No. of Recommendations: 3
Caveat: The following is just a preliminary exploration, not a recommendation to buy (or to avoid).

RCL is rated Ba3/BB-. That makes it a mid-tier junk bond, not the best of the worst, but not the worst of the worst, either. Since the March lows, prices on their bonds have roughly doubled. How much of that price improvement is due to the tide of irrational exuberance that is re-floating all financial assets, and how much is due to improving company fundamentals, would have to be determined by grinding through their financials. If it’s just the Fed’s free money that is floating RCL’s boats [pun intended], then when the tide goes out, the buyer of their bonds might get stranded in the mud flats. If RCL is a viable business, then the buyer of their bonds might recover his investment and earn a few bucks to boot. So that’s the crux of the investing problem with respect to RCL’s bonds:

Do they seem to have the cash-flows needed to repay their debts?

Here’s a further thought. Predicting cash-flows is an inexact art at best, for the future being the unknowable thing it is. My preference is to assume that, sooner or later, any company will be filing for Chapter 11 bankruptcy protection. Therefore, I want to get into their bonds at a price as close to a Chapter 11 workout-price as possible. Estimating what a workout-price might be involves more guessing about the quality and quantity of the assets that will be used to satisfy creditors. The trade-offs seem to be these. The closer the maturity is, the more certainty it would seem could be obtained about how events might play out. OTOH, the closer the maturity, the higher the price of the bond, AOTBE. Thus, my preference is to look to the long end of an issuer’s yield-curve, which serves multiple purposes. Buying cheaper, rather than dearer, creates a margin of safety by hedging my ignorance. Buying cheaper, rather than dearer, sizes my position smaller, thus reducing my risks in another way.

The yield-curve for RCL’s bonds is normal. None of the currently-offered issues are callable. Most are available for purchase at a 1-bond minimum, which is actually a two-edge sword. Small minimums seem to be investor-friendly. But this question always has to be asked. Why is the desk holding the bonds willing to sell in small quantities? Are they dumping? The thought has to be this. If the merchandise were truly good, the desk could sell in the larger-sized lots that are more convenient for them to process.

Coupon Maturity CY YTM Price
8.75 02/02/11 8.42 5.12 103.975
7.00 06/15/13 7.20 7.93 97.200
6.88 12/01/13 7.15 8.04 96.100
11.88 07/15/15 10.48 8.80 113.350
7.25 06/15/16 7.62 8.24 95.100
7.25 03/15/18 7.73 8.29 93.850
7.50 10/15/27 9.33 9.86 80.350

Reminder: this is not an obvious value play. Good due diligence will be needed to justify initiating a position or to add to an existing one.
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