MASTERS IN FINANCIAL MANAGEMENT 2012 - 2013

INVESTMENTS ASSIGNMENT 2
Course: Investments
Prof Dr. Guy Weyns

Shoaib Saleem

Student(s)s signature(s)

3.1 Terms of the Offering SEC form 424B5, the prospectus filed in connection with the offering SEC form 10-K, the 2011 annual report of the issuer

Who is the issuer? Royal Caribbean Cruises Ltd. (Page S-10 of SEC form 424B5, the prospectus filed in connection with the offering,
First page before Table of Contents in SEC form 424B5 )

Where is the issuer incorporated? Republic of Liberia (SEC form 424B5). What is the size of the issue? $650 million (Page S-10 of SEC form 424B5, the prospectus filed in connection with the offering,
First page before Table of Contents in SEC form 424B5 )

What is the face amount of one bond? $1000 (Page 8 under the heading Denominations, Interest, Registration and Transfer of
SEC form 424B5, the prospectus filed in connection with the offering.)

What is the maturity date? 15th November, 2022 (Page S-10 of SEC form 424B5, the prospectus filed in connection with the offering,
First page before Table of Contents in SEC form 424B5 )

What is the interest rate? 5.250% per annum (Page S-10 of SEC form 424B5, the prospectus filed in connection with the offering,
First page before Table of Contents in SEC form 424B5 )

What is the interest payment frequency? Semi-annually on May 15 and November 15 of every year (Page S-10 of SEC form 424B5, the prospectus filed in connection with the offering,
First page before Table of Contents in SEC form 424B5 )

Which convention is used for calculating accrued interest? Accrued interest will be calculated from November 7, 2012 if settlement occurs after that date.
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The basis upon which interest will be calculated based on a 360-day year of twelve 30-day months; (Page S-10 and page 7 of SEC form 424B5, the prospectus filed in connection with
the offering, First page before Table of Contents in SEC form 424B5)

Describe the call features, if any There are two call features for this offering. First is that the issuer has the right to redeem the Senior Notes in whole or in part, at any time on at least 30 days prior notice to each holder of Senior Notes. The redemption price will be equal to the greater of (i) 100% of the principal amount of such Senior Notes and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the redemption date) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points (the "Make-Whole Amount"), plus accrued and unpaid interest thereon to the redemption date. Second call feature is that the holder of the bond will have the option to require Royal Caribbean Cruises to purchase such holders Senior Notes at a purchase price in cash equal to 101% of the principal amount of such senior notes plus accrued and unpaid interest if any to the date of purchase. This option will only be applicable when a change of Control Triggering Event occurs. This Event has been defined in the prospectus fully with all its conditions which includes if the company is liquidated or change of ownership takes place or if some person or a group becomes the beneficial owner of more than 50% of the total voting stock of the company. It is to be noticed that holder must own minimum amount of $2000 senior securities to have this call feature. (Source: Page S-24 under heading Optional Redemption of SEC form 424B5, the
prospectus filed in connection with the offering.)

What will the proceeds be used for? The proceeds will be used for capital expenditures, the repayment of indebtedness, working capital and other general corporate purposes. It will not be used for buying of common stock from selling shareholders. The net proceeds will be approximately $638.5 million, after deducting the underwriters' discounts and the estimated offering expenses payable by Royal Cruises Ltd. They intend to use the net proceeds of this offering to repay $153 million outstanding under unsecured revolving credit facility due 2014 and $485.5 million outstanding under their unsecured revolving credit facility due 2016.Underwriters or
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their respective affiliates participating in this offering are lenders under Royal Cruises unsecured debt facilities being repaid and accordingly will receive a portion of the proceeds from this offering. (Page 3 and S-21 of SEC form 424B5, the prospectus filed in connection with the
offering.)

3.2 Bloomberg Quote:

Include a screenshot of the relevant DES page in your report:

Calculate how much you would actually pay for a $5,000 face value investment:
Ans: Assuming the date we buy is 7th December 2012. Clean Price = 106.5 percent of face value of $1000 = $1065

Accrued Interest = Coupon Payment multiply by Time Passed till Accrual Date = 52.5 multiply by 30/360 = $4.375 Dirty price for one bond = Clean price + Accrued Interest = 1065 + 4.375 = $ 1069.375 Actual payment for 5 bonds = 5 multiply by $1069.375 = $5346.9

3.3: Credit ratio analysis

Calculate the debt-to-total-assets ratio a) at the end of 2007, 2008, 2009, 2010 and 2011 and b) on 30 September 2012, pro forma adjusted for the new bonds. How is this ratio evolving?

Note: All the numbers I have used for calculating ratios are in millions of dollars unless otherewise specified.

