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JLMoran

OK, need help to understand this one -- Royal takes out $2.2B loan

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OK, first read this article just posted by @Matt. I've found (a copy of?) the original press release, and it says basically the same as Matt's article. Neither is long on detail to help anyone really understand the nature of the loan they just took.

Like I've said before, while I work in the financial industry I'm far from an expert. But debt, whether short term or long term, is debt. Maybe the term that's being used here -- "Secured Term Loan Facility" -- changes either how this particular type of debt works and really does make it an asset (they're the loan issuer instead of the payer), but as I read it, this is 2.2 billion dollars they have to pay back to the backing banks in a year (two at most), and the cash they have gotten from it is going to steadily decrease each month as they make the required payments back.

So I'm a bit confused by the article's statement (which I assume is coming at least in part from Royal) that this "enhances their liquidity position." Liquidity is cash and assets on hand to pay off debts and keep a company afloat. A short-term cash infusion doesn't strike me as especially liquid when it's vapor after a year or two.

Can someone with better understanding of debt instruments help me here? I will say that after reading this, I am glad that I have not invested in them as of yet. They just doubled their loan debt, even if only for a year or two, at a time when their net income and cash flow is about to be constrained for at least a full quarter and possibly longer. That nice steady 3:1 asset-to-liability ratio I saw on their 10-K just became more like 2:1 or 1.8:1, which strikes me a red flag.

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You and me JL are of the same thinking, limited in depth of knowledge as well.

So I could be wrong but am I understanding the following correctly???:

 

We are talking about Royal Caribbean and all it related brands (Azamara, TUI, Pulmanteur, Celebrity, etc.)

Last year RCL made $5 B profit, After all expenses they were $5 B to the good.

Two weeks ago, RCL agreed to a line of credit for $500M "for liquidity". Basically, the opportunity to take $500M if they need it.

Today they take out a $2.2 B loan "for liquidity" to be repaid in a year, or extendable to be repaid over two years. This means they have received the funds and owe them back. Matt's article kind of says these funds are to keep the ball rolling on all the new ships and upgrades. (Incidentally, there are 17 new ships across all brands in the works). So......this $2.2B is a loan to make sure the already agreed to loans still work out???

 

Big business is different than personal finance but if this were a conversation between me and my father he would say the following:

 

Dad: Last year you had $5 billion in the bank?

Me: Yep

Dad: Then the bad thing happens...

Me: Really bad thing....

Dad: So I agree to make available to you $1/2B just to get you through.

Me: Yes

Dad: Then a week later you go take out a short term loan of $2.2B, so that your other future loans will still be available?

Me: Yeppers

Dad: So.....It's March 23rd; since January 1st you have taken in nearly $8B, of which you only have $3.6B today? In 82 days you have blown through $4.4B....AND......have no firm or reasonable expectations of when you will be making money again???? You have loans to cover other loans??? You are still hell bent on essentially buying things that you already own??? Is thrift a word in your vocabulary??? 

Me: Yeah but... I want, I want, I want.....

Dad: Follow me to the woodshed   <takes off belt>

 

 

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@bobroo, as far as being able to put the money towards existing ship upgrades and such, I suppose that one way to look at that is they are taking a loan out to make sure those jobs that were put on hold are not just canned altogether, ruining the lives of the shipyard employees and others who are already on a knife edge of surviving this financially. IF that's the case, that's certainly a laudable thing for them to do as a side benefit; though let's be honest, what they absolutely want is to stay as on track as possible for their planned developments.

I actually went back to their investor relations page and found a Form 8-K filed today that actually goes into some very deep details, if you're someone with a degree in finance and/or financial law who knows all the terminology used. But here is a very interesting quote from the very start of that document (emphasis added):

Quote

The Company’s obligations under the Loan Agreement are guaranteed by our wholly-owned subsidiaries, Celebrity Cruises Holdings Inc., Celebrity Cruises Inc. and certain of our wholly-owned vessel-owning subsidiaries, and will be secured by our trademarks and a pledge of 100% of the equity interests of certain of our wholly-owned vessel-owning subsidiaries. We will also use commercially reasonable efforts to deliver a mortgage in favor of the collateral agent over each of the vessels owned by such vessel-owning subsidiaries.

