Are Norwegian & Royal Caribbean Officially Underwater?

As of September 30, the company’s long-term debt totaled $10.5 billion, up from $6.1 billion at the end of lst year. CFO Mark Kempa, told analysts during the Q3 earnings call last month that he expected the Q4 monthly cash burn to be upwards of $175 million “if all of our vessels remained in their lay-up status at minimum manning levels and did not begin preparations for a return to service.”

Royal Caribbean and Norwegian Cruise Line were put on notice by S&P Global Ratings for a credit-ratings downgrade amid uneasiness surrounding the latest continuation of U.S. cruise moratoriums into February & March.

In a news release, the ratings firm announced Royal Caribbean’s listing “reflects the heightened likelihood that we will lower our rating within the next few months, given a high degree of uncertainty as to Royal’s recovery path and its ability to substantially improve leverage in 2022 from what will likely be unsustainable levels in 2021.” [Step Aside DoorDash: Airbnb’s Market Cap Hits $114.8 Billion]

With ships sitting in their stables, Royal Caribbean has been hemorrhaging hundreds of millions of dollars of cash every month. In October, the company approximated that its monthly cash burn was averaging about $250 million to $290 million “during a prolonged suspension of operations.” As of September 30, the company’s long-term debt was sitting at $17.6 billion, more than double the $8.4 billion at the end of 2019—a reflection of the efforts Royal Caribbean has made to raise capital to stay above water.

“Our economic picture is tough. No revenue is coming in, zero. And our expenses continue, and I know each of you, like us, are having to make decisions that bring tears to your eyes.” — Royal Caribbean CEO Richard Fein

A lion’s share of Royal Caribbean’s commercial enterprise has been halted since mid-March due to the pandy. It’s had a limited number of sailings outside U.S. waters. The company said on Wednesday that a passenger aboard a cruise out of Singapore had tested positive for the virus.

Chris Woronka, an equity analyst at Deutsche Bank who covers the beat on cruise companies, asserts that the cash burn is a yuge concern for the industry, even when more ships start to sail. “You’re still going to be burning a lot of cash in the early days of resumption of service,” he says, adding that the companies will have to revamp their operations gradually once they’re green lighted in U.S. ports.

S&P Global said that negative credit watch listing “also incorporates a slower restart of cruises in many markets” and “the possibility that the pandemic could alter consumers’ demand for travel and cruising over the longer term because of concerns around contracting the coronavirus.”

Before COVID-19, the cruise industry was enjoying some off the most robust industry growth rates outside of the technology sector. The graph shows the number of global ocean cruise passengers has grown by an average 5.36% annually since 2009– a period that even included the aftermath of the 2008 Great Recession. Industry group Cruise Lines International had even projected an acceleration to 6.7% growth in 2020 prior to the pandemic.

For the cruise companies, the wave of positive news on vaccines has been a big impetus, boosting their shares—though those of all three of the major U.S.-based operators remain in the red for 2020. In recent months, executives at Royal and its peers, notably Norwegian and Carnival [$CCL], have conveyed optimism about cruise booking activity for next year.

S&P Global Ratings has Royal Caribbean’s issuer rating at B+, which below investment grade. A rating in the B category “indicates that the issuer is more vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments,” per an S&P spokeswoman.

Norwegian, who also carries a B+ issuer rating, was also placed on credit watch negative following another extension of its cruise suspension. “We expect Norwegian to burn more cash relative to our previous expectations and for leverage to remain very high in 2021,” according to S&P Global Ratings. [Airbnb & DoorDash to IPO via ‘Hybrid Auction’]

The company’s EBITDA margins surged toward the end of 2016, going over 30% and steadily increasing earnings per share, which peaked in the seasonally high third quarter of 2019.

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