Southwest Airlines 2015 Annual Report Download - page 105

is payable semi-annually, which payments began on January 1, 2010. In September 2015, the
Company prepaid $24 million on the loan agreement, which in turn released one of the encumbered
aircraft. As such, the remaining four aircraft related to this transaction are still encumbered as of
December 31, 2015.
On April 29, 2009, the Company entered into a term loan agreement providing for loans to the
Company aggregating up to $332 million, to be secured by mortgages on 14 of the Company’s 737-
700 aircraft. The Company borrowed the full $332 million and secured the loan with the requisite 14
aircraft mortgages. The loan matures on May 6, 2019, and is being repaid via quarterly installments of
principal that began August 6, 2009. The loan bears interest at the LIBO Rate (as defined in the term
loan agreement) plus 3.30 percent, and interest is payable quarterly, which payments began on
August 6, 2009. Pursuant to the terms of the term loan agreement, the Company entered into an interest
rate swap agreement to convert the variable rate on the term loan to a fixed 6.315 percent until
maturity.
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 0.95 percent, and interest is payable quarterly.
Pursuant to the terms of the term loan agreement, the Company entered into an interest rate swap
agreement to convert the variable rate on the term loan to a fixed 5.223 percent until maturity.
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. 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 December 15,
2016. The notes bear interest at 5.75 percent, 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; however, the
interest rate swap was terminated in 2015. See Note 10 for further information on the interest-rate swap
agreement and termination.
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