Southwest Airlines 2013 Annual Report Download - page 103

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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. 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%, payable semi-annually in arrears, with the first payment made on June 15, 2007. 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%, 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; however, the interest rate swap was terminated in January 2011. See Note 10 for more information
on the interest rate swap agreement and termination.
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 estimated at inception 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.
In September 2004, the Company issued $350 million senior unsecured notes due 2014. The notes bear
interest at 5.25%, payable semi-annually in arrears on April 1 and October 1. Concurrently, the Company entered
into an interest rate swap agreement to convert this fixed-rate debt to a floating rate; however, the interest rate
swap was terminated in January 2011. See Note 10 for more information on the interest rate swap agreement and
termination.
On February 28, 1997, the Company issued $100 million of senior unsecured 7.375% debentures due
March 1, 2027. Interest is payable semi-annually on March 1 and September 1. The debentures may be
redeemed, at the option of the Company, in whole at any time or in part from time to time, at a redemption price
equal to the greater of the principal amount of the debentures plus accrued interest at the date of redemption or
the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted
to the date of redemption at the comparable treasury rate plus 20 basis points, plus accrued interest at the date of
redemption. In January 2007, the Company entered into an interest rate swap agreement to convert this fixed-rate
debt to a floating rate; however, the interest rate swap was terminated in December 2012. See Note 10 for more
information on the interest rate swap agreement and termination.
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