Carnival CFO Plans to Skip Bond Market as Rates Soar

(Bloomberg) — Carnival Corp.’s chief financial officer, David Bernstein, isn’t worried about rising interest rates — unlike other finance executives — as the cruiseline operator looks to pay down its debt rather than refinance it.

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The Miami-based business had about $8 billion of liquidity, including cash and borrowings available under its revolver as of late March, up from $7.2 billion a year earlier. That’s enough to pay off the roughly $4.5 billion in debt coming due later this year and in 2024, Bernstein said in a phone interview.

“We expect to keep paying down debt,” Bernstein said. “We should be well positioned and not have the need to refinance in the next two to three years.”

Carnival is working to grow its earnings after the Covid-19 pandemic shuttered the industry in early 2020. That caused many cruise companies to rely on capital markets to weather the shutdown, sending debt loads soaring.

Both Carnival and rival Royal Caribbean Cruises Ltd. lost their investment-grade ratings as a result and have yet to regain them. Together with Norwegian Cruise Line Holdings Ltd., the companies had added about $44 billion to their debt loads since the end of 2019, according to a December analysis by Bloomberg Intelligence.

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Carnival is now focused on whittling down its $32.7 billion long-term debt pile, Bernstein said.

“It’s realistic in our view,” CreditSights analyst James Dunn said in a phone interview, referring to the company’s plan to pay down maturities through 2025. “Our expectation is that Carnival can cover a substantial amount of that with cash and cash flow.”

Carnival’s shares have slumped 80% since early 2020 as the pandemic hit markets, with the stock trading around $10 on Tuesday. The cruise company’s 4% bonds due in 2028 hovered around 86 cents on the dollar — compared to more than 90 cents a year ago, according to Trace bond-trading data.

Recession Risk

But the speed and strength of the company’s return to pre-pandemic free cash flow levels depends on the health of the broader economy. It’s also a bet that consumers won’t cut back on travel in the face of a potential downturn — even as they pull back on other discretionary spending.

“Carnival is chipping away at near-term debt, yet recession risks, a slower-than-expected return to normalcy, and looming 2024-25 maturities create hurdles,” Bloomberg Intelligence analyst Jody Lurie wrote in a note dated March 27.

Lurie expects margins to stay under pressure from elevated interest expenses, inflation and marketing costs, Lurie wrote. Free cash flow may not break even until the end of 2024, but the $8.1 billion in liquidity should be sufficient to manage the business through then, she wrote.

The company reported a net income loss of $693 million in its latest quarterly filing, compared to a loss of $1.9 billion this time last year. Credit ratings firm Moody’s Investors Service anticipates that the ratio of Carnival’s debt to earnings before interest, taxes, depreciation and amortization will exceed seven times at the end of 2023.

“The company’s EBITDA turned positive in the third quarter of 2022 but free cash flow available for debt reduction will continue to be constrained by rising interest costs and new ship commitments,” Moody’s senior analyst Peter Trombetta wrote an October report.

Any credit upgrade would require material debt reduction or an increase in earnings that would result in a debt to Ebitda ratio below 5.5 times, Trombetta wrote.

Carnival is rated B2, or five steps into junk, by Moody’s with a negative outlook.

That’s not to say Carnival won’t return to the debt markets in the next couple of years, especially as the cruiseline operator continues to work towards positive free cash flow, Bloomberg’s Lurie said.

CFO Bernstein said that while the focus is on paying down debt, there could be opportunities too good to pass up — similar to the early days of the pandemic when the Federal Reserve cut interest rates to close to zero.

“You get the money when you can because you never know if you can get it when you need it, and I have lived by that rule.”

Spokespeople for Royal Caribbean and Norwegian didn’t immediately respond to a request for comment.

–With assistance from Bre Bradham.

(Updates with credit rating in the 14th paragraph. An earlier version corrected analyst title in seventh paragraph.)