Cruise control
Royal Caribbean’s US$2bn bond offering in September demonstrated how a cruise line still emerging from the sector’s pandemic-related slowdown could be smart and innovative in one of 2022's most difficult weeks for high-yield.
Market participants could be forgiven for missing the deal’s significance. The Miami-based company had already successfully raised US$2.25bn via two unsecured bond offerings in 2022 by the time it returned to investors for this early autumn trade. All eyes that week were also on the hotly anticipated US$4bn bond backing the buyout of Citrix Systems that priced two days before the cruise line operator’s deal (and with a concerningly big discount).
Yet even after Citrix’s poor showing strongly suggested the primary market for junk-rated debt was all but shut, Royal Caribbean (and sole lead Morgan Stanley) saw an opportunity to use that same market to refinance the remainder of its pandemic-era bonds due 2023.
Never mind also that the company’s stock was down about 35% on the year, credit spreads were gapping out or that the latest inflation print – a potentially big factor for cruise-going travellers – was, at 8.3%, the highest in more than 40 years.
B2/B rated Royal Caribbean nonetheless decided to hit the market. But the decision came only after it solved a very company-specific problem: it did not have enough collateral to do what it wanted to do. Market conditions being what they were, a regular unsecured bond was out of the question and the collateral necessary to do a typical secured deal was tied up elsewhere.
“When we came back to manage the 2023 maturity, the collateral pool had already been partially sold off to a 2025 maturity as well, so they didn’t have [enough] collateral to refinance the 2023 maturity with,” said William Graham, co-head of North America leveraged finance origination at Morgan Stanley. “They had a billion dollar secured deal and they only had [about] US$250m of collateral.”
Royal Caribbean and Morgan Stanley, after getting the blessing of the ratings agencies, structured the deal as follows: a Ba3/BB– rated US$1bn tranche of senior secured notes backed by collateral capped at US$270m and a B3/B+ rated US$1bn tranche of priority guaranteed notes. The offerings priced at par and on the tight end of price talk at 8.25% and 9.25%, respectively.
The two tranches were multiple times oversubscribed, showing continued investor appetite for Royal Caribbean credit. Proceeds were used to redeem its 10.875% 2023 secured notes and 9.125% 2023 priority notes, both issued in 2020.
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