Global cruise company, Royal Caribbean Cruises Ltd., is expected to see a significant increase in revenue, EBITDA, and cash flow in 2023. This is due to a well-booked position, a return to normal occupancy, and better pricing compared to 2019. This improvement is expected to result in a decrease in leverage to around 7x in 2023.

S&P Global Ratings has revised its rating outlook on the company to stable from negative and has affirmed all ratings, including the ‘B’ issuer credit rating. The company plans to issue $700 million in priority guaranteed notes to repay principal payments on debt maturing in 2023 and/or 2024, and these notes have been assigned a ‘B+’ issue-level rating and a ‘2’ recovery rating by S&P Global Ratings.

The stable outlook reflects S&P’s forecast for significant improvement in credit measures in 2023, driven by anticipated revenue and EBITDA growth as Royal operates under more normal conditions and recovers from the impact of the COVID-19 pandemic.

Royal’s 2023 booked position provides sufficient revenue visibility to support improvement in credit measures this year. The company’s bookings are well within historical ranges and at record prices, despite a 14% increase in capacity from 2019. The booking window has returned to pre-pandemic levels, contributing to a strong wave season. Royal continues to exceed pre-pandemic onboard revenue, and pre-cruise purchases for onboard experiences are higher than in prior years due to higher participation and higher pricing. North American sailings, which make up 70% of 2023 capacity, are booked at record levels for the full year, and European itineraries, which make up 17% of 2023 capacity, are accelerating. Royal’s booked position and pricing provide increased revenue visibility, and the company is expected to recover to historical occupancy levels by late spring. This should result in significant revenue and EBITDA growth compared to 2022 and higher than 2019.

However, increasing macroeconomic risks, inflation, and high fuel costs could affect Royal’s cash flow recovery, which could slow its ability to reduce leverage further. Rising prices and interest rates are expected to impact household purchasing power in 2023 and could lead to a shallow and short recession in the U.S. Fuel costs, which are expected to increase significantly, could also impact EBITDA and margin recovery, but Royal’s hedging program could reduce the impact of fuel price volatility. The gap between the price of a cruise vacation and the price of a land-based vacation may also alter industry discounting dynamics during a recession. The booking curve has returned to pre-pandemic levels and a strong wave season provides good visibility into Royal’s revenue and cash flow recovery in the summer season.

Cruise operators generally have to commit to new ship deliveries several years in advance, which can result in a significant credit measure deterioration during operating weakness. Royal has planned ship orders in 2023, which include three ships costing $3.6 billion and partially funded with approximately $2.8 billion in incremental debt. These ship deliveries in 2023 and beyond will slow Royal’s ability to reduce leverage further.

In conclusion, S&P Global Ratings has revised its outlook on Royal Caribbean Cruises Ltd. to stable from negative and has affirmed all ratings, including the ‘B’ issuer credit rating. The stable outlook reflects S&P’s forecast for significant improvement in credit measures in 2023, driven by anticipated revenue and EBITDA growth as the company operates under more normal conditions and recovers from the impact of the COVID-19 pandemic.

Written by: Stephen Peters

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