So this is not some general secured loan against everything that RCL owns. This is a loan secured almost entirely by the assets of Celebrity, with a smidge of additional assets from their other lines (probably Azamara more than Royal). The fact the security is only against the "wholly-owned vessel-owning subsidiaries" says to me that's only Celebrity, Azamara, and Royal; they don't fully own Silversea, Pullmantur or the others they're involved with.

The way I interpret this part is that Celebrity's assets alone (not just ships, which are far from liquid collateral, but cash and short-term investments) have almost enough value that they don't need to put up much more as collateral for the loan. Another interesting part of this is that Celebrity's ships are all older, except for Edge and Apex, but they were just all refurbished as part of a monster upgrade program. And the pricing on X cruises is a good bit higher vs Royal, with a smaller fleet, so that subsidiary likely brings in higher profit for paying off the loan.

Azamara? They're even more expensive, but their fleet and the ships it holds are tiny, and do the definition of boutique cruises. Celebrity, I think, might be their main bread and butter for total company income. I haven't read their past 10-K or 10-Q docs in enough depth to have noticed if they break the income and profit down by cruise line, but from what I remember of the 10-k financial charts, they did not. Smart move, so competitors don't know which part to really heavily target.

But, at the same time, they have a plan in place to effectively replace actually having the ships or other material properties as the collateral with a mortgage, presumably on the ships. Not just Apex and Edge. Those are only worth... a couple hundred million? Certainly nowhere near 2.2 billion. No, if there's a mortgage involved with Celebrity I imagine it would have to be for all of the ships in the fleet.

If I'm reading that part right (and boy, is that a big freakin' IF), that means the short-term 2.2B loan could be replaced by a medium-term "mortgage" on some number of Celebrity's ships for equivalent or greater value (after interest). Smaller payments per month because of longer term, so less visible on the quarterly bottom line; but now those rapidly depreciating assets (especially Edge and Apex) became in my mind a bit of an albatross around Celebrity's neck for the next several years.

Lord, what an accounting shell game is at play here!

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Liquidity is very simple ... cash in hand = liquidity.

Debts and other assets are irrelevant, liquidity just means do you have cash available to pay bills.

I just grabbed $1M on my (much smaller) company's line of credit .... not because i need it now but because when i need it to pay bills in 2-3 months i think there is an excellent chance the bank wouldnt allow me to take it.

So now i am "liquid" .. i have cash sitting around in case i need it.

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I suspect that RCL and the bank can re-write the line of credit terms when nearing the two years and extended it out over mannnnnnny years. Banks love that. Agreed, glad I haven't bought stock. Prefer to invest in companies with no debt on their books. 

Edited by Baked Alaska
another thought and grammar police

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1 hour ago, Baked Alaska said:

I suspect that RCL and the bank can re-write the line of credit terms when nearing the two years and extended it out over mannnnnnny years. Banks love that. Agreed, glad I haven't bought stock. Prefer to invest in companies with no debt on their books. 

Completely correct and your beginning to touch on a potential big problem in the future.....RCL has had excellent financials for all these bankers and investors to sign up for future endeavors. In the future when the financials are less than stellar, at what price are they going to write the loans?  Nobody in the history of the world has called a banker “compassionate”, “understanding of the circumstances”, or.....”forgiving.” What has occurred here over the past month and a half is going to have a big impact for rates of interest for years to come on many of the new ships or for what ever else they receive loans.

Companies with no debt? There is only one that I know of; Berkshire Hathaway. I hope you have Class A shares!

 

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@JLMoran that’s great due diligence! Thanks for sharing.

I agree, it’s all of Celebrity that is being pawned.

“Wholly owned vessel-owning subsidiaries” ? I don’t think that’s Azamara, I think they mean Pullmantur. Example, Monarch of the Seas was retired and brought to Pullmantur. I’m guessing Royal still owns the boat but somehow leases it’s use. I don’t believe Royal has any say in the day to day Pullmantur management.

Perhaps Royal expects to replace these recent loans with Federal money? Federal money that is cheaper and not a lot of strings attached? If so, I hope they get their brand-new best friends to repeal the Hatch Act because maybe a good way to get back online is to have short sailings that don’t go out of country.

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8 hours ago, bobroo said:

Companies with no debt? There is only one that I know of; Berkshire Hathaway.

