Royal Caribbean (RCL -5.49%) has been very active in the capital markets to make sure it has enough cash to survive the coronavirus pandemic. The company plans to raise two concurrent $1 billion offerings.
The first will be senior guaranteed notes due in 2023 that pay 9.125% interest, while the second offering will be convertible senior notes due in 2023. The shares are convertible at a 25% premium.
"The convertible notes will be convertible at the holder's option in certain circumstances. Upon conversion, the company may satisfy its conversion obligation by paying or delivering, at its election, as applicable, cash, shares of its common stock, or a combination of cash and shares of its common stock," according to a press release.
What is Royal's liquidity position?
Royal Caribbean has been spending between $250 million and $275 million per month during its current shutdown. This includes "ongoing ship operating expenses, administrative expenses, debt service expense, hedging costs, expected necessary capital expenditures (net of committed financings in the case of new builds), and excludes cash refunds of customer deposits as well as cash inflows from new and existing bookings," according to a press release.
The company ended April with $3.3 billion in liquidity. When you add in the $2 billion it expects to raise via the new offerings, that would give it $5.3 billion in available cash. Royal Caribbean does have $1.3 billion coming due this year or next. That gives it $4 billion -- or roughly 16 months -- of cash to see it through the current shutdown.
Interest expenses take that reserve down by about two and a half months, but the cruise line should have enough cash to see it through the pandemic.
"We have taken swift and substantial actions to bolster our financial position by significantly reducing our operating and capital spend and leveraging our strong balance sheet to raise additional capital," said CFO Jason T. Liberty.
Is it safe to buy Royal Caribbean shares?
Bankruptcy now seems less likely, but it's not entirely out of the question. The reality is that Royal Caribbean -- like the other major cruise lines -- does not know when it will be able to operate at all, let alone return to some semblance of normal. It also does not know when consumers will feel comfortable cruising or when they will have the discretionary income to take vacations again.
If cruising returns in 2020, it will be limited. Some ports have already been closed for the rest of the year, and others may not be willing to have a major influx of tourists (even if the money those tourists bring is badly needed).
Royal has reported encouraging booking trends, but those numbers don't mean much given that the cruise line now allows customers to cancel until 48 hours before their sailing. That means some -- maybe many -- consumers are booking cruises on a "wait and see" basis where they may postpone their trip based on the conditions when their travel date arrives.
It's fair to say, however, that Royal Caribbean appears likely to survive. It's possible, maybe even likely, that its business will bounce back and be very profitable once again.
Buying shares is safer than it was, but certainly not safe. This is a long-term trip where the ship could literally sink. For fans of the brand, this is a smart time to buy, as long as you understand that there are no guarantees and that it may take years for the business to make a full recovery.