CORRECTION TO TEXT: MOODY'S CONFIRMS ROYAL CARIBBEAN'S Ba2 SENIOR UNSECURED RATING; OUTLOOK IS STABLE (SENIOR IMPLIED RATING AND ISSUER RATING CORRECTED TO Ba2)
Moody’s Investors Service confirmed Royal Caribbean’s (RCL) Ba2 ratings reflecting the better than anticipated rebound in the cruise industry pricing environment, our expectations that leverage will peak in 2002 and begin to decline in 2003, as well as our opinion that the company is unlikely to merge with P&O Princess following the RCL’s announcement that the implementation agreement with P&O Princess has been terminated, and P&O Princess has paid the company a $62.5 million break fee. The rating outlook is stable considering the improvement in cruise industry conditions that should enable Royal to grow earnings, and cash flow and improve its debt protection measures. This completes Moody’s review of Royal Caribbean’s rating that began on November 20, 2001 when the company announced its merger agreement with P&O Princess. Moody’s assigned a Ba2 senior implied, and Ba2 long-term issuer.
Ratings Confirmed:
Senior unsecured shelf registration at (P)Ba2.
Senior unsecured debt at Ba2.
Preferred stock shelf registration to (P)B1.
Ratings Assigned:
Senior Implied at Ba2.
Long-term Issuer Rating at Ba2.
RCL's ratings and stable outlook reflect the company's increased scale, its strong market position in the volume and premium segments of the cruise industry, its brand equity, as well as the company's sensitivity to consumer spending and economic downturns. The cruise industry has been negatively impacted by the events of 9/11/01 causing a weak price environment to worsen; however the industry and RCL has rebounded faster than expected. Net yields were expected to be down by 10-15% in 2002, but are likely to be down in the low single digits, thereby bringing pricing back to pre-9/11/01 levels. Moody’s notes that industry pricing is still well below peak levels reached in 1999. Additionally, RCL has taken pro-active steps to control costs, and re-deploy ships to drive-in ports that have experienced greater demand. Given continued industry wide capacity expansion, a weak economy, as well as geo-political risks (such as war in Iraq) Moody’s expects the operating environment of the industry will remain chal
lenging. Additionally, the booking window has narrowed limiting earnings visibility for 2003. If the improvement in the industry pricing environment should start to lose traction, or if demand falters, the rating outlook could be pressured. Moody’s anticipates that Royal Caribbean can effectively compete against the likely combination of Carnival and P&O Princess in the near to intermediate term.
RCL is nearing the end of its aggressive ship building program that commenced several years ago, and Moody’s expects leverage (Net Debt/EBITDA) to peak in 2002 at approximately 6.5x, and begin to reduce in 2003 and beyond. The company will take delivery of one more ship in 2002, two in 2003 and one in 2004 for a total approximate capital outlay of $1.9 billion. The company has sufficient cash balances to pay for the remaining ship delivery in 2002. Moody’s anticipate that RCL can finance more than 50% and 100% of its shipbuilding program and dividend requirements with cash from operations in 2003, and 2004, respectively. Therefore, absolute debt levels are expected to rise in 2003, but should be offset by growth in earnings primarily from capacity expansion resulting in improved debt protection measures. The company has sufficient liquidity to meets these capital commitments plus modest debt amortization given its $1.0 billion committed revolving credit agreement (currently undrawn) that matures in J
uly 2003, as well as commitments for export financing for up to 80% of the contract price for two ships. Moody’s notes that secured debt approximates 24% of total debt, including the operating lease on the Brilliance ship. Asset coverage for the unsecured debt remains adequate, but an increase in this level could result in the senior unsecured ratings being notched down.
Royal Caribbean, headquartered in Miami, Florida, operates a cruise line under the brand names, Royal Caribbean International and Celebrity Cruises. During the year ended December 31, 2001, the company's revenues were $3.1 billion.
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