2012 based on the
present value of expected future cash flows.
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. A
hypothetical one percentage point increase in sterling
LIBOR rates would increase our forecasted 2013 rent
expense by approximately $2.7 million, based on the
exchange rate at December 31, 2012.
Foreign Currency Exchange Rate Risk
Our primary exposure to foreign currency exchange
rate risk relates to our ship construction contracts
denominated in euro and our growing international
business operations. We enter into foreign currency
forward contracts, collar options and cross currency
swap agreements to manage portions of the exposure
to movements in foreign currency exchange rates.
The estimated fair value as of December 31, 2012 of
our euro-denominated forward contracts associated
with our ship construction contracts was an asset of
$4.1 million, based on the present value of expected
future cash flows. As of December 31, 2012, the aggre-
gate cost of our ships on order was approximately $3.6
billion, of which we had deposited $131.0 million as
of such date. Approximately 49.7% and 43.3% of the
aggregate cost of the ships under construction was
exposed to fluctuations in the euro exchange rate at
December 31, 2012 and December 31, 2011, respectively.
A hypothetical 10% strengthening of the euro as of
December 31, 2012, assuming no changes in compar-
ative interest rates, would result in a $205.3 million
increase in the United States dollar cost of the foreign
currency denominated ship construction contracts
exposed to fluctuations in the euro exchange rate.
Our growing international business operations subject
us to an increasing level of foreign currency exchange
risk. We transact business in many different foreign
currencies and maintain investments in foreign oper-
ations which may expose us to financial market risk
resulting from fluctuations in foreign currency exchange