In this video, Brian Dress, Director of Research at Left Brain Investment Research, presents a bond market analysis focused on the travel sector, specifically short‑maturity 2022 bonds issued by Royal Caribbean International (RCL) and American Airlines (AAL). He explains why travel companies remain attractive despite COVID‑19 disruption, outlines Left Brain’s investment criteria (recent access to capital markets and sufficient liquidity), and evaluates each issuer. For RCL, he notes a current yield of ~16% (preferring ~20%), a $5 billion June capital raise, strong liquidity, and signs of pent‑up cruise demand, recommending the bonds be placed on a watch list. For AAL, he highlights a ~39% yield, a $40 million daily cash burn (better than expected), a rapid capacity rebound, $6 billion public financing plus $4.5 billion federal loans (≈$15 billion liquidity), and a similar watch‑list recommendation. Both are classified under Left Brain’s “risky but worth it” category, with the suggestion that investors keep cash ready to buy on further price declines. The video concludes with a call to access detailed analyst reports on Left Brain’s website.
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Hello, investors, and welcome to Bond Spotlight from Left Brain Investment Research. This video is part of Left Brain's series intended to familiarize you with our investment approach to the bond market. I'm Brian Dress, Director of Research here at Left Brain Investment Research. Today we're discussing opportunities in the travel sector, particularly in short maturity bonds. I recently completed bond reports on two travel firms, Royal Caribbean International and American Airlines, and I'd like to share with you my findings. Why invest in a travel company during this disruption? Because people will always want to see new places, and these two companies have the capital and the brand recognition to lead the way through. For the cruise industry and RCL, even with the business downturn, we see a good return for investors over the next 2.5 years until these bonds mature. Let's look at the numbers. Royal Caribbean is a worldwide cruise operator with 47% of revenue coming from the US and the balance coming from international travelers. RCL has been forced to suspend operations until at least September 15th, causing a large sell-off in RCL bonds to prices implying an annual yield to investors of around 16%. We recognize the obvious risks of the current environment to RCL's business. However, I'd like to highlight a few characteristics in the situation here that pique our interest. Royal Caribbean was able to raise a combined more than $5 billion in the month of June in public bond markets, giving the company plenty of financial cushion to weather the disruption and also indicating that market participants View Royal Caribbean as a sensible credit risk. An important aspect of RCL is that it exhibits two criteria we at Left Brain keep in mind when reviewing investment opportunities. One, recent access to capital markets, and two, sufficient liquidity. These are key traits we look for in bond investments. We are also seeing signs of recovery in the business. Despite the clear concern that customers will be slow to return to cruising, competitor firm Carnival Cruises reported new bookings for 2021 voyages in line with historical levels. This suggests that there is plenty of pent-up demand for cruises going forward. In summary, despite the obvious worries about the travel industry, we see some green shoots here, and we think the RCL 2022 bonds are worthy of consideration at their current 16% yield to maturity. So we consider this an interesting investment, though to be fair, we would be much more interested in this bond at a lower price where the yield would be closer to 20%. Left Brain Investment Research advises investors to put the RCL 2022s on your watch list. American is the world's largest airline, and we feel comfortable with the way they've responded to this business interruption. American is seeing a better than expected return to business in June and in early July. We think the market is underestimating American's ability to come through this crisis. The numbers tell a story that lead us to see opportunity. American was forced to cut capacity by 90% in April, but has begun to grow revenue since. With the airline running at 20% of capacity in June and forecasting 40% in July. The situation has caused an understandable sell-off in American 2022 bonds to prices implying an annual yield to investors of 39% at the time of recording. Business is clearly down and carries an uncertain future, but we have good reasons to think AAL story has a happy ending for investors when we focus on some interesting factors about the 2022 bonds. At the June 2020 annual shareholders meeting, CEO Doug Parker announced that American was burning $40 million in cash per That sounds terrible, but it's actually good because it was far less than the previous expectations of a $70 million daily cash burn. In late June, American said it would begin flying full planes. Demand is steadily improving and American has the supply. It isn't only Left Brain who shares the belief that American will outlast the current business interruption. The fact that management was able to secure more than $6 billion in total debt and equity financing in public markets during the month of June shows that other market participants are on board too. Coupling this private market financing with the $4.5 billion in loans from the federal government, we estimate that AAL has around $15 billion in available liquidity to keep American flying, at least until these bonds mature in June of 2022. In summary, despite the clear business challenges here, AAL also shows those key characteristics we've mentioned with Royal Caribbean. Plus, AAL's bonds carry more than double the annual yield than do RCL's. We think the risk-reward balance is well in favor of the investor in this particular situation. At LBIR, we have a special category for bonds where we're willing to accept some risk in order to achieve a significant return over the historically low Treasury rates of today's market. We call them risky but worth it. Here's why RCL and AAL bonds fit that category. Royal Caribbean has seen a major sell-off, creating opportunity. Our view is that the investment risks here are offset by the substantial capital that the company currently holds. People will travel again once this diversion is over. The observation we would make on RCL bonds is that the securities have been volatile. The wise strategy is for investors investors to keep some funds available to buy more of these bonds should they slip further in value. For AAL, we have been encouraged by American's ability to raise capital from both public and private sources. Risks are substantial, but American's solid management and recent move to a more normalized flight schedule bode well for the business. We think there is a potential mispricing here, with investors having the opportunity for a nearly 100% total return over a 2-year period when the bond repays. In our view, American bonds offer an unusually generous yield in comparison to how we view the risks. Whether it's for business or pleasure, the travel industry will grow as the current barriers fall away over time. We're keeping our eyes on a few opportunities for investors that we think could grow along with it. Bond opportunities like this carry layers of complexity. LBIR analyst reports are designed to make sense of all the issues at play. You've got a standing invitation to come to our site at www.leftbrainir.com and learn more details. There you can access our full analyst reports on AAL, RCL, and many other names in both bonds and stocks. This is Brian Dress for Bond Spotlight from Left Brain Investment Research. Thank you, and we hope to see you again soon.
