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On the surface, RCL is a short seller’s dream: 1) lousy fundamentals,2) high leverage, and 3) liquidity/covenant issues comprise the bulk of the negative thesis. With 31% of the share sold short and a forward p/e ratio of 5.5x, shorting RCL is indeed the consensus call.

We have no response to the high leverage argument. We calculate leverage at 8x in 2010, although it will decline materially once the new ships come on line. Our only counter to the fundamental argument is that near term bookings appear better than investors may be expecting and Europe has been resilient. Where we may differ with consensus is on point number 3.

RCL really doesn’t have any covenant issues:

• Fixed Charge coverage test is actually negative (cash flow from operations/ (sum of dividends + scheduled principal payments – new financings)
• Net Debt to Capitalization Ratio was below 50% at 12/31/2008, and we project it peaking at 57% at the end of 2010, still below the 62.5% max
• Minimum Shareholder’s Equity was $4.7BN vs an actual of $6.6BN at 12/31/2008.

RCL may have some liquidity issues, but not until 2010. We are well below 2009 consensus earnings and cash flow estimates yet RCL maintains more than enough liquidity to fund its significant capex. See the chart below. 2010 will be awfully tight, however. Here are our assumptions:

• They will get the financing for Oasis and Allure in 2009
• By the end of 2009 all ship commitments should be fully financed removing that overhang
• $600MM funding need from: cash flow from operations of $800MM – capex of $2.2BN + new ship financings of $1.7BN – maturities on 2008 debt of $800MM – maturities on 2009 debt of $100MM
• Sources at 12/31/2009 of $650MM: R/C capacity of $400MM + cash on hand of $250MM

A 2010 funding shortfall is a real possibility, a 50% probability in our estimation. However, even in this scenario, RCL would likely procure an extension on one its 2010 maturities, albeit at a higher interest cost:

• Alternative would trigger a cross default and most of the lenders have exposure on multiple pieces of debt
• Last thing unsecured lenders want is for RCL to have to raise secured debt under its carve out
• RCL could always monetize it’s in the money hedges

The good news is that 2010 is truly a bridge year. Capex steps down materially in 2011 and presumably RCL will be in the clear in terms of liquidity. Now if only RCL can sustain the recent “less bad” operating momentum there could be a nice near term story here.

Plenty of 2009 liquidity but 2010 is tight