Carnival increases size of rescue bond sale to $4bn
Orders for debt package at world’s biggest cruise operator smash $10bn
Carnival Corporation is increasing the size of a rescue bond sale backed by its cruise ships to $4bn after drawing strong demand, even as the world’s largest cruise operator warned it might only have enough cash to stay afloat for eight months.
The Panama-incorporated company launched a $6bn fundraising package on Tuesday, tapping debt and equity investors for liquidity after coronavirus killed passengers on several of its cruise ships and had a severe impact on future bookings.
Having initially sought to raise $3bn in three-year bonds secured on the majority of its ships, Carnival announced on Wednesday that it was raising this to $4bn. Two investors said that the deal had already received more than $10bn of orders.
However the price Carnival is paying is steep. The group will offer investors an annual coupon of about 12 per cent, equating to nearly $500m in interest costs a year, and will issue the bonds at a slight discount to face value.
While the debt carries an investment-grade rating and will be backed by cruise vessels and other assets that Carnival says are worth more than $28bn, this interest rate is more normally associated with companies in the lowest reaches of the junk bond market.
“This is a high investment-grade company that is now borrowing at usury rates,” said John McClain, a portfolio manager at Diamond Hill Capital Management. “Things have changed quickly. If you are borrowing at 12 per cent then you are fairly desperate.”
The cruise ship operator has also set out plans to raise $1.75bn of bonds that can convert into shares and $1.25bn in newly issued stock, although two investors said on Wednesday that they expected Carnival to cut back the size of the equity offering to $750m. Carnival did not immediately respond to a request for comment.
In a memorandum to bond investors Carnival issued a series of stark warnings about its ability to withstand an unprecedented international shutdown of the cruise industry.
“We have never previously experienced a complete cessation of our cruising operations, and as a consequence, our ability to be predictive regarding the impact of such a cessation on our brands and future prospects is uncertain,” the document said.
The original $6bn funding plan would have given Carnival about $9.5bn of cash on its balance sheet, although the size of the overall deal might now be higher.
However, the bond document says that this is only sufficient to fund its “liquidity requirements over the next eight months” — until the end of November — as the company needs about $1bn of cash a month.
While investors have been drawn to the bond sale due to its collateral, which includes 86 of Carnival’s 105 cruise ships, the document warns that the market value of the fleet has been “adversely affected” by the shutdown in the cruise industry and that the market for used vessels is “small”.
Carnival is turning to investors for funding as it is unclear whether it will be able to benefit from the $2tn US stimulus deal signed last week. Even though the group has its headquarters in Florida and pays US tax, it is incorporated in Panama, which may impede government support.
Carnival said on Tuesday that although “on the surface” it appeared that the company would not be able to apply for it there were aspects of the package that “require further investigation”.