Carnival’s struggle to survive the coronavirus as outbreak wipes out the cruise industry

Despite the onslaught of bad news, Carnival still dominates the market. It is the world’s largest cruise operator, accounting for nearly 50% of all cruise passengers. It  also enjoys a stronger balance sheet than its rivals. 

Until the outbreak of COVID-19, sales for Carnival had been strong, rising every year since 2015, and up more than 10% from fiscal year 2018 to 2019. That’s nearly double the revenue of Royal Caribbean and more than three times Norwegian’s sales in fiscal year 2019. Net profit also dwarfs the competition, though the company has been struggling to maintain growth.

Carnival’s long-term viability ahead of the outbreak was also promising. As of the end of fiscal year 2019, Carnival’s debt-to-equity ratio, a measure used to help evaluate a company’s risk, was 45.3%, which is considered a good balance between what it owes and what it owns.

Compare that to its two chief rivals. Norwegian and Royal Caribbean’s debt-to-equity ratios are around 100%. Both took on a lot of debt, at a time when debt was cheap, which may prove difficult to pay back during a rough patch like this. 

Carnival has its own debt payments coming due, not to mention the fresh injection of new debt it took on last week, and the $4.8 billion it’s committed to spending on new ships in 2020. 

On top of the $518 million in cash it already had on hand, Carnival tapped its entire $3 billion credit facility, and it is trying to raise over $6 billion in stock and debt. However, Carnival said it needs about $1 billion a month to keep operating, according to an April 3 securities filing. 

Getting credit investors on board comes at great cost to the company. The bulk of this new financing is from bonds paying investors 11.5%, an interest rate typically seen in the junk bond market. 

“The cost of financing was particularly onerous, given this is an investment-grade entity with a substantial amount of collateral coverage,” said John McClain, a portfolio manager at Diamond Hill Capital. “Its collateral coverage is 86 vessels, plus intellectual property, with a net book value north of $28 billion. Historically, this would give a huge amount of confidence.”