Southwest Airlines 2012 Annual Report Download - page 100

AirTran Long-Term Debt
AirTran Holdings previously entered into aircraft purchase financing facilities, under which a total of
29 aircraft were financed as of December 31, 2012.
As of December 31, 2012, after prepaying one aircraft secured term loan during fourth quarter 2012,
26 Boeing 737 aircraft remain that were financed under floating-rate facilities. Each note is secured by a first
mortgage on the aircraft to which it relates. The notes bear interest at a floating rate per annum equal to a margin
plus the three or six-month London Interbank Offered Rate (“LIBOR” or “LIBO rate”) in effect at the
commencement of each semi-annual or three-month period, as applicable. As of December 31, 2012, the
weighted average interest rate is 1.90 percent. Principal and interest under the notes are payable semi-annually or
every three months as applicable. As of December 31, 2012, the remaining debt outstanding may be prepaid
without penalty under all aircraft loans provided under such facilities with the exception of one aircraft loan.
Under the aircraft loan for such aircraft, the right to prepay without penalty commences on the third anniversary
of the date such loan was made, or January 2013. The notes mature in years 2016 to 2020. As discussed further in
Note 10, a portion of the above floating-rate debt has been effectively converted to a fixed rate via interest rate
swap agreements which expire between 2016 and 2020. In January 2013, an additional aircraft secured term loan,
in the amount of $20 million, was prepaid.
As of December 31, 2012, three Boeing 737 aircraft were financed under a fixed-rate facility. Each note is
secured by a first mortgage on the aircraft to which it relates. As of December 31, 2012, the weighted average
interest rate is 7.02 percent. Payments of principal and interest under the notes are due semi-annually. The
remaining debt outstanding may be prepaid without penalty. The notes mature in years 2016 to 2018.
As of December 31, 2012, eight Boeing 717 aircraft were pledged as collateral for the obligations related to
enhanced equipment trust certificates (EETCs). Principal and interest payments on the EETCs are due semi-
annually through April 2017. The EETCs bear interest at a fixed rate of 10.36 percent.
In October 2009, AirTran Holdings completed a public offering of $115 million of convertible senior notes
due in 2016. Such notes bear interest at 5.25 percent payable semi-annually, in arrears, on May 1 and November 1.
As a result of the acquisition and subsequent dividends declared by the Company, the convertible senior notes are
convertible into AirTran conversion units of 164.8461 per $1,000 in principal amount of such notes. Based on the
terms of the merger agreement, the holders of these notes would receive shares of the Company’s common stock at
a conversion rate of 52.9156 shares and $615.16 in cash per $1,000 in principal amount of such notes. This
conversion rate is subject to adjustment under certain circumstances such as: granting of stock and cash dividends, a
make-whole fundamental change of ownership provision, the issuance of rights or warrants, and/or a distribution of
capital stock. Subsequent to the acquisition, holders of $5 million in principal amount elected to convert their notes.
Remaining holders may convert their 5.25% convertible senior notes into cash and shares of common stock at their
option at any time. As such, the Company has classified $68 million, which is the cash portion the Company would
be required to pay upon conversion, as current maturities in the Consolidated Balance Sheet. The 5.25% convertible
senior notes are not redeemable at the Company’s option prior to maturity. The holders of the 5.25% convertible
senior notes may require the Company to repurchase such notes, in whole or in part, for cash upon the occurrence of
a fundamental change, as defined in the governing supplemental indenture, at a repurchase price of 100 percent of
the principal amount plus any accrued and unpaid interest.
As a result of triggering the fundamental change of ownership provision in the 5.25% convertible senior
notes and as a result of the acquisition, an embedded conversion option is deemed to exist. In accordance with
applicable accounting guidance, the embedded conversion option was effectively separated and accounted for as
a free-standing derivative. A fair value calculation, utilizing similar market yields and the Company’s common
stock price, was performed for the debt with and without the equity to measure the equity component. The value
allocated to the conversion option of $35 million is classified as permanent equity. The estimated premium
associated with the notes excluding the equity feature was $10 million, and is being amortized to interest expense
over the remaining life of the notes. The dilutive effect of the shares that would be issued if the convertible notes
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