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