On the same day, Moody’s lowered the credit rating of Carnival Corporation and the World Health Organization declared Covid-19 a global pandemic, David Bernstein, the cruise line’s chief financial officer, was in the neighborhood Broadway theaters in New York to watch a play about the fall of another corporate giant.
The March 11 performance of the Lehman Brothers trilogy was the last in 2020 at the Nederlander Theater. Later in the week, the coronavirus crisis forced sites to close as the global economy sank into one of the worst crises since the Lehman collapse at the height of the 2008 financial crisis.
More than 2,000 miles away, off the coast of California, 3,500 passengers were stranded aboard the Grand Princess, a Carnival ship that had suffered an outbreak of the virus and was unable to dock. It was the start of a storm that would devastate the cruise industry.
Bernstein, then 62, had traveled to New York to meet his new grandson who had been born a few weeks earlier. He tried to buy a face mask for his flight back to Miami, but the pharmacies were sold out. When he arrived at La Guardia Airport on March 14, the terminal was deserted.
“It was such a strange feeling.” he said. “I realized after that trip home how drastically the world has changed.”
In the year through March 2021, Carnival spent over $ 7 billion in cash. The group recorded a net loss of $ 10.2 billion in its fiscal 2020 as its revenues fell 73%. A sign of financial scarring, Carnival’s credit rating was downgraded from A minus, a blue chip rating, to B, a rating associated with risky businesses.
Carnival weathered the ordeal in large part thanks to its ability to raise $ 23.6 billion from debt and equity investors in less than 12 months, which propelled it to become one of the biggest issuers in the US junk bond market.
Its story illustrates the debt-fueled recovery from the pandemic that took hold around the world, aided by historic central bank interventions that favored large corporations with access to capital markets. It is also a symbol of the borrowing frenzy of the past year, with companies now grappling with large debts.
“It’s really amazing,” said Pete Trombetta, analyst at Moody’s responsible for rating cruise lines. “Without access to capital markets [Carnival] wouldn’t have gone that far.
The crisis talks
Bernstein had already started crisis conversations with bankers at JPMorgan, Goldman Sachs and Bank of America to save Carnival from the economic fallout of the virus spread in late January.
As the number of cases increased and governments began to take drastic action to curb the spread, the conversations became more urgent. In March, the amount the company needed to borrow increased from around $ 1 billion to over $ 6 billion. Bernstein “foresaw the worst,” he said.
No solution was on the table. In addition to speaking with banks and exploring government debt offerings, Bernstein has spoken to “almost all of the best private equity firms in the United States” about possible financial arrangements. He looked at small syndicates of loans and selling equity directly to private investors.
It was unfamiliar territory for the CFO of a blue chip company accustomed to more conventional financing options. “During the month of March I had the most in-depth training on all possible financial instruments available to us at the time,” said Bernstein.
He says he only slept three or four hours a night, waking up at 4 a.m. EST to talk to European investors as the need for money grew more urgent.
A group of funds including Elliott Management Corporation and Apollo Global Management offered a multibillion-dollar loan at an interest rate close to 15%, according to people familiar with the transactions. Sixth Street had also approached the banks in March with a list of companies they would consider financing, ultimately offering Carnival $ 1.5 billion that would convert to stocks and be behind a public and secured bond on the scale. seniority. Details of the potential packages were first reported by The Wall Street Journal.
But on April 1, the company turned only to public markets, selling a $ 4 billion bond deal backed by 86 of its ships, along with a convertible note and equity – added to help comfort lenders.
The result was almost different. Calls and emails between bank chiefs, private equity executives and Bernstein have reached the thread, people familiar with the deals said. “Decisions were made at 11:12 am, 1:00 am the day before the launch as to the optimal structure,” said Bernstein.
The reason Carnival has moved away from private equity offerings is due to cost, Bernstein said, helped by furious demand from bond investors. Carnival got an 11.5% coupon for the three-year guaranteed bond, an interest rate still typically associated with some of the world’s most troubled companies.
The Carnival deal marked a pivotal moment, not only for the cruise line, but more broadly for US businesses, as it showed that capital markets remain open even to companies hardest hit by the Covid crisis. 19.
Investors, bankers and analysts say such transactions would not have been possible without the Federal Reserve, which on March 23 made the unprecedented decision to start buying corporate bonds among a series of other measures that calmed the turbulent markets.
People familiar with the proposed private equity deals say the nature of the talks changed as soon as the Fed announced it.
Bernstein said he felt Carnival would have survived the crisis even without the stimulus from the central bank, but “to this day I have no way of judging what would have happened if the Fed had not done so. what she did”.
Fundraising was a lifeline, giving the company enough money to last until the end of the year, according to estimates by S&P Global Ratings. Attention was drawn to changing key terms of agreement documents with dozens of different institutions, in part to allow the company to raise more money in the future.
The company raised an additional $ 2.8 billion in the loan market in June, followed by a $ 1.3 billion bond in July and another $ 900 million bond in August. Private equity firms still called occasionally, but it “became clear that public markets were available and these were the best alternative,” Bernstein said.
“From the lender’s point of view, if you have ever loaned [a company] money, you don’t want them to file for bankruptcy, ”said John McClain, portfolio manager at Diamond Hill Capital Management, noting that Carnival is now almost too big to fail from a market point of view. debt. “You will lend them more and more money until they get back to normal.”
The “game changer” vaccine
Bernstein had just got out of the shower on the morning of November 9 when he learned that Pfizer and BioNTech had developed a vaccine against the coronavirus that was found to be 90% effective. “I was just ecstatic. I realized it was a game changer, ”said Bernstein.
The company’s bonds had already started to recover over the summer. They jumped even more at the news about the vaccine. Carnival’s share price fell from $ 13.71 at the end of October to $ 21.66 at the end of 2020. The end was in sight.
“It was never about survival. I knew we would survive. But what would we look like? Bernstein said, adding that the vaccine announcement significantly reduced the possibility of a messy corporate restructuring.
But the company that exists today still looks very different from what it was at the start of 2020. Carnival has $ 11.5 billion in cash on its balance sheet after closing a $ 3.5 billion bond deal in February, enough to last until next year even with zero income. . He is still negotiating with the authorities for permission to resume cruising in the United States, his most lucrative market.
He is also defending himself against potentially costly class actions brought in the United States by more than 100 passengers who claim to have contracted coronavirus aboard Carnival ships in February and March of last year.
Even after profits return, more of Carnival’s cash will need to be spent servicing its massive debt. Carnival has paid more than $ 1.2 billion in interest in the past year, up from just $ 200 million in 2019.
“There is still a lot of risk here,” Moody’s Trombetta said, adding that the increase in interest charges “is hampering” Carnival’s prospects.
Bernstein says he’s already working to lengthen Carnival’s debt maturity through new fundraisers and reduce the amount the group has to spend on interest payments. He also hopes to regain the company’s coveted investment grade status.
“It will be a number of years before we return to our track record to what it was before Covid,” he said. “Our goal is to get back to this level.
Letter in response to this article:
Carnival investors ignore societal costs of cruises / By Richard Freeman, Kensington, California, USA