Southwest Airlines 2012 Annual Report Download - page 81

Financial market risk
The vast majority of the Company’s tangible assets are aircraft, which are long-lived. The Company’s
strategy is to maintain a conservative balance sheet and grow capacity steadily and profitably under the right
conditions. While the Company uses financial leverage, it strives to maintain a strong balance sheet and has a
“BBB” rating with Fitch, a “BBB-” rating with Standard & Poor’s, and a “Baa3” credit rating with Moody’s as of
December 31, 2012, all of which are considered “investment grade.” The Company’s French Credit Agreements
due 2018 do not give rise to significant fair value risk but do give rise to interest rate risk because this borrowing
was originally issued as floating-rate debt. In addition, as disclosed in Note 10 to the Consolidated Financial
Statements, the Company has converted certain of its long-term debt to floating rate debt by entering into interest
rate swap agreements. Although there is interest rate risk associated with these floating rate borrowings, the risk
of the French Credit Agreements due 2018 is somewhat mitigated by the fact that the Company may prepay this
debt under certain conditions. See Notes 6 and 7 to the Consolidated Financial Statements for more information
on the material terms of the Company’s short-term and long-term debt.
As of December 31, 2012, excluding the notes or debentures that have been converted to a floating rate, the
Company’s fixed-rate senior unsecured notes outstanding included its $350 million 5.25% senior unsecured notes
due 2014, its $300 million 5.125% senior unsecured notes due 2017, and its $100 million 7.375% senior
unsecured notes due 2027. Each of these notes had previously been converted to floating rates, but in 2011 and
2012, the Company terminated the fixed-to-floating interest rate swap agreements related to them. See Note 10 to
the Consolidated Financial Statements for further information. The effect of these terminations was that the
interest associated with these debts prospectively reverted back to their original fixed rates. As a result of the
gains realized on these transactions, which will be amortized over the remaining term of the corresponding notes,
and based on projected interest rates at the date of termination, the Company does not believe its future interest
expense, based on projected future interest rates at the date of termination, associated with these notes will
significantly differ from the expense it would have recorded had the notes remained at floating rates. The
Company believes the fixed interest rates associated with each of these notes are comparable to average rates
prevailing for similar debt instruments over the last ten years. The following table displays the characteristics of
the Company’s secured fixed rate debt as of December 31, 2012:
Principal
amount
(in millions)
Effective
fixed rate
Final
maturity Underlying collateral
Term Loan Agreement ..... $ 241 6.315 % 5/6/2019 14 specified Boeing 737-700 aircraft
Term Loan Agreement ..... 95 6.84 % 7/1/2019 5 specified Boeing 737-700 aircraft
Term Loan Agreement ..... 451 5.223 % 5/9/2020 21 specified Boeing 737-700 aircraft
The carrying value of the Company’s floating rate debt totaled $610 million, and this debt had a weighted-
average maturity of 5.01 years at floating rates averaging 2.62 percent for the year ended December 31, 2012. In
total, the Company’s fixed-rate debt and floating rate debt represented 17.7 percent and 4.2 percent, respectively,
of consolidated noncurrent assets at December 31, 2012.
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 $1.9 billion, at December 31,
2012. See Notes 1 and 10 to the Consolidated Financial Statements for further information. The Company
currently invests available cash in certificates of deposit, highly rated money market instruments, investment
grade commercial paper, treasury securities, U.S. government agency securities, and other highly rated financial
instruments, depending on market conditions and operating cash requirements. 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.
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