With its May 8 business update, Royal Caribbean Cruises (NYSE:RCL) painted an ugly picture. The cruise operator said what many RCL investors had feared, that the novel coronavirus has “severely impacted” operations.
That is putting it lightly. With operations closed until at least June 11, there is no revenue coming into a company that has more than $13 billion in debt. This includes $10.8 billion as of the end of December and $2.2 billion that it picked up recently in a bond debt offering.
High Cash Burn is Likely to Continue
Moreover, the company said it is burning $250 million to $275 million per month while its ships sit in port devoid of passengers. There is little reason to believe that cash flow will be significantly better than that after it opens up.
First of all, the company was deliberately vague about its revenue loss. It used the following terms: “meaningfully lower” booking volume, and “elevated cancellations” for 2020. There is no precise number as a percentage of last year. I suspect it is close to 90% to 95%.
Second, as of April 30, the company had only $2.3 billion in cash available to cover that $275 million monthly cash burn. This may not include the $2.4 billion in customer deposits, which it may have to return if the company goes under.
Third, the company just drew down another $150 million from its credit lines, even though it is continuing to take bookings. That is often what a company does right below declaring bankruptcy. Get as much cash as you can on the books before asking for protection from creditors.
It has $400 million in expected debt maturities in 2020 alone, along with $500 million in 2021. Right now, with the company’s cash burn, it will not be able to pay those off with new debt.
Sailing Toward the Edge of Insolvency
So, you can see, this is a company on the edge of insolvency. I find it interesting that Royal Caribbean has not yet announced its Q1 earnings. It has not even said what date it will file those. Under SEC rules, it has 45 days after the end of the quarter, or May 15. It can always ask for an extension.
The May 28 shareholders meeting could provide a further update for investors on whether demand is picking up for bookings as well as its liquidity situation. But if it was planning on filing for reorganization it may not want to file the 10-Q as it would give creditors a clear look at its financial condition.
Another possibility is an equity offering. But this again would require the company to come clean first about its financial condition in a 10-Q filing. Whether there would be any investors at today’s price is another thing. I suspect that RCL stock would be significantly lower if the company raises equity.
Am I Too Pessimistic About RCL Stock?
Let’s take a different look at RCL stock. Maybe I am being too pessimistic. After all, the company has an $8.35 billion market value, even though it has no prospects of making money anytime soon. Moreover, I have pointed out that it is burning cash and deeply in debt and close to insolvency.
Second, the company’s update said that its 2021 bookings are “within historical ranges” when compared to the same time last year. Again, more fuzziness. Why not just say what percentage of sales compared to last year? But at least this is something positive.
But if you think about it, it really means nothing. A huge percentage of the 2021 bookings could have been booked prior to the coronavirus pandemic event. The company does not say how many of these bookings, on a net basis, have occurred recently. That would show some intent to actually take the cruise. Without that information, the trend for booking cancellations might continue into 2021.
One last positive is that in its May 8 release, Royal Caribbean said it will cut expenses and capital expenditures even further. It cut its workforce by 26%, has put some ships in “cold layup,” and has cut ship expense burn to $150 million to $175 million per month. (I guess the difference with the $250 million to $275 million total burn is due to overhead outside of ship expenses.)
The problem with this information is that analysts like me still cannot predict when: (1) revenue will start, (2) how strong will revenue be, and, (3) how sustainable is the revenue. The company has given no guidance and there is virtually no way to judge these things.
What to Do With RCL Stock
RCL stock is a gamble, at best. There is no margin of safety for the defensive investor in this situation. The stock’s market value is very high for a company that is close to insolvency. So there must be a lot of investors who expect a significant rebound.
The problem with that kind of speculative method of investing is that you must try and find some form of probabilistic advantage. But I cannot see an edge here.
The probability is high that management will admit to insolvency and declare some form of bankruptcy. The fundamental issue is that travelers will likely be significantly averse to taking cruises for a good long time. That period may be longer than the cash resources at Royal Caribbean can last.