The $ 24 billion scoreboard that kept Carnival afloat

On the same day Moody’s downgraded Carnival Corporation’s credit rating and the World Health Organization declared Covid-19 a global pandemic, David Bernstein, the cruise line’s chief financial officer, was in the theater district from Broadway in New York to watch one play about the fall of another. corporate giant.

The March 11 performance of the Lehman Brothers trilogy was the last in 2020 at the Nederlander Theater. Later in the week, the coronavirus crisis forced sites to close as the global economy sank into one of the worst crises since the Lehman collapse at the height of the 2008 financial crisis.

More than 2,000 miles away, off the coast of California, 3,500 passengers were stranded aboard the Grand Princess, a Carnival ship that had suffered from an outbreak of the virus and was unable to dock. It was the start of a storm that would devastate the cruise industry.

The Grand Princess cruise ship passes under the Golden Gate Bridge in San Francisco, California in March 2020 © Josh Edelson / AFP via Getty

Bernstein, then 62, had traveled to New York to meet his new grandchild born a few weeks earlier. He tried to buy a face mask for his flight back to Miami, but the pharmacies were sold out. When he arrived at La Guardia Airport on March 14, the terminal was deserted.

“It was such a strange feeling. he said. “I realized from that trip home how drastically the world has changed.”

From the year through March 2021, Carnival burned more than $ 7 billion in cash. The group recorded a net loss of $ 10.2 billion in its fiscal 2020 as its revenue fell 73%. As a sign of financial scars, Carnival’s credit rating was downgraded from A minus, a blue-chip blueprint, to B, a rating associated with risky businesses.

Carnival has withstood the test largely due to its ability to raise $ 23.6 billion from debt and equity investors in less than 12 months, which propelled it to become one of the largest issuers in the US junk bond market.

Net Debt Column Chart (Billions of Dollars) Showing Growing Carnival Debt

Its story illustrates the debt-fueled recovery from the pandemic that took hold across the world, aided by historic central bank interventions that favored large corporations with access to capital markets. It is also a symbol of the borrowing frenzy of the past year, with companies now grappling with large debts.

“It’s really amazing,” said Pete Trombetta, analyst at Moody’s responsible for rating cruise lines. “Without access to financial markets [Carnival] wouldn’t have gone that far.

Crisis interviews

Bernstein had already started crisis conversations with bankers at JPMorgan, Goldman Sachs and Bank of America to save Carnival from the economic fallout of the virus spread at the end of January.

As the number of cases increased and governments began to take drastic measures to stem the spread, the conversations became more urgent. In March, the amount the company needed to borrow rose from around $ 1 billion to close to $ 6 billion. Bernstein “foresaw the worst,” he said.

No solution was on the table. In addition to speaking with banks and exploring government debt offerings, Bernstein spoke to “just about every major private equity firm in the United States” about possible financing plans. He looked at small syndicates lending and selling equity directly to private investors.

It was unfamiliar territory for the CFO of a blue chip company accustomed to more conventional financing options. “During the month of March, I had the most in-depth training on every possible financial instrument available to us at the time,” said Bernstein.

He says he only slept three or four hours a night, waking up at 4 a.m. EST to talk to European investors as the need for cash grew more urgent.

A group of funds that included Elliott Management Corporation and Apollo Global Management launched a multibillion-dollar loan at an interest rate close to 15%, according to people familiar with the deals. Sixth Street had also contacted the banks in March with a list of companies they would consider financing, ultimately offering Carnival $ 1.5 billion that would convert to shares and place behind a covered government bond on the scale of seniority. Details of the potential packages were first reported by the Wall Street Journal.

But on April 1, the company turned only to public markets, selling a $ 4 billion bond deal, backed by 86 of its ships, alongside a convertible note and equity – added to help comfort lenders.

