Royal Caribbean Cruises Seeks $3.3 Billion Debt Sale, Moody’s Cuts Rating to Ba2 Junk Status

Royal Caribbean Cruises (RCL) is planning to raise $3.3 billion from a bond sale as the ailing cruise operator struggles with the financial fallout of the coronavirus-related travel restrictions which brought its operations to an almost complete halt.

The embattled cruise operator is offering series of notes due 2023 and 2025, which will be secured by 28 of the company’s vessels, it said in a SEC filing. The proceeds of the $3.3 billion secured note issuance will be used to refinance the cruise operator’s existing $2.4 billion 364-day secured facility that matures in March 2021 with the balance being held for liquidity purposes.

“The incremental $1 billion will bolster the company’s liquidity position and ensure the company can get through the next year even with operations remaining suspended,” Moody’s Investors Service said in a report.

Moody’s slashed Royal Carribean’s credit rating by two notches to Ba2 into junk territory with a negative outlook due to its suspended operations and in expectation of a slow recovery even when cruise activity will resume.

The cruise operator disclosed that it expects to post a preliminary first-quarter net loss of $1.44 billion versus a profit of $249.7 million year-on-year. It will also write down the value of its Silversea Cruises unit and a number of ships by $1 billion to $1.3 billion. A prolonged suspension of operations is estimated to incur cash burn of about $250 million to $275 million per month. Total revenue in the three months ended March 31 dropped 16.7% to $2 billion, according to preliminary figures.

“Cruise operations will continue to be suspended in the US beyond the current July 24 no-cruise order issued by the Centers for Disease Control and Prevention (CDC) and available capacity will be modest for the remainder of 2020 and possibly into early 2021 as the risk of fully restarting operations before proper safety protocols are in place far exceed the potential reward,” stated Pete Trombetta, Moody’s lodging and cruise analyst. “When cruise operations do resume deployed cruise ships will have limits on the occupancy for each ship while social distancing rules remain in place which will lead to lower ship-level profitability during this period.”

The credit ratings agency’s negative outlook reflects the cruise operator’s high leverage and the uncertainty around the pace and level of the recovery in demand that will enable the company to de-lever, Moody’s added.

Deutsche Bank analyst Chris Woronka, who has a Hold rating on the stock estimates that sailings won’t resume before August.  Woronka’s $38 price target reflects 10% upside potential to current levels.

“RCL had $2.3bn of cash as of April 30 and has drawn another $150m on its revolver in May, which translates into nine to ten months of liquidity, excluding cash refund liabilities,” Woronka wrote in a note to investors last week. “We remain wary about reading too much into forward looking commentary, since change/cancellation policies have been relaxed and we don’t know what the initial consumer reaction will be to the “new normal” once onboard.”

The rest of Wall Street analysts is slightly more optimistic than Deutsche Bank. The stock’s 12 analyst ratings consist of 5 Buys, 6 Holds and 1 Sell adding up to a Moderate Buy consensus. The $68.33 average price target implies a 98% upside potential in the shares in the coming 12 months. (See Royal Caribbean stock analysis on TipRanks).

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