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Royal Caribbean (RCL): Tempting? Sure, But It Might Not Be a Buy Just Yet

Whoever invested in Royal Caribbean (RCL) a month ago has seen returns in the shape of 45%. As liquidity boosting measures have been put in place, and cruise lines are aiming to resume operations later in the year, optimism has sent these stocks soaring. Zoom out though, and on a year-to-date basis, RCL is still sinking 59% into the red.

This fact indicates how far the industry has fallen since the pandemic’s onset. As further evidence of the struggles faced by cruise lines in these COVID-driven times, barely a month after Royal Caribbean sold over $3 billion in senior secured notes at high interest rates to raise cash, the cruise ship operator is raising additional funds to keep it afloat.

The embattled cruise line is tapping the hole in the wall by pricing $2 billion in bonds and convertible notes. Looking more closely at the offerings, they are split in two: $1 billion senior guaranteed notes paying 9.125% interest due in 2023, and $1 billion in convertible senior notes due 2023 at 4.25%, which are convertible at a 25% premium.

RCL will create a new, wholly owned subsidiary that will own all of the equity interests in seven of its ships, which will guarantee the senior notes.

William Blair analyst Sharon Zackfia believes the cash will be an additional lifeline, should the cruise line remain chained to the harbor for an extended period.

The 5-star analyst said, “With Royal’s monthly cash burn in a zero revenue environment estimated at $260 million to $285 million (including interest expense and necessary capital expenditures, but excluding cash refunds of deposits and inflows from new and existing bookings), the additional capital raise adds approximately seven months to Royal’s liquidity runway in a zero-revenue environment, effectively funding the company for at least another 12 months.”

While Zackfia is “encouraged by Royal’s ability to continue to access funds,” the analyst reiterates a Market Perform (i.e. Hold) rating “based on limited visibility on the pace of recovery given uncertainty on the timing of a resumption of sailing.” Zackfia has no fixed price target in mind. (To watch Zackfia’s track record, click here)

Turning now to the rest of the Street, where based on 9 Buys, 4 Holds and 2 Sells, the analyst consensus rates RCL a Moderate Buy. However, the average price target comes in at $54.17, and implies a modest downside from current levels. (See RCL stock analysis on TipRanks)