Royal Caribbean (NYSE:RCL) has become the last of the big three cruise lines to take a major step in raising new cash in order to survive the coronavirus pandemic. The company had already drawn down its credit lines, laid off staff, and delayed capital expenses. Now it has made plans to sell $3.32 billion in senior secured notes at steep interest rates.

"These are unprecedented times for all of us. Travel restrictions and stay-at-home orders are important to slowing the spread of the virus, but they have severely impacted our operations," said CEO Richard D. Fain in a press release. "We are taking decisive actions to prioritize the safety of our guests and crew while protecting our fleet and bolstering liquidity."

What is Royal Caribbean doing?

The cruise line finished April with "liquidity of approximately $2.3 billion all in the form of cash and cash equivalents." It added $150 million to its credit facility on May 4 and drew that down. 

Now it has priced a private debt offering under the following terms:

Royal Caribbean Cruises Ltd. has priced its private offering of $1 billion aggregate principal amount of 10.875% Senior Secured Notes due 2023 (the "2023 Notes") and $2.32 billion aggregate principal amount of 11.500% Senior Secured Notes due 2025 (the "2023 Notes," together with the "2025 Notes", the "Notes"). The 2023 Notes will mature on June 1, 2023. The 2025 Notes will mature on June 1, 2025 and are redeemable at the company's option beginning June 1, 2022. The Notes are expected to be issued on or around May 19, 2020.

That's a steep price to pay for money, but it's in line with what rival Carnival (NYSE:CCL) had to pay for a similar offering. The debt is secured by 28 of the company's ships as well as "material intellectual property of Royal Caribbean."

Cruise lines are being forced to borrow money at high-interest rates because of the uncertainty of their future. Royal Caribbean has not canceled its cruises for all of June, but an order from the Centers for Disease Control and Prevention makes any sailing before late July very unlikely.

Carnival has a plan in place to begin sailing from three ports using eight of its ships in August. That seems plausible, but even if those ships sail, they will likely do so with less-than-full passenger loads and with customers paying lower-than-usual prices.

It's not going to be an easy recovery for any cruise line. Nobody knows when it will be safe to gather people in significant numbers, and until that can happen, the best cruise lines can hope for is to operate at very diminished capacity.

Necessary steps

No business wants to pay interest rates this high, but Royal Caribbean has no choice. It needs cash to survive, and anyone offering that money understands the risks involved in lending it. That has forced the cruise line to agree to somewhat egregious terms.

"Since late January, we have undertaken several proactive measures to mitigate the financial and operational impacts of COVID-19," said CFO Jason T. Liberty in a press release. "Our focus is on bolstering liquidity through significant cost-cutting, capital spend reductions, and other cash conservation measures."

Liberty did not rule out additional borrowing or taking other measures to remain solvent. These are bleak but needed steps to help the company survive long enough for an eventual return to normal.

This was once a very profitable business, and when the pandemic passes it should be again. How long it takes for that to happen remains a very big question.

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