Excluded from President Trump’s stimulus package, the cruise industry will be left to fend for itself during the coronavirus pandemic. That’s bad news for companies like Carnival Cruise. | Image: REUTERS/Patrick T. Fallon
- Carnival Corporation will not be receiving a federal bailout amid the coronavirus pandemic.
- The company is diluting shareholders and raising massive amounts of junk debt to generate liquidity for the crisis.
- With a global recession on the horizon, Carnival is sailing into uncharted territory. And bankruptcy is on the table.
The Diamond Princess cruise ship, with people quarantined onboard due to fears of the new COVID-19 coronavirus, grounded off the coast of Japan. | Image: Behrouz MEHRI / AFP
It’s poetic justice for Carnival Corporation (NYSE: CCL) and other cruise lines that have routinely ripped off American taxpayers by shipping jobs and profits overseas. These companies exploit loopholes in maritime law to register their ships in nations like Panama and the Bahamas to dodge taxes and underpay workers. But now, their unethical strategy is coming back to bite them.
Excluded from Trump’s $2 trillion stimulus package, the cruise industry will be left to fend for itself during the coronavirus pandemic. And companies are turning to desperate measures to raise the cash they need to survive.
Carnival Corporation has issued a staggering $4 billion in high-interest, junk debt and diluted its hapless shareholders to the tune of 62.5 million additional shares.
These moves are designed to raise capital to help Carnival weather the pandemic without government bailout money. But it may not be enough to save the company from sliding into bankruptcy.
Did Carnival Cruise Strong-Arm Passengers into Dangerous Cruises?
With multiple high-profile coronavirus cruise ship disasters, including Carnival’s Diamond Princess, Grand Princess, and Coral Princess, many are wondering why people are still going on cruises in the middle of a global pandemic.
J Dan blames the poor judgment of the passengers. Here is what he had to say on Twitter:
Twitter user J Dan believes Carnival’s passengers get what they deserve for going on cruises during a coronavirus pandemic. | Source: Twitter.com
But the real reason could be even more sinister. Unconfirmed reports suggest that Carnival Cruise and other cruise companies may be pressuring customers into taking cruises by refusing to give them refunds when they want to back out.
Here is what an anonymous poster named Richard said about his experience with Carnival Cruise during the pandemic:
My wife and I boarded the Carnival Miracle March 5 as COVID-19 was arriving in the EU and Washington state. I called Carnival and asked to cancel. ‘Sure’ they said. That’ll cost you your full fare. No offer of credit even. We cruised. Barely made it home.
He goes on to elaborate:
Miracle docked in LA, we were supposed to dock in SF, March 18. Carnival could have seen this coming March 5. They chose to ignore it. Heck, their CEO is a close friend of Trump. Figures he’s covered or he bought the boss’s “it’s no big deal” line.
While Richard’s experience is unverified, details from Carnival Cruise’s first-quarter result suggest the company may have been using some questionable tactics to keep revenue high during these uncertain times.
Carnival Cruise Generated Substantial Revenue in The First Quarter
This chart shows Carnival’s revenue over the trailing 12 months. | Data by ycharts
Carnival generated a suspiciously high amount of revenue in the first quarter of 2020. This suggests they didn’t refund many passengers or significantly scale back operations in the early months of the pandemic. The company grew first-quarter revenue by around 1% from $3.20 billion to $3.23 billion year-over-year.
But despite juicing revenue through potentially exploitative practices, Carnival still ended up losing money for the period.
Carnival ended up with a $770 million net loss due to well-deserved goodwill impairments on its massively tarnished NAA segment, which includes the Princess Cruise Line and the Holland America line — both the sites of massive COVID-19 outbreaks.
By recording impairments, Carnival is admitting that these assets (the ships) will not generate as much cash flow as previously anticipated due to the impacts of COVID-19. According to the quarterly report, many Carnival ships have net carrying values that exceed their estimated undiscounted future cash flows.
This may have something to do with Princess Cruises’ CEO Jan Swartz deciding to halt global operations for 60 days. The halt will probably need to go on for longer as the coronavirus pandemic continues to worsen.
Shareholders are the Bailout
Carnival Cruise is not included in Trump’s $2 trillion stimulus package because the company ships American jobs overseas and routinely dodges taxes by registering its vessels in other countries. This means cruise companies will have to use shareholders as their bailout in these uncertain times.
With significant cash burn expected in the second and third quarters, Carnival Cruise looks to bolster its liquidity through equity dilution and high-interest junk debt.
The company has issued $4 billion in 11.5% senior secured notes and $1.75 billion in 5.75% senior convertible notes due in 2023. The convertible notes will have a conversion rate of $1,000 to 1,000,000 shares and a conversion price of $10 per share, setting the stage for massive equity dilution.
On top of the junk debt, Carnival is also doing a dilutive equity raise of 62,500,000 new shares of common stock. Carnival will sell the shares for $8.00 per each. This will generate the company approximately $500 million in cash. The deal’s underwriters will also have the option to purchase a staggering 9,375,000 additional shares by May 1.
Can Carnival Fight off Bankruptcy?
Carnival’s long-term debt is spiking sharply. | Data by ycharts
Carnival Cruise has raised around $6.5 billion that it will add on to the $1.35 billion in cash it held on its balance sheet at the end of the first quarter. This is a huge amount of money that may help the company sail through a near term coronavirus pandemic. But it comes at the cost of massively diluting shareholders and may not be enough to stave off bankruptcy.
Carnival’s junk-rated debt comes at super-high interest rates that will further drag down cash flow. It joins $7.35 billion in fixed-rate debt and $5.74 billion in floating-rate debt already on the company’s balance sheet. With a massive global recession on the horizon, Carnival Cruise is sailing into uncharted territory. And bankruptcy is on the table.
The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.
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Last modified: April 5, 2020 4:37 PM UTC