TEXT-S&P rates Royal Caribbean senior notes 'BB'

Mon Nov 5, 2012 12:16pm EST

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Overview
     -- Royal Caribbean Cruises Ltd. plans to issue $500 million in
senior notes due 2022, and use the proceeds for debt repayment.
     -- We are assigning our 'BB' issue-level and '3' recovery ratings to the 
proposed notes.
     -- The stable rating outlook reflects our belief that Royal should be 
able to drive leverage improvement in 2013.

Rating Action
As Standard & Poor's Ratings Services previously announced, on Nov. 2, 2012, 
we assigned Miami, Fla.-based Royal Caribbean Cruises Ltd.'s proposed $500 
million senior notes due 2022 our 'BB' issue level rating, with a recovery 
rating of '3', indicating our expectation of average (50% to 70%) recovery for 
lenders in the event of a payment default. Royal expects to use the proceeds 
for debt repayment. All other ratings are unchanged.

Rationale
Our corporate credit rating on Royal reflects our assessment of the company's 
financial risk profile as "aggressive," and our assessment of the company's 
business risk profile as "satisfactory," according to our criteria.

Our assessment of Royal's financial risk profile as aggressive reflects high 
debt levels; we expect the ratio of total lease-adjusted debt to EBITDA to 
increase to around 6x and funds from operations (FFO) to total adjusted debt 
to decline to around 13.5% by the end of 2012. These measures are weak 
compared with our 5.5x threshold, and 15% to 20% target range, respectively, 
at the current 'BB' rating. EBITDA coverage of interest expense that will 
likely be in the mid-3x area in 2012, and an otherwise adequate liquidity 
profile, partly offset weak leverage measures. The current rating and stable 
outlook are based on our current expectation that Royal will reduce total debt 
to EBITDA (adjusted for lease and port commitments) to our 5.5x threshold, and 
improve FFO to debt to at least 15%, in 2013 through EBITDA growth and debt 
repayment.

Our assessment of Royal's business risk profile as satisfactory is based on 
its position as the second-largest cruise operator in the world, its solid 
brands, a relatively young, high-quality fleet of ships, high barriers to 
entry in the cruise industry, and an experienced management team. Key business 
risk factors include the capital-intensive nature of the cruise industry, lack 
of flexibility regarding committed ship orders, and the sensitivity of the 
travel and leisure sector to economic cycles.

We believe the cruise sector is slowly recovering from the impact of the Costa 
Concordia grounding, although booking trends remain somewhat weakened, 
especially for European itineraries in the contemporary segment. While Royal's 
load factor for fourth-quarter itineraries booked so far are below that of the 
same time last year at slightly higher per diems, cumulative 2013 bookings so 
far are higher than last year at higher per diems. Pricing remains strong for 
Caribbean itineraries, where a majority of the capacity is deployed; it 
remains weak for European itineraries. Royal plans to reduce capacity in 
Europe by 10% in 2013 in response to weak macroeconomic conditions. 

We believe net revenue yield in 2012 will increase in the low-single-digit 
area (compared with our earlier expectation that it would be flat) because of 
recently improving close-in booking demand. We expect net cruise costs per 
capacity day in 2012 will be up 5%. This incorporates a mid-teen percentage 
increase in fuel prices in 2012 (around 57% of Royal's estimated fuel 
consumption for the remainder of 2012 and 54% of 2013 fuel consumption is 
hedged, reducing some volatility in this significant cost item). Also, our 
2012 cost estimate incorporates Royal's announcement that distribution changes 
and deployment initiatives will increase costs by approximately 300 basis 
points in 2012. These investments have had a negative impact on 2012 EBITDA 
generation amid a challenging yield environment. Given these factors, and the 
expected 1.4% capacity increase, we believe 2012 EBITDA will decline in the 
high-single-digit area. We have incorporated into the rating that net revenue 
yield increases in the low-single-digits and EBITDA improves in the 
mid-single-digits in 2013. 

Downside risks to our performance expectations stem from a sustained, or more 
severe, negative impact to booking and pricing trends related to the accident, 
slowing economic growth and the sovereign debt crisis in Europe, and the risk 
that Royal experiences higher distribution, deployment, or fuel costs over the 
near term. Any one of these factors, if they worsen our expectation for EBITDA 
performance in 2013, would likely result in a negative outlook or potentially 
a lower rating, as Royal's ability to improve credit measures to within our 
thresholds at the current rating over the subsequent 12 to 18 months would be 
questionable.

