Carnival Corp is seeking to raise around another $1.26 bill in a bond offering.
The company has increased the size of its offering amid strong demand, and is now offering $775 mill of bonds after initially seeking $550 mill and raising the euro tranche by €25 mill to €425 mill.
The US dollar bonds will be offered at 10.5% and the euro notes will be offered at 10.125%, which were both a bit lower than originally planned.
Carnival said the notes will be secured by a second priority lien, a lower priority of repayment in case of bankruptcy or liquidation of assets.
This is the third time that the company’s has gone to the debt markets after COVID-19 brought its business to a halt.
Meanwhile, a note on Seeking Alpha from the Bears of Wall Street Group* claimed that with more than $20 bill in debt and a monthly cash burn of $650 mill, Carnival Corp could become insolvent in less than 18 months.
The company’s bonds have a junk rating, and its recent senior notes were offered at a 10% yield.
Carnival Corp cannot generate any revenues today, and no value is going to be created for shareholders in the foreseeable future, the note said.
The recent extension of the CDC ‘No-sail Order’ along with the recent spike of new coronavirus cases in the US puts Carnival in a dire situation, it was claimed.
With $10 bill in liquidity, out of which only $6 bill is in cash, Carnival will have no other option but to continue to raise funds on an open market and increase its debt load.
In one of its recent debt offerings, Carnival wasn’t able to issue senior notes below a 10% yield, which shows that it doesn’t have enough financial flexibility to receive capital at lower rates, which is a red flag for value investors.
For that reason, Bears of Wall Street said that it did not share the optimism of a lot of bullish authors on Seeking Alpha.
“We believe that issuing more debt to weather the current storm in the short term will have negative consequences for Carnival in the long term, as its debt burden will only increase but it’s unknown when the cruise line will become profitable again,” the analyst group said.
The second-quarter earnings report that was released in June showed how bad the situation inside Carnival is. From March to May, Carnival’s GAAP net loss was $4.4 bill, while its revenues declined by 85.5% year-on-year to $700 mill.
The company was able to generate revenue by taking bookings for 2021 at discounted prices. The problem is that these pre-bookings could still be cancelled if COVID-19 or some other event disrupts the cruise line operations again.
As Florida, from where a majority of Carnival ships homeport, becomes one of the major US epicentres of COVID-19, there’s no guarantee that CDC is not going to extend its ‘No-sail Order’ again. At the same time, even if Carnival manages to restart its operations in late September, the demand for cruises will remain weak, as many ports will continue to be closed for cruise traffic, and not every country will open its borders to foreign travellers.
For those reasons, Carnival will continue to be unprofitable at least in the next couple of years. While revenues for the year is expected to be $6.6 bill, around $4.8 bill was generated in 1Q20 and $700 mill in 2Q20. This leaves only with $1.1 bill in 3Q20 and 4Q20 combined.
Without being able to generate a substantial amount of revenue and burning $650 mill per month on maintenance and other expenditures, Carnival will not be able to create shareholder value anytime soon. With $22 bill in total debt and only $10 bill in liquidity at the end of May, out of which $6 bill is cash reserves, Carnival will run out of money in less than a year and a half at the current burn rate.
While Carnival had $18.88 bill in tangible book value at the end of May, most of that value is taken up by its fleet. Considering that the world is in the midst of a pandemic, it’s very unlikely that Carnival will be able to sell its ships at face value if needed.
There’s also a good chance that governments will make new regulations for the cruise industry, especially after the inability of cruise lines to ensure the safety of passengers on their ships, to prevent future pandemics. While Carnival’s stock will appreciate on the positive news regarding any vaccine, owning the stock for the long term right now is a risky endeavour with a relatively poor risk/reward ratio, the Bears said.
Considering all of this, the Bears warned that Chapter 11 could be the best option for Carnival. By filing for bankruptcy, the cruise line will be able to restructure its debt and continue to operate with a much leaner balance sheet.
While Norwegian Cruise Line Holdings (NCLH) hinted at this possibility in May, Royal Caribbean (RCL) took it a step further and let its Spanish subsidiary, in which it has a 49% stake, go under last month. The only downside of this strategy is that the existing shareholders will be wiped out.
*The Bears of Wall Street is a community of US traders and financial analysts, who claim to take a pragmatic approach to valuing companies.
