Pandemic Response Financing: Carnival’s US$6.6bn multi-asset class financing

IFR Awards 2020
8 min read
Stephen Lacey

Plugging the hole
When the pandemic left its operations listing and without a port of call, Carnival turned to a US$6.6bn multi-asset class funding package that didn’t just keep the company afloat but met with a rapturous response. It is IFR’s Pandemic Response Financing of the Year.

Pandemic Response

Cruise ship operators were acutely and uniquely affected by the coronavirus pandemic.

Not only was the industry forced to cease operations – in large part thanks to outbreaks of Covid-19 on its ships – but it did not have access to the government assistance that was extended to those like airlines deemed strategically important. The industry was also dependent upon governments to allow them to resume operations, something that was always going to be a long way in the distance.

So it was an impressive achievement when Carnival Corporation, the largest cruise ship operator globally, pushed through a US$6.6bn three-tranche financing in April that kept it afloat through November and would lead to a flurry of similar financings in the months that followed.

“This was one of the most distressed sectors at the time,” said Jim Cooney, head of Americas ECM at Bank of America. “Carnival was really in capital preservation mode.

“In that dark time, they really required a holistic funding solution that would get you to ‘x’ point in time, providing investors comfort that they would be able to continue funding operations. Carnival was the playbook for other Covid-related financings.”

Carnival’s funding plug certainly was not cheap, but financings amid crises never are.

Yet unlike the seizure of the credit markets in 2009, the capital markets in 2020 were open for business, albeit it at a cost that would push many affected by coronavirus shutdowns to dip into the equity markets for the most precious of capital. Just how accommodating markets were became apparent thanks to Carnival.

Simultaneous with voluntarily suspending operations on March 13, Carnival fully drew down the US$3bn available to a multi-currency revolver, giving it US$11.7bn of liquidity at the time. That was offset by US$2.2bn of debt coming due over the following year, roughly US$2.6bn of capex, and a US$1bn monthly cash burn after suspending common stock dividends.

Significantly, Carnival’s fleet was largely unencumbered, providing it some US$30bn of assets that could be pledged as collateral against new financing, either in the form of government loans (that ultimately would not come) or capital markets transactions that would.

We’re not in IG anymore

Carnival moved to plug the funding hole in early April with US$4bn of three-year senior secured debt, just over US$2bn of three-year convertible debt and US$575m of new equity.

While execution was paramount, so was limiting dilution of selling stock at impaired price levels.

Bank of America, Goldman Sachs and JP Morgan, the joint bookrunners on the combined financing, responded by upsizing the straight debt component to US$4bn from US$3bn, decreasing the common stock sale to US$575m, from US$1.25bn, while keeping the three-year CB at US$2.0125bn, inclusive of greenshoes on both the equity and CB.

While Carnival was technically investment grade, rated Baa3/BBB–, the banks marketed the new bonds as high-yield with a covenant package, non-call for life and a first-lien priority, all in a security with a short-dated tenor. Even with all those guarantees, the new bonds priced with a coupon of 11.5% and 99 OID for an annual yield of11.9%.

The 71.875m new shares Carnival sold on the same day were offered at US$8 apiece and the CB at a 5.75% coupon and a US$10 conversion price, a 25% premium to reference on the common pricing. Carnival shares plunged 33.2% to US$8.80 over the one day of marketing.

“Demand was surprisingly strong from high-yield investors,” one banker involved in the underwriting told IFR at the time. “We haven’t seen a company access the debt markets for this type of rescue financing in a long time.

“That demand [from HY] alleviated the need for more junior capital. While the debt is certainly not cheap it is certainly a lot cheaper than equity if the stock price recovers.”

The costs of the funding were nonetheless significant. Just a few months before – in October 2019 – Carnival had funded in the debt market at a 1% rate on a 10-year bond, while its shares at that point fetched over US$50 a piece. On the one night in April, it had increased annual interest expenses by US$575m and sold 12% of itself in the process, all to keep operations afloat through November 30.

Yet the context of that funding should never be forgotten.

Carnival had seven ships affected by Covid-19 with approximately 6,000 passengers stuck at sea and no location to disembark at the time of the April financing. That cruise ships were an accidental vector in the pandemic put the industry’s future in real doubt.

The financing would prove a template for similar coronavirus financings, including multi-tranche raises by the likes of Southwest Airlines (US$6.6bn), American Airlines (US$4.6bn), United Airlines (US$4.75bn) and Norwegian Cruise Lines (US$1.9bn).

Equity and equity-linked issuance by US-listed companies in the second quarter of 2020 totaled US$161.1bn, according to Refinitiv data – an all-time high and huge ballast for struggling economies.

A constant battle

Yet there was little time to pause for celebration as the continuing pandemic meant a constant need for dollars. Carnival, which did not resume operations in 2020, would be forced to navigate difficult funding conditions throughout the year that would see it raise some US$19bn.

In June, when S&P lowered its ratings to high-yield, Carnival made a berth in the leveraged loan market, landing US$2.8bn of five-year US dollar/euro-denominated term loans priced at Libor plus 750bp and 96 OID, well wide of the Libor plus 675bp–700bp it had hoped for. This was despite using the same collateral package as on the April bond sale.

A month later, as its monthly cash burn stood at US$650m, it returned to the bond market. This time it was high-yield across the board, for a US$1.25bn 10.5%/10.125% funding split between US dollars and euros that featured a second-priority claim.

This was followed by the sale of 99.2m shares at US$14.40 apiece in August through a registered direct offering to holders of the 5.75% CB sold in April, cashing out holders of US$885m of the bonds at 157% of par after just four months. Carnival sold stock again in October and November under at-the-market programmes covering 67.1m and 94.5m shares that raised a combined US$2.5bn.

The equity fill would pave the way for another US$2bn of high-yield debt in November, again secured and split between US dollars and euros, but this time at a 7.625% coupon.

Carnival negotiated amendments with 40 creditors across over 20 credit agreements to extend maturities and secure more lenient covenants.

Overall, Carnival sold some 330m shares, more than one-third of itself, on its 2020 voyage, the type of dilution no company ever wants to endure. Yet without that heavy float, it likely would not have survived.

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