Silversea Cruise Finance Ltd. — Moody's downgrades Royal Caribbean's CFR to B1; outlook negative
Rating Action: Moody’s downgrades Royal Caribbean’s CFR to B1; outlook negative
Global Credit Research – 24 Aug 2020
New York, August 24, 2020 — Moody’s Investors Service, (“Moody’s”) downgraded the ratings of Royal Caribbean Cruises Ltd. (“Royal Caribbean”) including its Corporate Family Rating to B1 from Ba1, Probability of Default Rating to B1-PD from Ba1-PD, senior secured rating to Ba2 from Baa3, and senior unsecured rating to B2 from Ba2. The company’s Speculative Grade Liquidity rating of SGL-2 remains unchanged. The outlook is negative. This concludes the review for downgrade that was initiated on July 14, 2020.
“The downgrade reflects Moody’s expectation that Royal Caribbean’s metrics will remain weak over at least the next two years with debt/EBITDA of above 6.5x and EBITA/interest expense below 3.0x,” stated Pete Trombetta, Moody’s lodging and cruise analyst. “The downgrade also reflects our assumption that Royal Caribbean’s available capacity will be modest in the first half of 2021 as the industry puts in place acceptable guidelines that satisfy the requirements for the Centers for Disease Control and Prevention (CDC) to lift its no sail order put in place in March,” added Trombetta. Royal Caribbean’s liquidity, which includes cash balances of about $4.2 billion at June 30, provides the company sufficient runway to get through this period of unprecedented earnings pressure.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today’s action reflects the impact on Royal Caribbean from the deterioration in credit quality it has triggered, given its exposure to travel restrictions in the US, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
Downgrades:
..Issuer: Royal Caribbean Cruises Ltd.
…. Probability of Default Rating, Downgraded to B1-PD from Ba1-PD
…. Corporate Family Rating, Downgraded to B1 from Ba1
….Senior Secured Regular Bond/Debenture, Downgraded to Ba2 (LGD2) from Baa3 (LGD2)
….Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD4) from Ba2 (LGD4)
..Issuer: Silversea Cruise Finance Ltd.
….Senior Secured Regular Bond/Debenture, Downgraded to Ba2 (LGD2) from Baa3 (LGD2)
Outlook Actions:
..Issuer: Royal Caribbean Cruises Ltd.
….Outlook, Changed To Negative From Rating Under Review
..Issuer: Silversea Cruise Finance Ltd.
….Outlook, Changed To Negative From Rating Under Review
RATINGS RATIONALE
Royal Caribbean’s credit profile is supported by its good liquidity and solid market position as the second largest global ocean cruise operator based upon capacity and revenue which acknowledges the strength of its brands. Royal Caribbean is well diversified by geography, brand, and market segment. In the short run, Royal Caribbean’s credit profile will be dominated by the length of time that cruise operations continue to be highly disrupted and the resulting impacts on the company’s cash consumption and its liquidity profile. However over the long run, the value proposition of a cruise vacation as well as a group of loyal cruise customers supports a base level of demand once health safety concerns have been effectively addressed. The normal ongoing credit risks include the company’s high leverage, the highly seasonal and capital intensive nature of cruise companies and the cruise industry’s exposure to economic and industry cycles, weather incidents and geopolitical events. For the LTM period ended June 30, 2020, Royal Caribbean’s debt/EBITDA has weakened to 12.5x and EBITA/interest was 0.4x. Moody’s expects these metrics to continue to weaken over the next twelve months before beginning to recover in the second half of 2021.
The negative outlook reflects Royal Caribbean’s high leverage and the uncertainty around the pace and level of recovery in demand that will enable the company to de-lever to below 5.5x.
Royal Caribbean’s liquidity is good. Moody’s expects the company’s cash balances, which totaled about $4.2 billion at June 30, are sufficient to cover the company’s cash needs over the next 12 to 18 months. The company has entered into agreements to amend all of its export credit facilities and certain of its non-export credit facilities to waive compliance with its financial covenants through the fourth quarter of 2021 and is only subject to a minimum liquidity covenant of $500 million — the minimum liquidity requirement decreases to $350 million when the company raises additional capital. The company’s combined $3.5 billion revolver commitments are fully utilized. The company’s ability to access alternate forms of liquidity are deemed to be modest in the current operating environment.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded further in the near term if the company’s liquidity weakened in any way or if the recovery in cruising activity is delayed beyond our base assumptions which include a resumption of US cruising in the first half of 2021 with capacity days reaching at least 65% of their 2019 levels and occupancy reaching at least 70% by the second quarter with continued improvement from there. The ratings could also be downgraded if there are indications that the company is not on a path to restoring leverage to a sustainable level. The outlook could be revised to stable if the impacts from the spread of the coronavirus stabilizes and cruise operations resume at a level that enables the company to maintain debt/EBITDA below 5.5x. Ratings could be upgraded if the company is able to maintain leverage below 4.5x with EBITA/interest expense of at least 3.0x.
Royal Caribbean (operating under the name Royal Caribbean Group) is a global vacation company that operates four wholly-owned cruise brands, including Royal Caribbean International, Celebrity Cruises, Azamara and Silversea. The company’s brands operate a combined 63 ships. Net revenue for fiscal 2019 was $8.7 billion.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Peter Trombetta Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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