Analyzing Carnival's Debt Situation
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For this blog post, I'll be analyzing a Seeking Alpha Article written by Harry Ren
Recently, Carnival raised capital through a debt and equity offering as well as suspending buybacks and dividends, making investors worried if that's enough to help them live throughout the crisis.
According to the writer, Harry Ren, who's been writing extensively about finance, Ren notes that "$13.75 billion of debt [is] due by 2023." That is a lot of debt and that includes the $6.25 billion the company raised recently. This capital raise gives them less than three years to pay off their debts, but the recent capital infusion gives them enough cash to survive the lockdowns. Also, while Carnival's credit rating is low, because its financials are better than its peers, they'll get lower interest rates on their debt.
When analyzing the capital raise further and their financial position, Carnival raised $500,000 in equity and they also have $3 billion in credit facility, leaving them with needing more than $10 billion to repay their debts (these numbers come from the article under review).
Well, according to a recent article, the Trump administration has hinted that if cruise companies register in the US and comply with US tax regulations, then the government can give them loans to help them out during these tough times.
While it's tempting for cruise operators to take that opportunity, it'll have to be the option of last resort since the opportunity will hurt their earnings in the long-run.
For this blog post, I'll be analyzing a Seeking Alpha Article written by Harry Ren
How bad is Carnival's debt situation?
With the coronavirus causing the world to go under lockdown, the industries hardest hit were the ones related to travel and tourism like airlines and cruises. With cruise stocks getting hit the hardest, many investors worry that many of these cruise companies will go bankrupt as their liquidity situations weren't great from the beginning. Because the big cruise companies don't file taxes in the US and instead file taxes in tax havens, there aren't any governments that are willing to bailout the cruise industry.
Recently, Carnival raised capital through a debt and equity offering as well as suspending buybacks and dividends, making investors worried if that's enough to help them live throughout the crisis.
According to the writer, Harry Ren, who's been writing extensively about finance, Ren notes that "$13.75 billion of debt [is] due by 2023." That is a lot of debt and that includes the $6.25 billion the company raised recently. This capital raise gives them less than three years to pay off their debts, but the recent capital infusion gives them enough cash to survive the lockdowns. Also, while Carnival's credit rating is low, because its financials are better than its peers, they'll get lower interest rates on their debt.
When analyzing the capital raise further and their financial position, Carnival raised $500,000 in equity and they also have $3 billion in credit facility, leaving them with needing more than $10 billion to repay their debts (these numbers come from the article under review).
How would Carnival be able to make up for the amount of money needed to cover its debts?
Well, according to a recent article, the Trump administration has hinted that if cruise companies register in the US and comply with US tax regulations, then the government can give them loans to help them out during these tough times.
While it's tempting for cruise operators to take that opportunity, it'll have to be the option of last resort since the opportunity will hurt their earnings in the long-run.
Conclusion
While the situation is bad, some investors choose to say that Carnival's ability to overcome their many PR problems from the past gives them hope that they'll be able to recover from this problem. Others will say that because the cruise industry will recover a lot slower from the crisis than other industries, it'll be a lot less likely before they can pay off their debts. If the loans due in 2023 can be serviced using longer term debt, then that will help boost Carnival's chances of living on.
This is a highly speculative situation, a situation that looks similar to the PG&E situation today and the American Airlines situation of around 2011-2013.
While Harry Ren's article was confusing as he talked about the company generating cash flow on a normal basis, he did give a great analysis on the overall amount of debt the company has as well as the potential sources for paying off the debt.
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