Carnival borrows $2bn as investors clamour for cruise ship-backed bond

Carnival, the world’s largest cruise operator, borrowed $2bn through a bond offering that used a dozen of its ships as collateral, as it works to refinance its huge debt pile amassed during the pandemic.

The company was able to borrow more than the $1.25bn it had initially planned to raise and at a lower interest rate than Carnival was prepared to stomach just hours earlier, according to two people briefed on the deal.

The new debt was discounted and priced with a coupon of 10.375 per cent, offering a yield to investors of 10.75 per cent. That was markedly below the 11.5 per cent yield bankers had marketed to credit investors on Tuesday morning, with the company citing “strong investor demand” for the bonds.

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

The double-digit coupon underscored the rapid increase in borrowing costs as the Federal Reserve has lifted interest rates this year. Similarly rated corporate bonds traded on average on Tuesday with a yield of 9.64 per cent, according to Ice Data Services.

Carnival is not the only one paying a premium due to the turmoil in financial markets. Junk-rated companies have had to offer an average yield of 12.25 per cent to raise new debt in October, PitchBook LCD data showed. Last week cinema operator AMC borrowed $400mn at a yield of 15.1 per cent to finance a subsidiary.

As part of the bond deal, Carnival’s parent company has transferred 12 vessels, most of which became operational in the past two years and have a combined value of $8.2bn, to a subsidiary which ultimately issued the bond, using 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 collateral to avoid paying “eye-watering” interest rates. “Without the ships, I don’t believe that they would have access to capital at a price they would have been comfortable with,” he said.

Its share price is down 62 per cent this year to just above $8 but rallied more than 11 per cent on Tuesday after the bond was announced.

The structure of the bond, which matures in 2028, puts the lenders “at the front of the line” for any claim on the 12 vessels in the event that Carnival is unable to meet payments, said Ross Hallock, head of high-yield research at Covenant Review.

Carnival has had to contend with a ballooning debt pile, totalling about $35bn as of early September, in the wake of the pandemic. Meanwhile, recovery in cruise bookings has lagged. Last month, the Miami-based company reported a net loss of $770mn for its fiscal third quarter.

Carnival’s dollar-denominated senior unsecured bonds maturing in 2026 rose as much as 4.7 per cent on Tuesday, in a sign of reassurance about the company’s cash flow, but they continue to trade well below face value, according to bond trading platform MarketAxess. At the start of the pandemic, the company offered bonds secured against its 80-plus fleet to entice investors.

Still, 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 see 11.5 per cent for highly cyclical, highly levered US corporates and compare it with others in the market [that are offering similar yields], I’m not impressed,” one investor said. “North of 15 per cent is when it becomes interesting . . . It’s not difficult to find yield in this market.”