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Carnival’s newly issued senior priority notes may look like secured notes at first glance, but in reality they’re not — rather, they offer investors a guarantee against 12 of the company’s vessels, helping to reduce borrowing costs without pledging collateral in the conventional way.
The new 5.5-year non-call 2.5 bonds, which total $2.03bn and are rated B2/B+, were priced earlier today at a 10.75% yield. The coupon was set at 10.375%, and the final OID came in at 98.465.
Joint leads JP Morgan, Barclays and Bank of America upsized the deal from an initial target of $1.25bn, but were still able to tighten pricing from IPTs that suggested a 11.25%-11.5% yield.
The final pricing was close to where Carnival printed unsecured bonds in May (10.5%) and well below the 16% yield those notes now offer in secondary. A high yield portfolio manager familiar with the company said those trading levels reflected the sector’s difficult near-term outlook.
“It’s still improving but it’s still pretty challenged,” said the PM. “These companies have a ton of leverage and everybody is aware that discretionary travel spending may be impacted, it’s just a difficult near term outlook.”
Creative collateral
Given the tough industry backdrop and its debt-laden capital structure, Carnival is having to get creative to bring down its cost of borrowing.
The new senior priority notes have a guarantee against 12 vessels (with a net book value of $8.2bn) that will be held in a new Carnival subsidiary known as NewCo.
These are some of the company’s newest and most fuel-efficient ships, according to Moody’s. They include the Enchanted Princess, which 9fin recently caught on camera in Newport, Rhode Island (see below).
The NewCo entity will transfer the proceeds of the new bonds to its parent, which will use the cash to pay down its revolving credit facility.
While the notes are unsecured, they benefit from a priority guarantee so they sit above Carnival’s existing unsecured notes.
“It isn’t a perfected first lien but you are structurally senior to other unsecured debt so you can haircut the collateral a reasonable amount,” said the portfolio manager. “There’s relative value here compared to unsecured debt of companies in other sectors in the same 9%-11% range.”
In an additional plus point for creditors, the NewCo entity is structured so that there’s little headroom for the company to prime investors with new non-subordinated debt, according to 9fin’s legal analysts.
Cash can only be distributed from the NewCo once at least 75% of the net book value of the collateral is transferred, and even then the company can only distribute up to 25% of the net book value of the ships transferred. For more detail on this, see our Legals QuickTake here.
Earnings concern
Carnival’s debt has traded off since the company reported third quarter earnings on 30 September. The earnings report showed net losses of $770m in Q3, bringing total net losses for the three quarters of 2022 so far to $1.835bn.
Although quarterly adjusted EBITDA turned positive in Q3 — for the first time since Carnival resumed cruise operations in 2021 — the company also forecast losses in Q4 2022.
“Their 3Q earnings were disappointing, even though it was much better than the prior quarter,” said a credit analyst following the company’s latest bond deal.
“The market was expecting more given the pent up travel demand. In 4Q, higher fuel prices will probably put a dampener on their recovery, and there’s going to be consumer weakness too since people are expecting a full-blown recession next year.”
Still, by freeing up room on the company’s $3bn revolving credit facility (of which it had drawn down $2.675bn) this latest debt raise at least gives the company some breathing room.
“What they did is buy themselves time,” said the portfolio manager. “They’ve raised some cash and taken care of the bulk of maturities next year, and if they can hit their EBITDA numbers and not burn too much cash, the market should open up for them.”
For a deeper dive on the company’s financials, clients see our Credit QuickTake here. You can also read about the company’s ESG metrics in our ESG QuickTake. If you are not a client but would like to request a full report package - which includes our Credit, Legal and ESG QuickTakes published within hours of the deal launching - you can request them here.
