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Davy Jones's locker

1 April 2020 By Christopher Thompson

It’s hard to think of a big company closer to the eye of the global coronavirus storm than Carnival. Three of the cruise operator’s ships have suffered deadly outbreaks of Covid-19 and its business is suspended while the world grapples with the deadly pandemic. Nevertheless, the bond market has thrown the company a vital, if costly, lifeline.

As the Carnival-owned MS Zaandam, which has lost four passengers to the disease, was desperately seeking permission to dock in Florida on Tuesday, the Miami-based company announced it was seeking to raise some $6 billion in debt and equity. On Wednesday it expanded the issue of senior secured bonds to $4 billion, IFR reported, reflecting what one investor said was demand for more than twice that amount.

Lenders have extracted a hefty price, though. A yield of around 12% is almost six times what creditors were demanding to hold Carnival’s benchmark U.S. dollar bonds at the beginning of the year, according to Refinitiv. In addition, the new creditors’ claims are secured against ships valued at some $28 billion, according to a person familiar with the offering, giving them a hefty lifeboat if the company is liquidated. That said, if Carnival does capsize the value of its cruise ships would presumably also sink.

Carnival says it’s burning through $1 billion per month in operating expenses. Along with existing cash and credit facilities, the new funds should broadly see it through until November. By then shareholders, including those buying into the company’s equity offering, will be hoping for a rebound in business. After hefty losses this year, Berenberg analysts reckon Carnival’s ships won’t be running at capacity again until 2022, even if the cruise industry’s lockdown is lifted by August.

Carnival is currently offering 45% off future cruises to tempt passengers, including its core elderly demographic, back on board when the virus recedes. Bond investors have demanded similarly attractive terms. Still, the offering shows that even the most troubled of companies can get emergency cash – at a price.


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