Moody's Lifts Outlook on Royal Caribbean Cruises (RCL) to Positive
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Moody's Investors Service, ("Moody's") changed the rating outlook of Royal Caribbean Cruises Ltd. (NYSE: RCL) to positive from stable. At the same time, Moody's affirmed all existing ratings including the Ba1 Corporate Family Rating, Ba1-PD Probability of Default Rating, Ba1 senior unsecured notes rating, and SGL-2 Speculative Grade Liquidity rating.
The change in outlook acknowledges Moody's expectation that RCL's credit metrics will strengthen over the next eighteen months from a combination of earnings growth and debt repayment from mandatory ship debt amortization and debt maturities. It also incorporates Moody's belief that RCL is committed to achieving and maintaining debt to EBITDA at 3.5x and will forego any debt financed share repurchases or dividends until it has reached this level.
"The change in Royal Caribbean's rating outlook to positive reflects that we expect Royal Caribbean to focus on repaying debt in 2017 over making share repurchases," stated Maggie Taylor, Senior Vice President at Moody's.
The following ratings are affirmed:
Corporate Family Rating at Ba1
Probability of Default Rating at Ba1-PD
Senior unsecured notes and debentures at Ba1, LGD 4
Speculative Grade Liquidity rating at SGL-2
RCL's Ba1 Corporate Family Rating reflects its solid market position as the second largest global ocean cruise operator based upon capacity and revenue which acknowledges the strength of its brands. RCL is well diversified by geography, brand, and market segment. The rating also acknowledges that RCL's leverage has temporarily increased to 4.5x as of the twelve months ended June 30, 2016 as a result of the timing of two ship deliveries in the spring of 2016. Moody's anticipates that debt to EBITDA will return to 4.0x by the end of 2016. The rating considers that while industry wide capacity will increase, capacity expansion will remain at a rational level as a result of supply constraint. In addition, Moody's believes that the value proposition of a cruise vacation will support continued penetration of the vacation market by cruise operators. Key credit risks include the highly seasonal and capital intensive nature of cruise companies and the cruise industry's moderate exposure to economic and industry cycles.
Ratings could be upgraded if RCL continues to grow operating margins and the company achieves and demonstrates the willingness to sustain in the context of the cyclicality of the cruise industry; debt to EBITDA below 3.75x, retained cash flow to debt around 18%, and EBITA to interest expense over 4.0x. An upgrade also requires RCL's financial policy supporting credit metrics remaining better than these levels. Additionally, an upgrade requires RCL maintain liquidity well in excess of its near term funding needs.
Ratings could be pressured if the operating environment deteriorates causing cruise pricing to decline such that debt to EBITDA would be sustained above 5.0x or retained cash flow to net debt declines to 10% or if EBITA to interest expense drops below 2.5x.
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