Carnival Corp Raises $2B Increasing Offering on Strong Demand

Carnival Corporation refinances
Carnival Corporation raised $2 billion on strong investor demand (Carnival Cruise Line file photo)

Published Oct 19, 2022 4:10 PM by The Maritime Executive

Carnival Corporation reported that stronger than anticipated investor demand permitted the company to increase the size of its latest refinancing offering by nearly two-thirds while also pricing the offering with a lower than projected coupon interest rate. All of this comes as the world’s largest cruise corporation works to continue to build its momentum in the return to service after the pandemic despite the recent headwinds from the economy.

After the close of the financial markets yesterday, October 18, Carnival Corporation announced the pricing of a private offering of Senior Priority Notes. Based on the strong investor demand, Carnival reported that the offering was increased by 62 percent to a total of $2.04 billion. Earlier in the day, the company had revealed its intent for a $1.25 billion private offering.

Early speculation in the market was that the company was going to have to offer a rate of about 11.5 percent on the coupon to attract investors to the deal, which would be its first attempt at junk bonds since May 2022, when investors were rattled by a 10.5 percent coupon. In addition, in the spring, the expectations were that the company was on a faster track to financial recovery, while in September Carnival reported a larger than forecast loss from operations with lower than expected passenger ticket revenues.

Carnival however projected for investors an improving outlook citing the ending of more COVID-19-related restrictions and requirements. In September they reported meaningful improvement in booking volume saying that they were now running ahead of 2019 levels. While in the near term the corporation’s brands have been heavily discounting to build passenger levels, the corporation said it expects pricing to increase in 2023. Further, while the coming quarter was also forecast below consensus, the corporation said it expects to approach breakeven on its adjusted earnings before interest, tax, and deprecation.

In addition to increasing the size of yesterday’s offering, Carnival Corporation reported that it had been priced with a lower than anticipated 10.375 percent annual coupon. The notes, which are due in 2028, will be initially used to repay amounts drawn under the company’s revolving credit facility. The facility however will remain available for future principal payments and general corporate purposes. In addition, as of the end of August, Carnival reported $7.4 billion in liquidity in cash and undrawn credit. 

While the notes will be unsecured and will be unconditionally guaranteed by the corporation, investors noted that the company used a creative step to attract investors. Carnival reports that 12 of its ships that are currently unencumbered were transferred into an issuing subsidiary for the private offering. Investors are reassured by the structure meaning investors would have more than $8 billion worth of vessels in effect as collateral against the notes.

Despite selling older vessels and moving aggressively to lower expenses, the pandemic left Carnival Corporation with nearly $35 billion in debt (as of September 2022). The company has turned to the financial markets to refinance as it looks to move forward. Prior to the latest offering, Carnival raised $1.15 billion of public equity last quarter.

In addition to the continuing challenges from COVID-19 and the now ended restrictions which the company believed were slowing bookings, they have also been facing raising costs. Fuel costs spiked earlier in 2022 and in its most recent financial report, Carnival warned of higher non-fuel related expenses. The strong dollar also was negatively impacting the company which has a large portion of its passenger bookings in the euro and British Pound. They also choose to discount fares in 2022 to help with occupancy which reached 84 percent last quarter.

With China remaining closed to foreign cruise lines, Carnival has slowed the return of some ships, especially in its Costa brand which was large in the Chinese market. However, the company said by the end of 2022 eight of its nine brands would have all their ships back into service. Despite the challenges in the economy, management told investors that it expects occupancy to continue to climb and that pricing would improve in 2023.