One other, up until about 5 or so years ago: Apple. Only reason they have debt now is because they issued a number of bonds that have been used to pay for their new main campus and some other projects, rather than liquidating the cash and short term investments. And to be clear, they could have easily done it all with cash; their cash and short-term investments hoard is monstrous! While officially debt, understand they could pay back those bonds today and barely even blink. Main reason they took the debt was to avoid having to pay the taxes all at once on that large of a cash divestment. (plus any supplemental taxes for repatriation, since like most megacorps the majority of their war chest is held outside the US)

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10 hours ago, bobroo said:

Companies with no debt? There is only one that I know of; Berkshire Hathaway. I hope you have Class A shares!

 

You better believe it! And, I have others without debt and I have others that do have debt (not as many, though).

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9 hours ago, Osu_buckeye said:

Hatch Act???  You mean Jones Act.

Oops! You are absolutely correct it’s the Jones Act that prevents cruise ships from behavior they would very much like to do.

I apologize.

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2 hours ago, JLMoran said:

One other, up until about 5 or so years ago: Apple. Only reason they have debt now is because they issued a number of bonds that have been used to pay for their new main campus and some other projects, rather than liquidating the cash and short term investments. And to be clear, they could have easily done it all with cash; their cash and short-term investments hoard is monstrous! While officially debt, understand they could pay back those bonds today and barely even blink. Main reason they took the debt was to avoid having to pay the taxes all at once on that large of a cash divestment. (plus any supplemental taxes for repatriation, since like most megacorps the majority of their war chest is held outside the US)

Juxtaposing your ideas onto RCCL's situation, why not ride out the storm as it were, but leave some ships in port/drydock when the industry is moving again. Sell a part of the fleet to raise cash, unless that's the plan to bring down the debt. I think RCCLs strategy is like hoping a band-aide will hang on during a long, hot shower.

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47 minutes ago, Baked Alaska said:

Sell a part of the fleet to raise cash, unless that's the plan to bring down the debt.

Sell ships to who?  Who would buy a cruise ship right now?  Let's say Vision was worth $200M before the virus.  Now?  Maybe $20M would fetch a buyer.  

So you sell ships below market value.  Let's say someone has ample cash and buys up older and smaller ships from the big three.  A year from now they launch a brand new budget friendly cruise line offering cruises for $40.  They can offer dirt cheap cruises because their cost to acquire a fleet was pennies on the dollar.  

Now 1/3 of all future cruise business goes to this new cruise line making it that much harder for the big three to crawl their way back out of the red.  This is exactly why Carnival has a lot of older and smaller ships in the fleet.  Safer to keep them close as opposed to fueling a competitor who will steal some of the market away from you.

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2 hours ago, twangster said:

Sell ships to who?  Who would buy a cruise ship right now?  Let's say Vision was worth $200M before the virus.  Now?  Maybe $20M would fetch a buyer.  

 

I thought about clarifying and then thought "nah". I should have. Yes, NO ONE will be buying in the near future. I am talking about in the next 3 to 5 years. Vision, in your hypothetical, will be worth more. Cut it from the fleet, raise the cash, and get rid of the debt. . . There WILL be buyers, maybe even now, poised to make a purchase at sale prices. But my message to RCCL, DON'T BUY BACK COMPANY STOCK! 

Edited by Baked Alaska

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3 hours ago, WAAAYTOOO said:

I think any cruise line would have a difficult time selling any of their ships right now.  Who would want to buy them ?

I’m sure the Sultan of Brunei could find something to do with the Oasis of the seas. Lol 

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1 hour ago, Zambia-Zaire said:

That's exactly what most of these companies do when they get bailout money...

That's why I stated that. If the government bails them I, that's what they will do. I hate that. Plus, with 2B USD borrowed from their line of credit, that action will over leverage the company. I can hear the toilet flushing, already. 

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22 hours ago, bobroo said:

 

Companies with no debt? There is only one that I know of; Berkshire Hathaway. I hope you have Class A shares!

 

Not sure why you think Berkshire Hathaway doesn't have any debt.  The company is a direct and indirect issuer of Corporate Bonds among other forms of debt, including bank loans, asset securitizations, leasing, etc.  Check their most recent 10-K, they have over $100 BILLION in Debt issued directly by Berkshire, wholly owned subsidiaries, and consolidated investments.

