Carnival, the world’s largest cruise operator, has offered a dozen ships as collateral in its latest $1.25 billion bond offering as it refinances its large pile of debt left over from the pandemic.
Carnival is expected to pay an expensive coupon of about 11.5 percent on the six-year debt, two people briefed on the deal said. The issuance is the company’s first foray into the junk bond market since May, when a 10.5 percent bond coupon rocked the stock market.
As part of the bond deal, Carnival’s parent company has transferred 12 ships, most of which became operational in the past two years and have a combined value of $8.2 billion, to a subsidiary that will issue the bond with the ships as collateral.
John McClain, a high-yield portfolio manager at Brandywine Global Investment Management, said the bond showed Carnival was “getting creative” with the collateral to avoid paying “significant” interest rates. “Without the ships, I don’t believe they would have access to capital at a price they would be comfortable with,” he said.
Its share price is down 63 percent this year to just over $8, but rose more than 11 percent on Tuesday after the bond announcement.
The bond structure puts lenders “at the front of the line” for any claims on the 12 ships in the event that Carnival can’t meet payments, said Ross Hallock, head of high-yield research at Covenant Review. He said this was intended to make the bond “more attractive” to investors, despite fears of how a consumer slump would affect the travel sector.
Carnival has had to deal with a mounting debt pile in the wake of the pandemic. Its debts at the beginning of September reached about 35 billion dollars. Meanwhile, recovery of cruise bookings continues to be delayed. Last month, the Miami-based company reported a net loss of $770 million for its fiscal third quarter.
Carnival’s other dollar-denominated unsecured bonds maturing in 2026 rose as much as 4.5 percent on Tuesday in a sign of certainty for the company’s cash flow, but they continue to trade well below par. At the start of the pandemic, the company offered bonds secured against its 80-plus fleet to lure investors.
However, some traders said the cruise sector’s vulnerability to economic downturns and Carnival’s high level of debt meant the double-digit yield on offer was not high enough.
“When I look at 11.5 percent for very cyclical, highly leveraged US corporates and compare that to others in the market [that are offering similar yields], I’m not impressed,” said one investor. “North of 15 percent is when it gets interesting. . . It’s not hard to find yield in this market.”
