29 May 2020 by jbchevrel
Another leg in the reversal for US cruise names. Today Royal Caribbean (RCL) keeps going tighter -0.5% despite broader market small wider. The RCL new 11.5 2025 bond priced earlier this month finally stopped rallying though, now stable in 106 (-) area. The RCL stock is about 2.5x the lowest level, COVID-to-date. CCL is also tighter -50bp today and the CCL 11.5 2023s issued ~7w ago is now trading at 106.5 (-0.5). Earlier this month, RCL issued $3.3bn 3y 5y notes secured by ships and related IP, including trademarks and customer lists. Until the company is rated IG at both S&P and Moody's, the collateral will be subject to a cap of up to $1.662b (5% of total assets) per the credit agreement limitation on liens. The use of proceeds from the new issuance was the repayment of RCL's secured 364d term loan and GCP. While the 3y had priced at 10.875% and the 5y had priced at 11.5%, we have had an amazing rally since then (more than +6pt on the 5y!). The fundamental picture is still weak, but much less than in Q1. The reopening theme has been a relief for RCL and the broader sector. Indeed, ports/regions/countries are gradually opening back up to cruise. The company is currently in dialogue with tens of different ports and destinations around the world in terms of planning a return to service. Bookings had started to deteriorate in mid-Feb, before dropping further in mid-Mar. Overall, 130 itineraries were canceled in 1Q20. So RCL had to pull its guidance in March. RCL noted that interest expense is expected to be around $600m for all quarters from Q2-20 to Q4-20. RCL’s debt maturities for the remainder of 2020 and 2021 were $400m and $900m. By the end of 2020 interest expense may acheive around 40% of revenue what will result negative Eps so the equity picture looks dark. It seems that the best case is that RCL goes back to profitability in Q4-20. Bookings are pacing better since this month, really (Q4-20 and 2021 itineraries being the most frequently booked). There hasn't been (at least not yet) an abnormal level of cancellations for 2021 bookings. The pro-forma total liquidity, as of April 30th, was ~$3.4b (or ~$3.0b net of 2020 debt maturities). That means that RCL has ~12 months of operating cushion, which the market sees as a comfortable buffer, at this juncture, further reinforced by the various cap-ex reductions and other cost-cutting initiatives that have been taken. Ultimately, the next game-changer for this credit is a potential COVID vaccine, like it is for most of the market, except that RCL is a high-beta play.