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Royal Caribbean’s Moment of Truth Has Arrived

If you’re an all-or-nothing type of investor, Royal Caribbean (NYSE:RCL) stock should be on your radar right now. This is a stock that could double or get cut in half within the next few months, or even weeks.

RCL Stock: Royal Caribbean's Moment of Truth Has Arrived
Source: Laszlo Halasi / Shutterstock.com

That doesn’t mean RCL stock isn’t a buy. It’s just not a good investment for everybody in every situation. The downside risk is clear and present. without a definite timetable for the novel coronavirus crisis to subside, a recovery road map for the cruise ship industry is practically impossible.

That being said, value investors should hear the faint sound of Baron Rothschild’s ghost telling us to buy “when there’s blood in the streets.” Unfortunately, it’s hard to hear Rothschild’s voice amid the anguished cries of RCL stockholders.

Waiting to Sail Again

As you’re probably aware, the spread of the coronavirus ground the cruise line market to a halt. Compounding this problem is the Centers for Disease Control and Prevention’s no-sail order, which is set to remain in effect until July 24.

So, what is a company like Royal Caribbean supposed to do while its cruise ships can’t sail? One of the few things that the company can do is put its financial house in order.

Royal Caribbean CFO Jason Liberty hinted at that approach, saying, “Our focus is on bolstering liquidity through significant cost cutting, capital spend reductions, and other cash conservation measures.”

At least the company is tightening its fiscal belt, then. Another way to bolster liquidity would be to take action to secure financing. And that’s what Royal Caribbean did recently when the company priced $3.3 billion worth of senior secured notes.

Senior secured notes are basically a type of corporate bond, but with an advantage. If the issuing company ever goes bankrupt, the senior secured notes must be honored before other most of the other company’s debt obligations.

Therefore, senior secured notes could be viewed as less risky. Still, Moody’s assigned a rating of “Baa3” to Royal Caribbean’s senior secured notes. That’s tantamount to an insult as it’s basically calling the company’s debt low-grade.

A Daring Investment

So, here’s where the all-or-nothing moment comes in. This debt-note offering could be of existential significance for Royal Caribbean. It could make or break the company.

It’s hard to blame Royal Caribbean for issuing the debt notes. The company needs the capital as it has to pay back to a senior-secured-term loan worth $2.35 billion. In theory at least, issuing $3.3 billion worth of senior secured notes should take care of that loan.

But as you might expect, it’s not as simple as that. Royal Caribbean has other capital drains besides the repayment of that $2.35 billion loan. The company’s CFO did cite “cash conservation measures,” but those measures may be easier said than done.

Moreover, Royal Caribbean will pay a high price to those who finance the company’s debt-note offering. Specifically, Royal Caribbean will have to pay a 10.875% rate of interest on $1 billion of the senior secured notes due in 2023. Worse yet, the company will pay a 11.5% interest rate on $2.32 billion of the debt due in 2025.

The question, then, comes down to whether Royal Caribbean’s ships will be sailing again soon. That will determine the company’s ability to turn a profit and therefore repay its debts.

Thus, all investors’ eyes should be focused on the CDC and other regulatory entities. The fate of Royal Caribbean ultimately rests on whether the regulators will allow cruise ships to sail sooner rather than later. If so, then RCL stock could recover quickly and sharply.

The Takeaway on RCL Stock

At the very least, we can say that Royal Caribbean is taking actions to secure financing. Perhaps the company will do some fiscal belt tightening, as well. Gutsy RCL stockholders could certainly lose money on their investment, but if the cruise ships can sail again soon, a giant wave of profits could come rolling in.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/royal-caribbean-stock-moment-of-truth/.

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