Royal Caribbean Cruise Lines 2004 Annual Report Download - page 18

entered into in the normal course of business. There are no stated
or notional amounts included in the indemnification clauses and we
are not able to estimate the maximum potential amount of future
payments, if any, under these indemnification clauses. We have not
been required to make any payments under such indemnification
clauses in the past and, under current circumstances, we do not
believe an indemnification in any material amount is probable.
As a normal part of our business, depending on market condi-
tions, pricing and our overall growth strategy, we continuously
consider opportunities to enter into contracts for the building of
additional ships. We may also consider the sale of ships. We con-
tinuously consider potential acquisitions and strategic alliances. If
any of these were to occur, they would be financed through the
incurrence of additional indebtedness, the issuance of additional
shares of equity securities or through cash flows from operations.
FUNDING SOURCES
As of December 31, 2004, our liquidity was $1.6 billion consisting
of approximately $0.6 billion in cash and cash equivalents and $1.0
billion available under our unsecured revolving credit facility. (See
Note 6.
Long-Term Debt to our consolidated financial statements.)
Capital expenditures and scheduled debt payments will be funded
through a combination of cash flows from operations, drawdowns
under our available credit facility, the incurrence of additional
indebtedness and the sales of equity or debt securities in private
or public securities markets. Therecan be no assurances that
cash flows from operations and additional financing from external
sources will be available in accordance with our expectations.
Our financing agreements contain covenants that require us,
among other things, to maintain minimum net worth, and fixed
charge coverage ratio and limit our debt to capital ratio. We were
in compliance with all covenants as of December 31, 2004.
If A. Wilhelmsen AS. and Cruise Associates, our two principal
shareholders, cease to own a specified percentage of our com-
mon stock, we may be obligated to prepay indebtedness out-
standing under the majority of our credit facilities, which we
may be unable to replace on similar terms. If this were to occur,
it could have an adverse impact on our liquidity and operations.
We believe our existing credit facility, cash flows from opera-
tions and our ability to obtain new borrowings and/or raise new
capital or a combination of these sources will be sufficient to
fund operations, debt payment requirements and capital expen-
ditures over the next twelve-month period.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
GENERAL
We are exposed to market risk attributable to changes in inter-
est rates, foreign currency exchange rates and fuel prices. We
minimize these risks through a combination of our normal oper-
ating and financing activities and through the use of derivative
financial instruments pursuant to our hedging practices and poli-
cies. The financial impacts of these hedging instruments are pri-
marily offset by corresponding changes in the underlying expo-
sures being hedged. We achieve this by closely matching the
amount, term and conditions of the derivative instrument with the
underlying risk being hedged. We do not hold or issue derivative
financial instruments for trading or other speculative purposes.
Wemonitor our derivative positions using techniques including
market valuations and sensitivity analyses. (See Note 11.
Financial Instruments to our consolidated financial statements.)
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates to
our long-term debt obligations and our operating lease for
Brilliance
of the Seas
.At December 31, 2004, 64% of our debt was effec-
tively fixed and 36% was floating. We enter into interest rate
swap agreements to modify our exposure to interest rate move-
ments and to manage our interest expense and rent expense.
Market risk associated with our long-termfixed rate debt is the
potential increase in fair value resulting from a decrease in inter-
est rates. At December 31, 2004, our interest rate swap agree-
ments effectively changed $268.8 million of fixed rate debt with
aweighted-average fixed rate of 7.81% to LIBOR-based float-
ing rate debt. The estimated fair value of our long-termfixed rate
debt at December 31, 2004, excluding our Liquid Yield Option™
Notes and zero coupon convertible notes, was $3.1 billion using
quoted market prices, where available, or using discounted
cash flow analyses based on market rates available to us for
similar debt with the same remaining maturities. The fair value of
our associated interest rate swap agreements was estimated to
be $21.9 million as of December 31, 2004 based on quoted
market prices for similar or identical financial instruments to
those we hold. A hypothetical one percentage point decrease in
interest rates at December 31, 2004 would increase the fair
value of our long-termfixed rate debt, excluding our Liquid Yield
Option™ Notes and zero coupon convertible notes, by approx-
imately $144.1 million, net of an increase in the fair value of the
associated 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. A hypothetical one percentage point increase in
interest rates would increase our 2005 interest expense by
ROYAL CARIBBEAN CRUISES LTD.
16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)