Royal Caribbean’s ratings upgraded due to favorable bookings and credit improvement: S+P Global

Investing.com -- Royal Caribbean Cruises Ltd. (NYSE:RCL) has had its ratings increased to ’BBB-’ from ’BB+’ due to strong forward bookings and anticipated sustained improvement in credit measures, according to S&P Global Ratings. The global cruise operator has reportedly sold over two-thirds of its capacity for 2025, providing clear visibility on future revenue and cash flow.

The improved bookings, coupled with higher prices, are expected to support a continued enhancement in credit measures. The company’s fund from operations (FFO) to debt and EBITDA coverage of interest in 2025 are projected to improve to approximately 27% and 5.5x, respectively. This is higher than the current upgrade thresholds of 25% and 4.5x. Royal Caribbean’s leverage is also expected to improve to around 3x in 2025, well below the 3.75x leverage threshold.

The stable outlook reflects the expectation that Royal Caribbean’s forward bookings and moderate yield growth in 2025 will support continued cash flow growth. The company’s FFO to debt is projected to reach about 27%, leverage around 3x, and EBITDA coverage of interest about 5.5x this year.

The company’s booked position for 2025 provides good revenue visibility and is expected to support ongoing improvement in credit measures. On its fourth quarter 2024 earnings call, Royal reported that 2025 bookings accelerated, with the company experiencing its five best booking weeks since its third-quarter earnings call in October 2024.

The company’s current booked position, which is believed to exceed two-thirds of 2025 inventory, is in line with prior years but at higher average prices per day. The premium to last year has widened since its third-quarter earnings call. The company expects yields to grow 2.5% to 4.5% on a constant currency basis (1.8% to 3.8% on a reported basis).

Despite the potential for a decline in future cruise bookings in a slowing macroeconomic environment, Royal Caribbean’s stated financial policy to sustain leverage under 3.5x supports the upgrade.

The company’s larger cash flow base compared with pre-pandemic and a more moderate ship delivery schedule should allow it to continue reducing leverage over the next 12 months despite new ship debt and assumptions around shareholder returns.

Royal Caribbean has also announced its plan to expand into river cruising with the launch of Celebrity River Cruises, expected to begin sailing in 2027. As part of that announcement, Royal placed an initial order for 10 river ships.

The company’s growing cash flow base should allow it to generate good cash flow for other investments in its portfolio, including Perfect Day Mexico and Celebrity River Cruises, and still reduce leverage over the next two years, despite expected debt to finance new deliveries.

The stable rating outlook reflects the expectation that Royal Caribbean’s forward bookings and moderate yield growth in 2025 will support continued cash flow growth and drive FFO to debt to about 27%, leverage to around 3x, and EBITDA coverage of interest to about 5.5x this year. These credit measures represent sufficient cushion to thresholds to withstand a moderate to severe cyclical downturn.

The rating could be lowered if it is believed that Royal can no longer sustain adjusted debt to EBITDA below 3.75x, FFO to debt higher than 25%, and EBITDA coverage of interest above 4.5x. Conversely, the rating could be raised if it is believed that Royal can sustain adjusted leverage below 3x, FFO to debt higher than 30%, and EBITDA coverage of interest above 6x, even during a moderate to severe cyclical downturn.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.