If you don't have debt, it means you are 100% equity financed.  Equity is the most expensive form of financing.  A well-run company will be an attractive credit risk and can get debt at a cost much less than the cost of equity.

For simplicity sake, assume that investors require 12% return on investment for equity (stock ownership), whereas debt investors are willing to lend money at 6% as long as the company doesn't have more than 50% of their capital from debt.  The all-equity company has a cost of capital of 12%.  The company with 50% debt has a cost of capital of 9% (0.5x12% + 0.5x6% = 9%).  I'm ignoring tax effects, but that would lower the cost even further for the 50% debt company as interest expense is deductible.

A good company uses the debt financing to invest in projects (buy ships?) that produce a return in excess of the cost of the financing.  All of those returns go to the equity holders after the debt is repaid.  A project is evaluated on this basis by prudent managers.  There are several ways to do it, including payback period, IRR, NPV, etc.  NPV is probably best for long-term asset investments like ships - they have a long life span.

 

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15 hours ago, monctonguy said:

I dont understand it all either, nor do I really care to.

 

What I do care about though...is how Royal is going to pay all this money back.....and NOT raise cruise prices......that's what I would like someone to tell me......

Oh that's easy. Just jack up the prices at CocoCay. $5,000 for a floating cabana anyone? 🤣

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On ‎3‎/‎25‎/‎2020 at 12:57 AM, KWofPerth said:

Oh that's easy. Just jack up the prices at CocoCay. $5,000 for a floating cabana anyone? 🤣

Dont laugh.....I predict a lot of increased pricing on cruises and everything else associated with a cruise moving forward..

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48 minutes ago, monctonguy said:

Dont laugh.....I predict a lot of increased pricing on cruises and everything else associated with a cruise moving forward..

As with all such things, there's going to be a balancing act. Celebrity was already pricing 2021 cruises significantly higher than this year's, so much so that people who have chosen to cancel their Iceland & Greenland sailing for this year due to health concerns are refusing to rebook on next year's itinerary. And even with the current year, the pricing they are charging on some excursions has been nuts vs. what I see when I look at directly booking with a third party.

When they see that people aren't booking, aren't buying drink packages or dining, and/or are not booking shore excursions with them; and when people continue to refuse to even think about booking because everyone they talk to continues to malign the entire industry as a hotbed of disease, the industry as a whole won't have a choice but to lower prices or else take a loss (at best break even) on those sailings.

They're a business, they're not going to let themselves continue to hemorrhage money like this, and they know it's going to be critical to restore faith in the industry and positive word of mouth if they ever want to return to previous levels of profitability.

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I don't know much about finance, but I think RCCL along with a lot of companies, during these trying times are just trying to find a way to make it through this all and still come out the other side as a viable company.  There are going to be a lot of companies that won't make it through this, especially if it goes another month or two.

The companies that make it through will make plans to payoff their debt or make up their profits down the road. Hopefully, customers across all companies will know if a company is trying to make back their losses quickly, by raising prices and make purchasing decisions to let those companies know that that is not acceptable. 

My hope is that RC will choose long term success by spreading out their losses over a longer period of time and try not to make it all back at once.

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I don't think RCCL will go under unless this lasts for the 18 months some have predicted. If we are back to traveling by the end of the year I think the cruise industry as we know it will still be around. I think there will be some steals to get too just to get as many bodies back on board as possible. Those of us on here love cruising, but once again the news is smearing the industry and I have several friends and coworkers that still comment on a cruise ship being a "germ factory" but when I ask them if they wash their doorknobs and railings 3 times a day and clean their bathrooms 2x daily they all are shocked that RCCL takes those measures. I was just on Symphony the week before the shutdown and the ship was extremely clean just as all other royal ships I've sailed on (other than what passengers do with their food between cleanings). I think the news would do a favor to us all by actually going on a cruise themselves and getting a passenger experience for themselves and I bet they'd speak more highly of the vacation we all love.  I'm optimistic we will get to enjoy the breeze blowing on a day at sea in the not too distant future and life can be back to normal once again. If this COVID-19 last for the 18 months dooms day scenario then we are going to be worrying about a lot more things than the cruise industry. Could you imagine all the cruise ships just sitting somewhere if no cruise lines were in business again? That's crazy talk

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