Column chart of annual net income (in billions of dollars) showing coronavirus has taken a hole in Carnival's finances

The result was almost different. Calls and emails between bank chiefs, private equity managers and Bernstein ran to the wire, people familiar with the deals said. “Decisions were made at 11, 12 and 1 a.m. the day before the launch as to the optimal structure,” said Bernstein.

The reason Carnival has moved away from private equity offerings is due to cost, Bernstein said, helped by furious demand from bond investors. Carnival got an 11.5% coupon for the three-year guaranteed bond, still an interest rate typically associated with some of the world’s most distressed companies.

The Carnival deal marked a pivotal moment, not only for cruise lines, but for US businesses more broadly, as it showed that financial markets remained open even to companies most affected by the Covid-19 crisis.

Line chart of the share price ($) showing that Carnival has started to recover from the pandemic shock

Investors, bankers and analysts say such deals would not have been possible without the Federal Reserve, which on March 23 made the unprecedented decision to start buying corporate bonds among a series of other measures which calmed the turbulent markets.

People familiar with the proposed private equity deals say the nature of the talks changed as soon as the Fed announced it.

Bernstein said he felt Carnival would have gotten through the crisis even without the central bank stimulus, but “to this day I have no way of judging what would have happened if the Fed hadn’t done so. what she did”.

Fundraising was a lifeline, giving the company enough money to last until the end of the year, according to estimates by S&P Global Ratings. Attention was drawn to changing key terms of agreement documents with dozens of different institutions, in part to allow the company to raise more money in the future.

Passengers exit Diamond Princess cruise liner
Passengers leave the Diamond Princess cruise liner after a two-week coronavirus quarantine in the port of Yokohama, Japan © Igor Belyayev / TASS via Getty

The company raised an additional $ 2.8 billion in the loan market in June, followed by a $ 1.3 billion bond in July and another $ 900 million bond in August. Private equity firms still called occasionally, but it “became clear that public markets were available and these were the best alternative,” Bernstein said.

“From the lender’s point of view, if you have ever loaned [a company] money then you don’t want them to file for bankruptcy, ”said John McClain, portfolio manager at Diamond Hill Capital Management, noting that Carnival is now almost too big to fail from a debt market perspective. . “You will lend them more and more money until they get back to normal.”

Carnival fundraiser

Vaccines are a game changer

Bernstein had just got out of the shower on the morning of November 9 when he received the news that Pfizer and BioNTech had developed a vaccine against the coronavirus that was found to be 90% effective. “I was just ecstatic. I realized it was a game changer, ”said Bernstein.

The company’s bonds had already started to rally over the summer. They jumped even more at the vaccine news. Carnival’s share price fell from $ 13.71 at the end of October to $ 21.66 at the end of 2020. The end was in sight.

“It was never about survival. I knew we would survive. But what would we look like? Bernstein said, adding that the vaccine announcement significantly reduced the possibility of a messy corporate restructuring.

But the company that exists today is still very different from what it was at the start of 2020. Carnival has $ 11.5 billion in cash on its balance sheet after entering into a $ 3.5 billion bond contract in February, enough to last next year even with zero income. He is still stuck in negotiations with the authorities to obtain permission to resume cruising in the United States, his most lucrative market.

He is also defending himself against potentially costly class actions brought in the United States by more than 100 passengers who claim to have contracted coronavirus aboard Carnival ships in February and March of last year.

Even once the profits return, more of Carnival’s money will have to be spent on servicing its gigantic debt. Carnival has paid more than $ 1.2 billion in interest in the past year, up from just $ 200 million in 2019.

“There is still a lot of risk here,” Moody’s Trombetta said, adding that the increased interest burden “hampers” Carnival’s prospects.

Bernstein says he’s already working to extend Carnival’s debt maturity through new fundraisers and reduce the amount the group has to spend on interest payments. He also hopes to regain the company’s coveted status in the investment category.

“It will take a number of years before we get our record back to where it was before Covid,” he said. “Our goal is to get back to this level.”

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