Carnival’s Latest Debt Sale Comes With Less Onerous Terms Than Earlier in Pandemic

Like peers such as

Royal Caribbean Group

(RCL) and

Norwegian Cruise Line Holdings

(NCLH), Carnival has mostly been shut down by the pandemic since mid-March of last year, though it has had limited sailings in Europe. The shutdown has caused the companies to burn through hundreds of millions of dollars a month and forced them to raise more capital to stay afloat.

A Carnival spokesman tells Barron’s in an email that the company has “secured $19 billion in liquidity in the past year, not including the additional $3.5 billion being raised by the latest offering.”

Carnival said the proceeds from the offering will be used to make scheduled principal payments on debt during 2021 and for general corporate purposes.

As of Nov. 30, the Miami-based company’s long-term debt totaled $22.1 billion, up from $9.7 billion a year earlier. However, long-term debt isn’t the only way a company can increase its liquidity. Other avenues include tapping a line of credit or pushing out debt payments. The company’s debt ratings from Moody’s and Standard & Poor’s Global are both at junk levels.

A bright spot for Carnival amid all of its setbacks, including the increasingly likely possibility that sailing out of U.S. ports won’t resume until well into the second half of this year or even later, is that the terms of its latest debt raise are less onerous than previous ones–especially those that occurred early in the pandemic.

In April 2020, for example, the company said that it had priced a $4 billion debt issue with a coupon of 11.5%–well above the 5.75% of the latest issue. It was one of several high-coupon debt issues around that time for the Miami-based company.

In addition, the April issue was secured by using various forms of capital, including “mortgages on a substantial majority of the vessels and related vessel collateral, material intellectual property and pledges over other vessel-related assets,” Carnival said in a press release at the time. Those assets included inventory, trade receivables, computer software and casino equipment.

The latest debt placement was unsecured.

An easing of onerous credit conditions for Carnival started last year, according to CreditSights.

“In November of [2020, Carnival] issued two tranches of senior guaranteed bonds, signaling a turning point in market conditions given the favorable 7.625% coupon achieved on those 2026 bonds relative to the 10-11% coupons attached to the various tranches of senior secured debt issued early on in the pandemic,” according to CreditSights.

In an email to Barron’s, Patrick Scholes, an analyst at Truist Securities, calls the latest capital raise significant because, based on Carnival’s cash-burn patterns, “It buys them about six more months of liquidity.”

He estimates that the company has 21 months of liquidity in a no-sail environment.

But “it adds approximately $200 million of annual interest expense, which equates to approximately a 19 cents a share hit to earnings per share,” Scholes adds.

Still, “The market over the past several months has shrugged-off earnings dilution from additional capital raises as well as continued delays in sailing restart dates,” he observes.

Carnival shares are down about 4% year to date, and their value has been cut in half over the past year owing to the pandemic. But since early November, when stocks began to perk up on encouraging Covid vaccine news, the stock is up by about 50%.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com