Royal Caribbean Cruise Lines 2008 Annual Report Download - page 47

Royal Caribbean Cruises Ltd. 31
$1.1 billion at December 31, 2007. Substantially all customer deposits
represent deferred revenue rather than an actual current cash liability.
We generate substantial cash flows from operations and our business
model has historically allowed us to maintain this working capital deficit
and still meet our operating, investing and financing needs. We expect
that we will continue to have working capital deficits in the future.
We have four Solstice-class vessels under construction in Germany, all
of which have committed bank financing arrangements and include
financing guarantees from HERMES (Euler Hermes Kreditrersicherungs
AG), the export credit agency of the German government for 95% of
the financed amount. The terms of the financing guarantees and bank
commitments are similar to those established for the Celebrity Solstice
and are executable at our option. During 2008, we signed a credit
agreement for our fifth Solstice-class ship and have elected our option
to finance Celebrity Equinox. We must elect to use the remaining com-
mitments within six months of the relevant ship delivery and they are
each subject to customary funding conditions.
We also have two Oasis-class vessels under construction in Finland.
Oasis of the Seas is scheduled for delivery in the fourth quarter of
2009 and Allure of the Seas is scheduled for delivery in late 2010. We
have commitments for financing guarantees from Finnvera, the export
credit agency of Finland for 80% of the financed amount. We must
elect to use these commitments within five months of the ship delivery
and they are each subject to customary funding conditions. We are
working with the relevant export credit agencies and various financial
institutions to obtain committed financing for Oasis of the Seas. This
includes exploring opportunities to increase the guarantee level and
obtain partial funding support from the relevant export credit agencies.
Although we believe that we will secure committed financing for these
ships before their delivery dates, there can be no assurance that we will
be able to do so or that we will do so on acceptable terms.
The current worldwide economic downturn has adversely impacted
our cash flows from operations. In addition, the turmoil in the credit
and capital markets may make it more difficult for us to secure new
financing or to raise additional capital or to do so on acceptable terms.
During 2008, our credit rating was lowered from BBB– with a nega-
tive outlook to BB with a negative outlook by Standard and Poor’s. In
January 2009, Standard and Poor’s placed our credit rating on credit
watch with negative implications. In addition, our credit rating was
lowered from Ba1 with a stable outlook to Ba2 with a negative outlook
by Moody’s. There is no assurance that our credit ratings will not be
lowered further. The lowering of our credit ratings may increase our
cost of financing and can make it more difficult for us to access the
credit and capital markets.
In response to the current environment and in light of our funding
needs, we have increased our focus on preserving cash and improving
our liquidity. We have discontinued our dividends, curtailed our non-
shipbuild capital expenditures, currently do not have plans to place
further newbuild orders, and are working with various financial institu-
tions to secure financing for our Oasis-class ships. In addition, we may
elect to fund our contractual obligations through other means if current
conditions in the capital markets improve. While we anticipate that our
cash flows from operations, our current available credit facilities, our cur-
rent financing arrangements and those that we expect to obtain will
be adequate to meet our capital expenditures and debt repayments
over the next twelve-month period, there can be no assurance that
this will be the case.
If any person other than A. Wilhelmsen AS. and Cruise Associates, our
two principal shareholders, acquires ownership of more than 30% of
our common stock and our two principal shareholders, in the aggre-
gate, own less of our common stock than such person and do not
collectively have the right to elect, or to designate for election, at least
a majority of the board of directors, we may be obligated to prepay
indebtedness outstanding 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.
DEBT COVENANTS
Our financing agreements contain covenants that require us, among
other things, to maintain minimum net worth and fixed coverage
ratio and limit our net debt-to-capital ratio. Our minimum net worth
and maximum net debt-to-capital calculations exclude the impact of
accumulated other comprehensive income (loss) on total shareholders’
equity. The fixed coverage ratio is calculated by dividing net cash from
operations by the sum of dividend payments plus scheduled principal
debt payments in excess of any new financings. We are currently in
compliance with all debt covenants. The specific covenants and related
definitions can be found in the applicable debt agreements, the majority
of which have been previously filed with the Securities and Exchange
Commission. As of December 31, 2008, our net worth was $7.1 billion
compared with a minimum requirement of $5.1 billion, our fixed cover-
age ratio was 8.37x compared with a minimum requirement of 1.25x
and our net-debt-to-capital ratio was 48.1% compared to a maximum
requirement of 62.5%.
DIVIDENDS
During fiscal year 2008, we paid out dividends totaling $128.0 million.
In November 2008 our board of directors discontinued our quarterly
dividend commencing with the fourth quarter of 2008. This decision
is intended to enhance our liquidity during this period of heightened
economic and financial market uncertainty.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
FINANCIAL INSTRUMENTS AND OTHER
General
We are exposed to market risk attributable to changes in interest
rates, foreign currency exchange rates and fuel prices. We manage
these risks through a combination of our normal operating and financ-
ing activities and through the use of derivative financial instruments
pursuant to our hedging practices and policies. The financial impacts
of these hedging instruments are primarily offset by corresponding
changes in the underlying exposures 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. We monitor our derivative positions using techniques includ-
ing market valuations and sensitivity analyses. (See Note 15. Fair Value
Measurements to our consolidated financial statements under Item 8.
Financial Statements and Supplementary Data.)
PART II