Southwest Airlines 2008 Annual Report Download - page 74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On December 30, 2008, the Company sold $400
million of secured notes due 2011 (the “Notes”) in a
private placement. The Notes will mature on
December 15, 2011, and bear interest at a fixed rate
of 10.5 percent per annum. Interest on the Notes will
be payable semi-annually, beginning June 15, 2009.
The Notes are secured by a first priority perfected
security interest in a specified pool of 17 Boeing
737-700 aircraft granted under a single mortgage.
The Notes cannot be called by the Company prior to
stated maturity. However, they are subject to
redemption at par in certain circumstances involving
a casualty loss of an aircraft securing the Notes. The
Notes contain conventional events of default and
acceleration provisions, but have no financial
covenants. The Company used the net proceeds from
the sale of the Notes for general corporate purposes,
including using a portion of the proceeds to provide
cash collateral for some of the Company’s fuel
hedging arrangements. See Note 10.
On May 6, 2008, the Company entered into a
Term Loan Agreement providing for loans to the
Company aggregating up to $600 million, to be
secured by first-lien mortgages on 21 of the
Company’s 737-700 aircraft. On May 9, 2008, the
Company borrowed the full $600 million and secured
these loans with the requisite 21 aircraft mortgages.
The loans mature on May 9, 2020, and are repayable
quarterly in installments of principal, with the first
payment made on August 9, 2008. The loans bear
interest at the LIBO rate (as defined in the Term
Loan Agreement) plus .95 percent, and interest is
payable quarterly. Concurrent with its entry into the
Term Loan Agreement, the Company entered into an
interest rate swap agreement that effectively fixes the
interest rate on the term loan for its entire term at
5.223 percent. The Company used the net proceeds
from the term loan for general corporate purposes.
On October 3, 2007, grantor trusts established
by the Company issued $500 million Pass Through
Certificates consisting of $412 million 6.15% Series
A certificates and $88 million 6.65% Series B
certificates. A separate trust was established for each
class of certificates. The trusts used the proceeds
from the sale of certificates to acquire equipment
notes in the same amounts, which were issued by the
Company on a full recourse basis. Payments on the
equipment notes held in each trust will be passed
through to the holders of certificates of such trust.
The equipment notes were issued for each of 16
Boeing 737-700 aircraft owned by the Company and
are secured by a mortgage on each aircraft. Interest
on the equipment notes held for the certificates is
payable semi-annually, with the first payment made
on February 1, 2008. Also beginning February 1,
2008, principal payments on the equipment notes
held for both series of certificates are due semi-
annually until the balance of the certificates mature
on August 1, 2022. The Company utilized the
proceeds from the issuance of the Pass Through
Certificates for general corporate purposes. Prior to
their issuance, the Company also entered into swap
agreements to hedge the variability in interest rates
on the Pass Through Certificates. The swap
agreements were accounted for as cash flow hedges,
and resulted in a payment by the Company of $20
million upon issuance of the Pass Through
Certificates. The effective portion of the hedge is
being amortized to interest expense concurrent with
the amortization of the debt and is reflected in the
above table as a reduction in the debt balance. The
ineffectiveness of the hedge transaction was
immaterial.
During December 2006, the Company issued
$300 million senior unsecured Notes due 2016. The
notes bear interest at 5.75 percent, payable semi-
annually in arrears, with the first payment made on
June 15, 2007. The Company used the net proceeds
from the issuance of the notes for general corporate
purposes.
During February 2005, the Company issued
$300 million senior unsecured Notes due 2017. The
notes bear interest at 5.125 percent, payable semi-
annually in arrears, with the first payment made on
September 1, 2005. In January 2007, the Company
entered into an interest-rate swap agreement to
convert this fixed-rate debt to a floating rate. See
Note 10 for more information on the interest-rate
swap agreement.
In fourth quarter 2004, the Company entered
into four identical 13-year floating-rate financing
arrangements, whereby it borrowed a total of $112
million from French banking partnerships. Although
the interest rates on the borrowings float, the
Company estimates that, considering the full effect of
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