Southwest Airlines 2008 Annual Report Download - page 61

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Excluding the notes or debentures that were converted to a floating rate as previously noted, the Company’s
only fixed-rate senior unsecured notes at December 31, 2008 were its $300 million notes due 2016. These senior
unsecured notes have a fixed-rate of 5.75 percent, which is comparable to average rates prevailing for similar
debt instruments over the last ten years. The following table displays the characteristics of the Company’s
secured fixed rate debt as of December 31, 2008:
Principal
amount
(in millions)
Effective
fixed rate
Final
maturity Underlying collateral
Secured Notes ................... $400 10.500% 12/15/2011 17 specified Boeing 737-700 aircraft
Pass Through Certificates ......... 500 6.240% 8/1/2022 16 specified Boeing 737-700 aircraft
Term Loan Agreement ............ 600 5.223% 5/9/2020 21 specified Boeing 737-700 aircraft
The carrying value of the Company’s floating rate
debt totaled $1.4 billion, and this debt had a weighted-
average maturity of 6.9 years at floating rates averaging
4.0 percent for the twelve months ended December 31,
2008. In total, the Company’s fixed rate debt and
floating rate debt represented 14.7 percent and 12.3
percent, respectively, of total noncurrent assets at
December 31, 2008.
The Company also has some risk associated with
changing interest rates due to the short-term nature of its
invested cash, which totaled $1.4 billion, and short-term
investments, which totaled $435 million, at
December 31, 2008. See Notes 1 and 10 to the
Consolidated Financial Statements for further
information. The Company invests available cash in
certificates of deposit, highly rated money market
instruments, investment grade commercial paper,
auction rate securities, and other highly rated financial
instruments, depending on market conditions and
operating cash requirements. However, as a result of
recent turmoil in credit markets, the Company has
discontinued further investments in auction rate
securities. Because of the short-term nature of these
investments, the returns earned parallel closely with
short-term floating interest rates. The Company has not
undertaken any additional actions to cover interest rate
market risk and is not a party to any other material
market interest rate risk management activities.
A hypothetical ten percent change in market
interest rates as of December 31, 2008, would not have
a material effect on the fair value of the Company’s
fixed rate debt instruments. See Note 10 to the
Consolidated Financial Statements for further
information on the fair value of the Company’s
financial instruments. A change in market interest rates
could, however, have a corresponding effect on the
Company’s earnings and cash flows associated with its
floating rate debt, invested cash (excluding cash
collateral deposits held, if applicable), and short-term
investments because of the floating-rate nature of these
items. Assuming floating market rates in effect as of
December 31, 2008, were held constant throughout a
12-month period, a hypothetical ten percent change in
those rates would correspondingly change the
Company’s net earnings and cash flows associated with
these items by less than $3 million. Utilizing these
assumptions and considering the Company’s cash
balance (excluding the impact of cash collateral deposits
held or provided to counterparties, if applicable), short-
term investments, and floating-rate debt outstanding at
December 31, 2008, an increase in rates would have a
net negative effect on the Company’s earnings and cash
flows, while a decrease in rates would have a net
positive effect on the Company’s earnings and cash
flows. However, a ten percent change in market rates
would not impact the Company’s earnings or cash flow
associated with the Company’s publicly traded fixed-
rate debt.
The Company is also subject to a financial
covenant included in its revolving credit facility, and
is subject to credit rating triggers related to its credit
card transaction processing agreements, its out-
standing debt agreements, and some of its hedging
counterparty agreements. Certain covenants include
the maintenance of minimum credit ratings and/or
triggers that are based on changes in these ratings.
For the revolving credit facility, of which $400
million of the available $600 million had been drawn
as of December 31, 2008, the Company must also
maintain, at all times, a Coverage Ratio, as defined in
the agreement, of not less than 1.25 to 1.00. The
Company met this condition as of December 31,
2008. However, if conditions change and the
Company fails to meet the minimum standards set
forth in the agreement, there could be a reduction in
42