The coronavirus pandemic has hit the cruise industry hard. And perhaps no one knows this better than Carnival Corp. (CCL +6.79%), which has been the victim of some high-profile coronavirus outbreaks on its ships. The cruise operator is adapting to the challenges in an attempt to fight off bankruptcy.
Management has tapped the debt market for $5.75 billion in junk bonds and diluted shareholders to the tune of 62.5 million new shares. While these capital raises will help Carnival survive in the short term, it won't be smooth sailing. The company faces significant cash burn whether or not it operates its cruises.
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2020 has been a rough year for Carnival
Carnival has been especially hard hit by the coronavirus pandemic, particularly its Princess Cruises line. The nightmare started with the Diamond Princess, which saw over 700 of its passengers and crew contracting COVID-19 during a tour of East Asia. Later, the Grand Princess, Coral Princess, and Ruby Princess all had major outbreaks onboard.
On March 12, Princess President Jan Swartz announced a pause of ship operations on the Princess line. This move, along with overall market weakness due to government-mandated travel restrictions, has led Carnival to impair the carrying value of ships in both its NAA segment (which represents North American and Australia) and its EA segment (which represents Europe and Asia). In total, the company recorded $731 million in goodwill impairment charges for these reporting units in the first quarter.
Carnival's fiscal-first-quarter revenue (which represents the three months ended Feb. 29) did not show notable coronavirus impact. Revenue was up around 2.5% from $4.67 billion to $4.79 billion year-over-year. But the goodwill impairment charge was a major factor in Carnival's bottom line deteriorating from a profit of $336 million to a loss of $781 million.
Management taps debt and equity markets
The cruise industry is notably excluded from the White House's $2 trillion economic stimulus plan, and it will not be receiving a bailout. This means Carnival has had to tap the debt and equity markets.
Carnival has undertaken a public offering of 62.5 million common shares for $8 each, along with what's known as a greenshoe option that allows the underwriters of the deal to purchase an additional 9.375 million shares if they want. The dilutive capital raise is joined by a debt raise of $4 billion worth of 11.5% senior secured notes and $1.75 billion in 5.75% senior convertible notes -- both due in 2023.
When all is said and done, Carnival will have around $7.6 billion in cash on its balance sheet (adding the $500 million from stock sales and the $5.75 billion in debt raised to the $1.35 billion in cash the company reported in the first quarter). The new capital should help Carnival through a near-term slowdown, but it won't be smooth sailing because of the company's significant cash outflows.
Can Carnival fight off bankruptcy?
Carnival burned through around $12.9 billion in operating costs and expenses in fiscal 2019. The company will quickly run out of money if it faces similar cash outflows in 2020.
The good news is that at least $5 billion of these outflows (food, fuel, tours, and onboard) seem to be variable, while $5.17 billion (payroll and ship operating costs) seem to be fixed. That means Carnival will have to pay these outflows whether or not it runs cruises. Carnival's $2.72 billion in commissions, transportation, and other outflows seem to fall somewhere in between variable and fixed cash outflows.
With around $7.6 billion in cash on its balance sheet, Carnival should be able to sustain an estimated $5.17 billion in cash outflows for payroll and ship operating costs. And it should also be able to pay the $1.8 billion in debt maturing in 2020. The only other major challenge will come from new ship deliveries. As of the most recent annual report, the company has up to 17 additional ships scheduled to be delivered by 2025, with six new ships entering service in 2020.
New deliveries will increase Carnival's operating costs and drain its cash reserves. It is unclear how management plans to deal with this challenge and what impact it will have on the company's ability to meet its obligations in these perilous times.
What is the outlook for Carnival's stock?
Carnival CEO Arnold Donald believes his company has enough cash to survive -- even if it generates no revenue for the rest of the year. And he's probably right. The embattled cruise company has raised over $6 billion in cash through debt and equity, giving it enough liquidity to sail through these challenging times.
But while Carnival probably won't go bankrupt, the stock seems to offer way more risk than reward right now. And it is likely to continue underperforming the market.
Carnival's stock has fallen about 77% year to date through midday Thursday, compared to a 13% decline in the S&P 500. And it is likely to continue underperforming over the long term as its weakening balance sheet and cash burn put the company in a very precarious position. Investors should focus on healthier companies in this period of economic uncertainty.
