Royal Caribbean Cruise Lines 2014 Annual Report Download - page 59

58 Royal Caribbean Cruises Ltd.
PART II
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 man-
age this risk. At December 31, 2014 and December 31,
2013, we maintained interest rate swap agreements
on the $420.0 million fixed-rate portion of our Oasis
of the Seas unsecured amortizing term loan and on
the $650.0 million unsecured senior notes due 2022.
The interest rate swap agreements on Oasis of the
Seas debt effectively changed the interest rate on
the balance of the unsecured term loan, which was
$245.0 million as of December 31, 2014, from a fixed
rate of 5.41% to a LIBOR-based floating rate equal to
LIBOR plus 3.87%, currently approximately 4.20%.
The interest rate swap agreements on the $650.0 mil-
lion unsecured senior notes effectively changed the
interest rate of the unsecured senior notes from a
fixed rate of 5.25% to a LIBOR-based floating rate
equal to LIBOR plus 3.63%, currently approximately
3.86%. These interest rate swap agreements are
accounted for as fair value hedges.
The estimated fair value of our long-term fixed-rate
debt at December 31, 2014 was $2.1 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 a liability of $22.3 million as of December 31, 2014,
based on the present value of expected future cash
flows. A hypothetical one percentage point decrease
in interest rates at December 31, 2014 would increase
the fair value of our hedged and unhedged long-term
fixed-rate debt by approximately $96.4 million and
would increase the fair value of our fixed to floating
interest rate swap agreements by $55.5 million.
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 2015
interest expense by approximately $48.4 million,
assuming no change in foreign currency exchange rates.
At December 31, 2014 and December 31, 2013, we
maintained forward-starting interest rate swap agree-
ments that hedge the anticipated unsecured amortiz-
ing term loan that will finance our purchase of Anthem
of the Seas. 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 $47.5 million as of December 31, 2014
based on the present value of expected future cash
flows. These interest rate swap agreements are
accounted for as cash flow hedges.
In addition, at December 31, 2014 and December 31,
2013, we maintained interest rate swap agreements
on our Celebrity Reflection term loan. Our interest
rate swap agreements effectively converted the inter-
est rate on a portion of the Celebrity Reflection unse-
cured amortizing term loan balance of approximately
$545.4 million from LIBOR plus 0.40% to a fixed rate
(including applicable margin) of 2.85% through the
term of the loan. Furthermore, at December 31, 2014,
we maintained interest rate swap agreements on our
Quantum of the Seas term loan. Our interest rate
swap agreements effectively converted the interest
rate on a portion of the Quantum of the Seas unse-
cured amortizing term loan balance of approximately
$735.0 million from LIBOR plus 1.30% to a fixed rate
of 3.74% (inclusive of margin) through the term of
the loan. These interest rate swap agreements are
accounted for as cash flow hedges.
Foreign Currency Exchange Rate Risk
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,
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, 2014, of
our Euro-denominated forward contracts associated
with our ship construction contracts was a liability of
$182.2 million, based on the present value of expected
future cash flows. As of December 31, 2014, the aggre-
gate cost of our ships on order was approximately
$5.0 billion, of which we had deposited $394.4 million
as of such date. Approximately 28.8% and 36.3% of
the aggregate cost of the ships under construction
was exposed to fluctuations in the Euro exchange rate
at December 31, 2014 and December 31, 2013, respec-
tively. A hypothetical 10% strengthening of the Euro
as of December 31, 2014, assuming no changes in
comparative interest rates, would result in a $188.4
million increase in the United States dollar cost of the
foreign currency denominated ship construction con-
tracts exposed to fluctuations in the Euro exchange
rate. The majority of our foreign currency forward
contracts, collar options and cross-currency swap
agreements are accounted for as cash flow, fair value
or net investment hedges depending on the designa-
tion of the related hedge.