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Carnival Cruise Line may have bounced back from the pandemic, but when it hit the market today to tackle looming maturities, it still wound up paying an interest rate similar to debt it issued at the height of the Covid crisis when its ships were docked.
In some ways, it’s a case of better late than never: bankers have been trying to convince Carnival to get ahead of rising funding costs for months, and it has finally done so.
But the deal does little to reduce debt, so those rising funding costs may bite eventually — not an ideal outcome for investors who were hoping to see the company delever as business recovered.
The new deal, a $1bn SUN due 2030, priced at 10.5%, the wide end of the 10.25%–10.5% price talk. That represents a roughly 154bp concession over the $2bn 6% SUNs due 2029 Carnival priced last November, which were trading at 84.93 on Tuesday for a yield to maturity of 8.96%.
“We are in a rising interest rate environment and we are being opportunistic to secure financing at today’s rate, which may be higher than previous rates, but will potentially look attractive in hindsight,” said Carnival spokesperson Roger Frizzell in an emailed statement.
Still, the decision to issue today was not an easy one: as it surveyed what looked to be a bad day for markets, the company held multiple go/no-go calls this morning before ultimately deciding to go ahead with the deal, sources told 9fin.
Against the flow
Carnival has some $3bn of debt maturing in 2023 (including $1.5bn of export credit facilities) which is the bulk of where the new proceeds will be deployed, sources said.
However, the export debt has a very low-interest rate, so to replace it with a bond yielding more than 10% is a “drag on cash flow” and adds some $100m of annual cash interest expenses, said an analyst familiar with the company.
In the spring and summer of 2020, when its operations had been shuttered by the pandemic, Carnival issued senior secured bonds and second-lien notes with coupons over 10%.
By 2021, it had cut those rates in half, partly thanks to the impact of central bank stimulus on credit markets but also on optimism that its business would bounce back as Covid waned.
Carnival’s bonds, yield to worst (source: 9fin)
The pricing Carnival achieved today seems almost shockingly high by comparison — indeed, sources told 9fin that the company’s financial advisors have been pushing management to tackle its maturity wall for months, advice that looks even more pertinent after the recent selloff.
“If Carnival is short some $3bn, it should have been refinancing it at the end of last year,” a credit investor said. “No one could have predicted a war in Ukraine and rates going the way they did, but seems to me like they should have taken care of this earlier.”
JPMorgan, which led the bond deal, did not respond to requests for comment.
The company could have tackled some of its maturity wall with cash, the investor said, estimating that Carnival will have $3bn of available liquidity by the end of the year, before accounting for additional cash flow from the restart of operations.
However, other sources noted that Carnival’s management team wanted to maintain a strong liquidity buffer (the pandemic is not over, after all) and that some of the company’s cash position is made up of customer deposits.
Heavy ballast
By the end of February, Carnival’s total debt had ballooned to $34.9bn — more than triple its 2019 levels — after the company was forced to raise extra liquidity to stay afloat during the pandemic. Pro forma this deal, total debt is $36.72bn.
(source: 9fin)
In the latest quarter, the company reported negative adjusted EBITDA of $4.07bn. But on an investor call today, executives said the company should flip to positive operating cash flow in the second quarter — a trend that should accelerate into the summer vacation months.
With Covid cases generally down from their peaks and more people vaccinated, the cruise industry is close to running back at full steam.
As of earlier this month, 85% of Carnival’s fleet capacity is back up and running compared with just 47% in the fourth quarter of 2021, according to today’s investor presentation.
Revenue per passenger was up 7.5% in the first quarter compared to 2019 levels, even with some of the company’s more lucrative and exotic cruise routes still out of operation.
Carnival management also notes that its fleet is more optimized and will be more profitable emerging from the pandemic than it was before.
The cruise operator has delivered nine larger more efficient ships since 2019 — three of which came during the first quarter 2022 — which have more premium balcony cabins, more onboard revenue opportunities, and reduced ship level unit costs (excluding fuel).
All of this points to potential improvements in Carnival’s standalone credit quality down the line. However, the market-wide rise in funding costs means that the company could end up paying substantially more to borrow in the future, even as its earnings improve, said a sellside source.
In that sense, today’s deal looks prescient. But on the other hand, the lack of meaningful debt reduction in this transaction means the company may have to deal with those higher future funding costs anyhow, unless it decides to tap its cash reserves.
“With ships back in the water, I thought maybe we could start actually seeing a bit of deleveraging here,” said the credit investor. “But it seems like it's more just kicking the can a bit further down the road.”
