Royal Caribbean Cruise Lines 2013 Annual Report Download - page 95
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. At December 31, 2013,
approximately 34.6% of our long-term debt was
effectively fixed as compared to 45.8% as of Decem-
ber 31, 2012. We use interest rate swap agreements to
modify our exposure to interest rate movements and
to manage our interest 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, 2013 and 2012, we main-
tained 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 interest
rate on the balance of the unsecured term loan, which
was $280.0 million as of December 31, 2013, from a
fixed rate of 5.41% to a LIBOR-based floating rate
equal to LIBOR plus 3.87%, currently approximately
4.23%. These interest rate swap agreements are
accounted for as fair value hedges.
During 2013, we entered into interest rate swap agree-
ments that effectively changed the interest rate on
the $650.0 million unsecured senior notes due 2022,
from a fixed rate of 5.25% to a LIBOR-based floating
rate equal to LIBOR plus 3.63%, currently approxi-
mately 3.87%. 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. At December 31, 2013 and 2012, we main-
tained 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 inter-
est 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 mar-
gin) 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 mar-
gin) beginning in April 2015. These interest rate swap
agreements are accounted for as cash flow hedges.
In addition, at December 31, 2013 and December 31,
2012, we maintained interest rate swap agreements
on a portion of the Celebrity Reflection unsecured
amortizing term loan. Beginning April 2013, the inter-
est rate swap agreements effectively converted the
interest rate on the balance of the unsecured term
loan, which was $600.0 million as of December 31,
2013, from a floating rate equal to 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.
The notional amount of interest rate swap agree-
ments related to outstanding debt and on our current
unfunded financing arrangements as of December
31, 2013 and 2012 was $3.0 billion and $2.4 billion,
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, our foreign currency denomi-
nated debt and our international business operations.
We enter into foreign currency forward contracts, col-
lar options and cross currency swap agreements to
manage portions of the exposure to movements in
foreign currency exchange rates. As of December 31,
2013, the aggregate cost of our ships on order was
approximately $4.7 billion, of which we had disbursed
$518.8 million as of such date. Approximately 36.3%
and 49.7% of the aggregate cost of the ships under
construction was exposed to fluctuations in the Euro
exchange rate at December 31, 2013 and 2012, respec-
tively. The majority of our foreign currency forward
contracts, collar options and cross currency swap
agreements are accounted for as cash flow or fair
value hedges depending on the designation of the
related hedge.
During 2013, we entered into foreign currency forward
contracts to hedge €365.0 million of our €745.0 million
5.625% unsecured senior notes due January 2014. These
foreign currency forward contracts are accounted for
as cash flow hedges and mature January 2014.