Southwest Airlines 2009 Annual Report Download - page 72

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
Company entered into a fixed-to-floating interest rate swap to convert the interest on these secured notes to a
floating rate until their maturity. See Note 10 for further information on the Company’s fuel hedging
arrangements and on the interest-rate swap agreement.
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 fourth
quarter 2009, the Company entered into a fixed-to-floating interest rate swap to convert the interest on these
unsecured notes to a floating rate until their maturity. See Note 10 for further information on the interest-rate
swap agreement.
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 the “net present
value benefits” included in the transactions, the effective economic yield over the 13-year term of the loans will
be approximately LIBOR minus 45 basis points. Principal and interest are payable semi-annually on June 30 and
December 31 for each of the loans, and the Company may terminate the arrangements in any year on either of
those dates, under certain conditions. The Company pledged four aircraft as collateral for the transactions.
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