Southwest Airlines 2009 Annual Report Download - page 56

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Excluding the notes or debentures that have been converted to a floating rate as previously noted, the
Company had no fixed-rate senior unsecured notes outstanding at December 31, 2009. The following table
displays the characteristics of the Company’s secured fixed rate debt as of December 31, 2009:
Principal
amount
(in millions)
Effective
fixed rate
Final
maturity Underlying collateral
Term Loan Agreement ............. $124 6.840% 7/1/2019 5 specified Boeing 737-700 aircraft
Term Loan Agreement ............. 332 6.640% 5/6/2019 14 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 $2.0 billion, and this debt had a weighted-
average maturity of 5.2 years at floating rates averaging 5.4 percent for the twelve months ended December 31,
2009. In total, the Company’s fixed rate debt and floating rate debt represented 13.3 percent and 18.4 percent,
respectively, of total noncurrent assets at December 31, 2009.
The Company also has some risk associated with changing interest rates due to the short-term nature of its
invested cash, which totaled $1.1 billion, and short-term investments, which totaled $1.5 billion, at December 31,
2009. 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 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, 2009, would not have a
material effect on the fair value of the Company’s fixed rate debt instruments. See Note 11 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),
floating rate aircraft leases, and short-term investments because of the floating-rate nature of these items.
Assuming floating market rates in effect as of December 31, 2009, 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 $7 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, 2009,
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, the pricing related to any funds
drawn under its revolving credit facility, 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. The
Company’s revolving credit facility contains a financial covenant requiring a minimum coverage ratio of
adjusted pre-tax income to fixed obligations, as defined. As of December 31, 2009, the Company was in
compliance with this covenant and there were no amounts outstanding under the revolving credit facility.
However, if conditions change and the Company fails to meet the minimum standards set forth in the revolving
credit facility, there could be a reduction in the availability of cash under the facility, or an increase in the costs
to keep the facility intact as written. Two of the Company’s hedging counterparty agreements contain ratings
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