Royal Caribbean Cruises Ltd. (NYSE: RCL) has not been spared from the investor carnage that has been seen in the cruise industry. On top of needing capital, the company had previously announced a voluntary suspension of its global cruise operations through at least June 11, 2020. Travel disruptions and port operations in multiple regions may result in further suspensions.

The big news from Wednesday was that Royal Caribbean was launching a new private debt offering, but this actually comes with multiple twists that could greatly influence its future.

With effectively no cruise lines in operation anywhere in the world, it is expected to be a long slow recovery for the entire industry even after cruises are allowed to start sailing. Even for those passengers who say they are not concerned about catching the coronavirus in a future second wave, if just one COVID-19 case is confirmed (or perhaps even suspected) then no passengers are likely going to be able to disembark for excursions and that boat will likely be quarantined with passengers unable to come back into the country. Cruise operators have been raising capital globally to stave off financial ruin as they are not allowed to operate.

Royal Caribbean announced on Wednesday that it has commenced a private offering $3.3 billion worth of senior secured notes to be due in 2023 and 2025. These secured notes and the related guarantees will be secured by 28 of Royal Caribbean’s vessels and material intellectual property of the company.

There are at least four twists that we have seen on the surface as a result of this Royal Caribbean debt offering that go beyond just how the notes are secured.

Many unsecured notes have been sold to investors by other distressed companies to raise capital. The first twist of how this plays out if the company were to default is that these note holders will effectively own a new cruise line due to backing by vessels and material intellectual property. Looking back at prior data, Royal Caribbean operated 62 ships and it had 16 ships on order as of March 31, 2020.

The second twist of this offering is that the net proceeds raised will be used to repay its $2.35 billion 364-day senior secured term loan agreement with Morgan Stanley. The remainder of the proceeds are earmarked for general corporate purposes, but the company also said this may include repayment of additional indebtedness.

The third twist here is that Royal Caribbean may have just caused its own credit rating to go to “junk bond” or speculative grade. Details from the press release indicate that Royal Caribbean is in compliance with its debt covenants through May 12. As of April 30, 2020, the company had liquidity of approximately $2.3 billion in cash and cash equivalents. The company also showed its expected debt maturities for the remainder of 2020 as $400 million and for 2021 $900 million.

There are concerns that the industry could be crippled permanently. Moody’s and Standard & Poor’s both took rating actions on Wednesday after the announced deal:

• Moody’s downgraded the ratings of Royal Caribbean (and Silversea Cruise Finance Ltd.), including its senior unsecured rating to ‘Ba2’ from ‘Baa3’, senior secured rating to ‘Baa3’ from ‘Baa2,’ and short term commercial paper rating to non-Prime from P-3. Moody’s also assigned a ‘Ba1’ rating and a ‘Baa3’ rating to planned secured note issuance and the credit outlook is “negative” after it initiated a review for downgrade back on March 11, 2020.
• Standard & Poor’s rates its senior unsecured notes at ‘BBB-‘ and said that its ‘BB’ issuer credit rating are unchanged. The ratings agency’s ‘Negative Outlook’ reflects high uncertainty in the base-case recovery assumptions for late in 2020 and into 2021.

A fourth twist is regarding customer deposits and future credits. Royal Caribbean’s filings indicated that it held $2.4 billion in customer deposits as of March 31, 2020. That sum includes roughly $800 million of future cruise credits related to prior trip cancellations through June 11, 2020. There are still many customers who have had cancelled voyages on Royal Caribbean and other operators who are not sure what they want to do nor what will become of their credits if the financial pressure from the recession carries over into 2021 or beyond.

Shares of Royal Caribbean were trading down 5% at $34.50 shortly before the closing bell on Wednesday. Its 52-week range is $19.25 to $135.32 and its market cap is down to $7 billion.

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