Carnival borrows $2 billion as investors clamor for cruise ship-backed bond

Carnival, the world’s largest cruise operator, borrowed $2 billion through a bond issue that used a dozen of its ships as collateral, as it struggles to refinance its massive stack of debt accumulated during the pandemic.

The company was able to borrow more than the $1.25 billion it originally planned to raise and at a lower interest rate than Carnival was willing to bear hours earlier, according to two people briefed on the news. OK.

The new debt was discounted and priced with a coupon of 10.375%, providing investors with a yield of 10.75%. That was significantly lower than the 11.5% yield that bankers had marketed to credit investors on Tuesday morning, with the company citing “strong investor demand” for the bonds.

The issue is the company’s first foray into the junk bond market since May, when a 10.5% bond coupon spooked the stock market.

The double-digit coupon underscored the rapid rise in borrowing costs as the Federal Reserve raised interest rates this year. Similarly rated corporate bonds averaged 9.64% yield on Tuesday, according to Ice Data Services.

Carnival isn’t alone in paying a premium due to the financial market turmoil. Junk-rated companies had to offer an average yield of 12.25% to raise new debt in October, according to data from PitchBook LCD. Last week, cinema operator AMC borrowed $400 million at a yield of 15.1% to fund a subsidiary.

As part of the bond deal, Carnival’s parent company 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 eventually issued the bond, using the ships as collateral.

John McClain, high-yield portfolio manager at Brandywine Global Investment Management, said the bond showed Carnival “getting creative” with collateral to avoid paying “maddening” interest rates. “Without the ships, I don’t believe they would have access to capital at a price they would have been comfortable with,” he said.

Its stock price is down 62% this year to just over $8, but rose more than 11% on Tuesday after the bond was announced.

The structure of the bond, which matures in 2028, puts lenders “in the front line” of any claims on the 12 ships in the event Carnival is unable to meet payments, said Ross Hallock, chief executive. high yield research. to Covenant magazine.

Carnival had to deal with ballooning debt, totaling around $35 billion in early September, as a result of the pandemic. Meanwhile, the resumption of cruise bookings has lagged. Last month, the Miami-based company announced a net loss of $770 million for its fiscal third quarter.

Carnival’s 2026 dollar-denominated senior unsecured bonds rose 4.7% on Tuesday in a sign of reassurance about the company’s cash flow, but they continue to trade well below their face value, according to the bond trading platform MarketAxess. At the start of the pandemic, the company offered bonds secured by its fleet of more than 80 people to attract investors.

Still, some traders said the cruise industry’s vulnerability to economic downturns and Carnival’s high level of debt meant the double-digit yield on offer wasn’t high enough.

“When I see 11.5% for highly cyclical, highly leveraged US companies and compare it with others in the market [that are offering similar yields], I’m not impressed,” one investor said. “North of 15% is where it gets interesting. . . It is not difficult to find yield in this market.

Robert D. Coleman