For Ratio calculations I have used the headings Notes Payable/Short Term Debt and Current portion of Long Term Debt/Capital Leases given in the Balance Sheets of Annual Filings Reports to calculate Short Term Debt. I have used the headings Long Term Debt and Capital Lease Obligations given in the Balance Sheets of Annual Filings Reports to calculate Long Term Debt. Total Debt-to-total-assets ratio = [(Notes Payable or Short Term Debt + Current portion of Long Term Debt or Capital Leases) + (Long Term Debt + Capital Lease Obligations)] / Total Assets

2011:
Total Debt-to-total-assets ratio = [(0 + 638.89) + (7796.88 + 60.08)] / 19804.41 Total Debt-to-total-assets ratio = 0.43

2010:
Total Debt-to-total-assets ratio = [(0 + 1198.93) + (7892.54+ 58065)] / 19653.83 = 0.47

2009:
Total Debt-to-total-assets ratio = [(0 + 756.22) + (7892.54+58.65)] / 18233.49 = 0.46

2008:
Total Debt-to-total-assets ratio = [(0 + 471.89) + (6539.51+0)] / 16463.31 = 0.43

2007:
Total Debt-to-total-assets ratio = [(0 + 351.73) + (5346.55+0)] / 14982.28 = 0.38

b) on 30 September 2012, pro forma adjusted for the new bonds. Total Debt-to-total-assets ratio = Total Debt / Total Assets = 8496/ 19668.22 = 0.43

Q: How is this ratio evolving?

RATIO
Debt-to-total-assets ratio

2007
0.38

2008
0.43

2009
0.46

2010
0.47

2011
0.43

2012
0.43

This ratio has increased from year 2007 to Year 2010 from 0.38 to 0.47 which shows that Royal Caribbean has been increasingly taking debt to finance its operations. However, after year 2010 this ratio of debt over total assets has decreased to 0.43 which shows that Royal Caribbean has decreased its share of debt considerably within a year. However it is important to note that the capital structure is at normal level and Royal Caribbean is not too inclined towards debt which obviously increases the riskiness of the business.

Calculate the current ratio, quick ratio, cash ratio and CFO ratio at the end of 2011. Current Ratio = Current Assets/ Current Liabilities = 969.29/3067.64 =0.32

Quick Ratio = Current Assets Inventories/ Current Liabilities = (969.29-144.55) / 3067.64 = 0.27

Cash Ratio = Cash + Marketable Securities/ Current Liabilities = 262.19/ 3067.64 = 0.09

CFO Ratio = Cash Flow from Operations / Average Current Liabilities =1455.74/ [(3067.64+3445.17) / 2] = 0.45

Interest Coverage (Accrual) Ratio for 2011: Interest Coverage (Accrual) Ratio = EBIT/ Interest Expense = 931.63 / (396.42 + 14) = 2.27 Where, Operating Income = 931.63 Interest Expense = Interest Expense Non-Operating + Interest Capitalized Non Operating
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Interest Expense Non-Operating = 396.42 Interest Capitalized Non Operating = 14

Interest Coverage (Accrual) Ratio for the 9 months ending 30 September 2012: Interest Coverage (Accrual) Ratio = EBIT/ Interest Expense = 684.417/ (266.749 + 7.485 + 15.155) = 2.37 Where, Interest Expense = Interest Expense + Extinguishment of unsecured notes + Other Income Expense Interest Expense = 266.749 Extinguishment of Unsecured Senior Notes = 7.485 Other Income Expense = 15.155

Calculate the interest coverage (cash) ratio for 2011.

Interest Coverage (Cash) Ratio = Cash Flow from Operations / Net Interest Expense = 1455.74 / (382.42 - 25.32 - 32.89) = 4.49 Where, Net Interest Expense Non-Operating = 382.42 Interest Income = 25.32 Other Non-Operating Income = 32.89

Discuss the difference between the accrual and cash interest coverage ratios, if any. Since the accrual interest coverage ratio also takes into account depreciation and amortization therefore I believe that it does not represent the true representation of whether the company will be able to service debt in short term. We can see that Royal Caribbean has a much greater Cash interest coverage ratio of 4.49 that the accruals based interest coverage ratio of 2.37 therefore I think that Royal Caribbean has a very sound short term liquidity position to service its debt obligations.

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3.4 Opinion

Would you invest in this new issue? Motivate your decision. If yes, what percentage of a $25,000 bond portfolio would you be comfortable allocating to it? Reading the Equity Research Reports we can see that it has been given an outperform rating within the last period of 6 months. Even though it might reflect that stock value may be undervalued but the general trends in reports indicate that it is the general business performance of the Royal Caribbean which has resulted in a positive outlook for the company. Moreover, in the aftermath of Concordia we can predict that this impact will also help Royal Caribbean for around 2 years as its affect has started to die down but still it will be on consumers minds. Additionally, by looking at the credit and solvency ratios, I feel pretty safe about investing in it and consider it to be not a serious risk to invest even though the company operates in a highly cyclical Travel and Leisure Sector. Since the company is almost hedged 51% for next years fuel prices so I consider this bond to be a good investment for short term. Royal Caribbean has also just reached break-even in China as well which presents a good outlook in Asia-pacific region as well. Since the bond also has a call provision for holders so it can be a safe investment even in case credit rating agencies increase its rating to investment grade status in two years. Royal Caribbean has reduced its leverage, hedged its fuel prices and has presence in emerging growth markets of Asia and Latin America with an outlook of moderate growth so considering these factors I believe it looks like that companys management is acting very wisely in the current scenario. Even after these all positive indicators I still feel a bit hesitant in giving it a very large percentage in my bond portfolio especially when the company is operating a highly cyclical Travel and Leisure sector in a gloomy global economic scenario for the coming two to five years. Hence I will stick within the 10 to 20 percent range for investing in it which comes to around $2000 to $5000 but certainly not more than that.

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