In the first nine months of fiscal 2012, net yield increased 1.4%, while net 
cruise costs per capacity day increased 6.7%, resulting in EBITDA declining 
9%. As of Sept. 30, 2012, our measure of Royal's total lease and port 
commitment adjusted debt to EBITDA was 5.6x and our measure of FFO to total 
adjusted debt was about 15%, near our thresholds for the 'BB' rating. Based on 
our current expectation for an EBITDA decline in the high-single-digit area in 
2012 and new debt associated with the fourth quarter delivery of Celebrity 
Reflection, we believe total lease and port commitment adjusted debt to EBITDA 
would temporarily increase to around 6x, and FFO to total debt would fall to 
around 13.5% by the end of 2012. These measures are weak compared with our 
5.5x threshold, and 15% to 20% range, respectively, at the current 'BB' 
rating. 

Liquidity
Based on likely sources and uses of cash over the next 12 to 18 months and 
incorporating our performance expectations, Royal has an "adequate" liquidity 
profile, according to our criteria. Relevant expectations and assumptions in 
our assessment of Royal's liquidity profile include:
     -- We expect sources of liquidity (including cash and facility 
availability) over the next 12 to 18 months to equal or exceed uses by 1.2x. 
We believe Royal is likely to refinance part of its $1.5 billion in debt 
maturing in 2013, if necessary.
     -- We expect net sources to be positive, even if forecasted EBITDA 
unexpectedly declines 15% over the next 12 months.
     -- We believe Royal has solid relationships with its banks and a 
satisfactory standing in the credit markets.

Royal's liquidity sources include cash balances of $241 million as of Sept. 
30, 2012, and $1.7 billion in availability under aggregate unsecured 
facilities, including the five year EUR365.0 million term loan facility with a 
one-year delay draw option closed in July 2012 and $1.6 billion in aggregate 
revolver borrowing capacity. Royal prepaid a $100 million unsecured term loan 
maturing in September 2013 as part of its refinancing strategy. In August 2012 
the company borrowed $290 million under an unsecured term loan and used the 
proceeds to pay down revolver balances. In September 2012 Royal repurchased 
EUR255 million of its EUR1 billion unsecured notes due 2014. These actions 
increase Royal's flexibility to address upcoming maturities, in our view.

We expect capital expenditures to be $1.3 billion in 2012 (down by over 50% 
from 2010 levels) as ship deliveries are limited to one Solstice-class vessel. 
We expect deliveries to be financed with relatively low-cost export financing. 
There are no new ship deliveries in 2013. Given the substantial reduction in 
expected levels of capital spending in 2012 and 2013 compared to recent years, 
we believe Royal will generate modestly negative free operating cash flow in 
2012 and significant free operating cash flow in 2013. Royal recently 
increased its annualized quarterly dividend to about $105 million per year. We 
expect any future increase in Royal's common dividend to occur in concert with 
further deleveraging. We expect Royal to meet high debt maturities totalling 
$600 million, $1.5 billion, and $1.5 billion in 2012, 2013, and 2014, 
respectively, with internal cash flow and revolver borrowings, although some 
portion is likely to be financed in a capital markets transaction. We expect 
overall debt levels to increase moderately in 2012 on new debt associated with 
the delivery of Celebrity Reflection offsetting debt amortization.

Recovery analysis 
We expect to publish a complete recovery analysis on Royal Caribbean as soon 
as practical following this release. 

Outlook 
Our stable rating outlook reflects our belief that, despite the impact from 
the Costa Concordia grounding, negative economic headwinds in Europe, and 
ongoing geopolitical events in the Middle East and North Africa, Royal should 
be able to improve leverage in 2013 following a temporary leverage spike in 
2012. We expect Royal will reduce total lease and port commitment adjusted 
debt to EBITDA to our 5.5x threshold, and FFO to debt to at least 15%, in 2013 
through EBITDA growth and debt repayment. 

Downside risks to our performance expectation stem from a sustained, or more 
severe, negative impact to booking and pricing trends related to the accident, 
slowing economic growth and the sovereign debt crisis in Europe, and the risk 
that Royal experiences higher distribution, deployment, or fuel costs over the 
near term. Any one of these factors, if they worsen our expectation for EBITDA 
performance in 2013, would likely result in a negative outlook or potentially 
a lower rating, as Royal's ability to improve credit measures to within our 
thresholds at the current rating over the subsequent 12 to 18 months would be 
questionable.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Royal Caribbean Cruises Ltd.
 Corporate credit rating       BB/Stable/--

Ratings assigned
Royal Caribbean Cruises Ltd.
 Senior unsecured
  $500 mil. Notes due 2022     BB
    Recovery rating            3
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