Cruise industry in choppy waters; fallen angel fears grow

4 min read
Americas, EMEA
William Hoffman

Cruise lines and other travel and hospitality companies are at increased risk of being downgraded due to the impact of the spreading coronavirus, which has customers curtailing travel and leisure.

"Everything related to tourism and travel, be it cruise ships or airlines, is of course hurting from less volume of passengers going through," said Wolfgang Bauer, co-manager of the M&G Absolute Return Bond Fund.

The sector has been attracting a lot of attention since Carnival's Grand Princess cruise line was locked down and docked in Oakland California for days after 21 people contracted coronavirus.

While the headlines have focused on the Grand Princess, cruise lines across the board have suffered as S&P put the top three — Carnival (Baa1/A-), Royal Caribbean Cruises (Baa2/BBB-) and Norwegian Cruise Line (BB+) — on credit watch negative this week.

"When the State Department is saying things like 'US citizens ... should not travel by cruise ship,' with no time frame given, and CNN is running nonstop video of passengers trapped in quarantined cruise ships roaming the seas seeking a port like the Flying Dutchman, it's difficult to perform a rational analysis of the financial situation," Carol Levenson, investment grade credit analyst at GimmeCredit, wrote in a report this week.


Creditors have focused their attention on the cuspy Triple B Royal Caribbean.

The cruise line could become a fallen angel as adjusted leverage is expected to increase to around 3.75 times debt to Ebitda, which would be around or modestly above S&P's downgrade threshold the rating agency said in a report.

Royal Caribbean has a US$300m 2.65% November 2020 note coming due as part of some US$2.6bn of total short-term and commercial paper debt maturing this year.

If the blow to the industry is as bad as it was during the financial crisis and 2009 Swine Flu scares, CreditSights said the company may have enough free cash flow and capex cuts to fund a meaningful portion of these refinancings.

The problem is, there is a real risk that cruise demand could shrink at rates that exceed prior contraction levels, which could push the company to high yield and force them to issue debt at elevated levels, CreditSights noted.

"Without an effective mechanism for generating demand, the cruise industry could effectively lose its summer sailing season," according to the report.

The effects on the industry will last for at least a year as bookings are done well in advance.

And companies are still sifting through how much they will owe customers in total and partial refunds for the cruises already booked.

Royal Caribbean reported US$3.4bn of customer deposits at 2019 year end and half of them guarantee full refunds, according to the company earnings report and CreditSights.

All of these risks triggered a 558bp widening in Royal Caribbean's 7.5% 2027 since mid-February. The note was last seen trading at around 705bp over Treasuries, according to MarketAxess data.

Likewise, Carnival Cruise's 7.875% 2027 issued back in 2001, was trading 331bp wider since mid-February, at around 440bp over Treasuries.


The leisure sector as a whole is taking a pounding as average high grade sector spreads widened out 135bp over the last 10 trading days to new four-year highs of 273bp over Treasuries, according to ICE BofA data.

As businesses cancel travel plans, large events are nixed and customers stay home, airlines are seeing credit spreads widen as well.

Market participants are closely watching the two major high grade US airlines Delta (Baa3/BBB-) and Southwest (A3/BBB+/A-) for signs of downgrade risk.

"Airlines are generally a below investment grade business and there is a lot of concern about them right now," one senior syndicate banker said.

"When people are not in the planes and the planes don't fly those business hemorrhage cash because they are highly levered, so it's not great for the credit."