Royal Caribbean’s (RCL) $1.25B Debt Deal Hides A Bigger Story

Royal Caribbean Group (RCL) completed a $1.25 billion debt sale on August 20, 2024, with a 5.55% coupon rate, maturing on January 20, 2034. The funds were primarily used to pay off floating-rate loans and to repay or refinance other debt. The deal, which was filed on February 29, 2024, offers insight into the company's financial standing.

By swapping floating-rate debt for fixed-rate notes, RCL eliminated some interest-rate uncertainty and has a manageable debt schedule, with $2.7 billion due in 2027 and $3.4 billion in 2028. As of June 30, 2024, RCL held $6.9 billion in liquidity and raised its revolving credit line by $250 million in July. The company reported strong second-quarter earnings of $4.21 per share, exceeding its own expectations, and raised its full-year adjusted EPS guidance to a range of $17.73 to $17.87, indicating a 14% growth.

RCL's earnings also included $404 million in dividends and $199 million in share buybacks. Despite a 4.4% increase in costs excluding fuel per passenger cruise day, the company's booking volumes remain above pre-pandemic levels, and bookings for 2027 are ahead of previous years, even on routes affected by geopolitical events in 2026.

However, third-quarter net yields are expected to remain flat while capacity increases by 8.5%, leading to revenue growth primarily driven by capacity expansion rather than higher yields. Additionally, geopolitical factors have negatively impacted bookings on certain itineraries, but management considers the impact to be modest.

The debt refinancing does not reduce RCL's overall debt, and the company still anticipates net interest expenses of $980 million to $990 million for the year. With capital spending estimated at $4.7 billion in 2026, the business requires a consistent influx of capital. The company has 56 hedge fund holders, up from 53 in the previous quarter, indicating continued interest from large investors.

Short selling remains a factor, with about 6.00% of the float sold short, though it is not a widespread concern. The forward P/E ratio of 12.12 as of September 18, 2024, suggests a low valuation multiple, particularly when compared to the management's 14% adjusted earnings growth guidance for 2026. While the bond sale is a minor development, the bigger question for RCL is whether the company can sustain earnings growth amid flat pricing in the third quarter, high interest costs, and substantial shipbuilding expenses.

Some analysts remain bullish, noting the favorable booking pace in 2027, while others remain cautious about the impact of interest expenses and potential geopolitical headwinds on future pricing.