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

Carnival, the world’s largest cruise line, has borrowed $2 billion through a bond offering using a dozen of its ships as collateral to refinance its huge debt piled up during the pandemic.

According to two people briefed on the deal, the company raised more than the $1.25 billion originally planned.

The new debt was discounted and carried a coupon of 10.375 percent, giving investors a 10.75 percent yield. That was well below the 11.5 percent yield bankers marketed to credit investors 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 percent bond coupon spooked the stock market.

The double-digit coupon underscores the rapid rise in borrowing costs as the US Federal Reserve hiked interest rates this year. Similarly-rated corporate bonds traded at an average yield of 9.64 percent on Tuesday, according to Ice Data Services.

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

As part of the Bond deal, Carnival’s parent company has acquired 12 ships, most of which have been commissioned in the past two years, and are valued at $8.2 billion.

John McClain, a high-yield portfolio manager at Brandywine Global Investment Management, said the bond shows Carnival is getting “creative” with collateral to avoid paying “overwhelming” interest rates. “I don’t think that without the ships they would have access to capital at a price they would have been happy with,” he said.

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The share price is down 62 percent this year to just over $8 but rose more than 11 percent on Tuesday after the bond announcement.

The structure of the bond, which matures in 2028, puts the lenders “on top” for any claims on the 12 ships in the event Carnival is unable to make payments, said Ross Hallock, head of high-yield research at Covenant Review.

Carnival has had to deal with a skyrocketing mountain of debt in the wake of the pandemic, which totaled around $35 billion in early September. Meanwhile, the recovery in cruise bookings has been delayed. Last month, the Miami-based company reported a $770 million net loss for the fiscal third quarter.

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Carnival’s dollar-denominated senior unsecured notes, which mature in 2026, rose as much as 4.7 percent on Tuesday in a sign of the company’s cash flow settling, but they remain well below par, according to bond trading platform MarketAxess traded. At the start of the pandemic, the company offered bonds backed against its 80+ fleet to lure investors.

However, some traders said the cruise sector’s vulnerability to economic downturns and Carnival’s high level of debt meant the double-digit yield it was offering wasn’t high enough.

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

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