April 3, 2008
Standard & Poors lowers its ratings on RCL
Standard & Poor's Ratings Services today lowered its ratings on Miami, Fla.-based Royal Caribbean Cruises Ltd. (RCL); the corporate credit rating was lowered to 'BB+' from 'BBB-'. The rating outlook is stable.
"The downgrade reflects our assessment that given its aggressive, partially debt-financed fleet expansion strategy, RCL will not generate sufficient growth in EBITDA to drive its credit metrics to levels we have outlined as consistent with an investment-grade rating over the intermediate term," explained Standard & Poor's credit analyst Ben Bubeck.
More specifically, the previous rating incorporated the expectation that leverage, adjusted for operating leases and port commitment fees, would trend to less than 4x. Despite EBITDA growth of 8% in 2007, leverage remains in the mid-4x area, and Standard & Poor's not expect RCL to meet the 4x target until at least 2010, primarily due to fleet-related investments. Capital expenditures associated with RCL's fleet expansion are expected to substantially exceed the company's operating cash flow generation over the next few years, says Standard & Poor's, precluding the company's ability to drive improvement to its credit metrics via debt repayment. Finally, while cruise industry performance has thus far fared well despite the slowing U.S. economy, economic factors, including rising fuel costs, weigh into Standard & Poor's forward view of RCL's performance, though the company affirmed its full-year guidance in its 10-K filed on Feb. 19, 2008."
The rating on RCL reflects an aggressive financial risk profile, the capital-intensive nature of the cruise industry, and the sensitivity of the travel and leisure sector to economic cycles, says Standard & Poor's. These factors, it says, are somewhat offset by RCL's solid brands, a relatively young and high-quality fleet of ships, high barriers to entry in the cruise industry, and an experienced management team.
The issue-level rating RCL's senior notes and debentures also was lowered to 'BB+' (at the same level as the corporate credit rating on the company) from 'BBB-'. A recovery rating of '3' was assigned to this debt by Standard & Poor's, indicating that lenders can expect meaningful (50% to 70%) recovery in the event of a payment default.
"Although our analysis indicates recovery in the 90% to 100% range, the recovery rating has been capped at '3' due to the possibility that RCL may incur additional and potentially secured debt as its credit profile weakens, material enough to reduce our recovery estimate," says Standard & Poor's. "Typically, as a company with a high-speculative-grade rating transitions down the rating scale, which is the case under our simulated default scenario, incremental debt, often secured, is added to the capital structure. It should be noted, however, that RCL does not currently have any secured debt in its capital structure, and the terms of its existing unsecured facilities limit the amount of secured debt that the company can take on."