Of all the high-risk, high-upside opportunities in the market today, none are perhaps as interesting as cruise line stocks Norwegian Cruise Lines, Royal Caribbean, and Carnival. Amid the coronavirus pandemic, all three cruise companies have ceased cruising and are burning cash with no end in sight.
On the other hand, all have managed to raise money from the public debt and equity markets in order to tide them over for the intermediate term — albeit expensively, with significant shareholder dilution. Also encouraging, recent data points show strong consumer demand for cruising is intact, whenever these companies are allowed to set sail again.
More information came to light today as Norwegian Cruise Lines gave an investor update, Royal Caribbean raised new debt, and Carnival announced further cost-cutting measures.
Royal Caribbean taps the debt markets
Unlike Norwegian and Carnival, Royal Caribbean hadn’t yet raised money from the public debt markets until today. Instead, the company drew down its $2.32 billion revolving credit facility back in late March. However, that facility was only 364 days, and it has since become clear that Norwegian will probably not be up to full or even partial sailing for some period of time.
Thus, Royal Caribbean went to the public debt markets today to raise longer-term, high-yield debt, including $1 billion of senior notes due in 2023 at a 10.875% interest rate, along with $2.32 billion of senior notes due in 2025 at an 11.5% interest rate. The company will pay off its $2.35 billion revolving credit facility use the remaining $1 billion or so for a liquidity cushion amid the extended shutdown.
While that seems rather expensive, Royal Caribbean actually did better than its rivals in terms of interest rates and terms. Carnival raised senior debt in early April due in 2023 but at an 11.5% interest rate, above the 10.875% rate Royal Caribbean got for its 2023 debt. Meanwhile, the smaller Norwegian Cruise Lines recently raised senior notes due in 2024 at a 12.25% interest rate.
Royal Caribbean is between the two other cruise lines in terms of sheer size, but the company has displayed better margins than rivals in recent years, which could explain the lower interest rate it received — and why it waited so long tap the debt markets.
Carnival Cuts Deep
Also, Carnival announced an unfortunate but necessary series of job cuts and furloughs meant to limit the company’s losses and extend its life amid the cruising shutdown. Though Carnival was the earliest to raise money and secure its liquidity through the year, it’s becoming clear that cruises will likely not be back to full strength by then, and maybe even longer.
As such, Carnival announced a series of, “layoffs, furloughs, reduced work weeks and salary reductions across the company, including senior management.” The company expects the new measures will save an additional, “hundreds of millions of dollars in cash conservation on an annualized basis.”
Carnival actually kept many employees on its payroll for the past two months and is continuing to pay commissions to agents even on cancelled cruises, even though it’s clear cruising won’t return for a while. Yet with cruising restarts still highly uncertain, it was likely only a matter of time before Carnival made this move.
CEO Arnold Donald said in a recent interview that the April capital raise had given the company enough liquidity to last through the fiscal year at zero revenue, but Carnival’s fiscal year ends at the end of November, just six months from now. However, Donald also said there is the “possibility of going even longer.” That interview was given before the recent round of layoffs, so it’s possible the new measures could extend Carnival’s life into 2021 before any additional capital raises need to be executed.
Norwegian Cruise Lines unveils its 18-month plan
Finally, Norwegian Cruise Lines held its first-quarter earnings presentation, reporting a huge $1.9 billion net loss in the quarter ending in March. However, without a $1.6 billion non-cash goodwill impairment charge, the net loss only came to $0.3 billion, with essentially two “normal” months and one month of shutdown.
More important than the results of last quarter were the company’s plans going forward. Norwegian recently raised roughly $2.2 billion in the form of senior debt, convertible debt, and equity at $11 per share — actually a slightly higher price than today.
That’s a pretty big raise for the smaller cruise line, yet CEO Frank Del Rio was very enthusiastic that the new raise, combined with big cost cuts, has actually bought Norwegian 18 months of liquidity at zero revenue while burning only between $120 million and $160 million per month. The raise and cost cuts have now arguably put the smaller Norwegian on the most solid footing of all three companies, at least from a time perspective.
Looking ahead to next year
With all three major cruise lines seemingly liquid for the rest of 2020, many are now looking to 2021. In conjunction with recent announcements, all three companies have pointed to 2021 bookings already returning to normal. Norwegian noted resumed bookings, “beginning in the fourth quarter 2020 accelerating through 2021 with the Company’s overall booked position and pricing for 2021 within historical ranges.”
Royal Caribbean also reported interest in cruising in 2021, saying, “the booked position for 2021 is within historical ranges when compared to same time last year with 2021 prices up mid-single-digits compared to 2020.”
Meanwhile, Carnival also said bookings for 2021 were “within historical ranges” and that 66% of those bookings were with former cruisers, showing the loyalty and interest in cruising once it’s safe to do so. Also encouraging, a majority of Carnival’s current cancellations are opting for credit on future cruises, with less than 38% requesting a cash refund.
All three are now looking to implement a phased restart on lower-risk itineraries later this year, with Carnival setting a goal for resuming cruises in August, with new safety and cleaning procedures. Still, it’s really unclear when and if cruises will be able to resume in 2020. Two things are for sure, though. There’s clearly a lot of interest on the part of debt investors in helping the cruise lines through this time, and there’s also lots of interest in taking cruises again once people are allowed to do so.
Whether these consumer discretionary companies will be able to capitalize on these two favorable factors will depend on health directives from governments in the year, which remains the big wildcard.
By Billy Duberstein