Carnival to sell $1.6bn unsecured bonds as virus pressure eases

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Carnival is seeking to borrow $1.6bn in a bond offering not backed by its cruise ships, a first for the company since the pandemic wreaked havoc on the travel sector.

The group is selling the debt in US and European junk bond markets, according to a term sheet seen by the Financial Times. It marks the clearest sign yet that recent vaccine developments have eased constraints for groups hard hit by the pandemic, including those in the hospitality and travel businesses.

Low borrowing costs on high-grade bonds has further polished the allure of junk-rated issuers that offer significantly higher returns.

Carnival’s planned bond sale comes at a time of worsening coronavirus outbreaks around the world with the death toll in the US having now surpassed 250,000 people.

Still, investors have begun looking beyond the Covid-19 crisis after Pfizer and BioNTech, and then Moderna, revealed over the past fortnight that their coronavirus vaccines were highly effective in patients in late-stage trials.

Carnival has raised more than $10bn since the start of the pandemic but this week’s planned sale marks its first unsecured bond deal as the debt is not backed by its fleet of ships or other assets. Unsecured bonds are considered riskier than their secured counterparts since holders are not entitled to specific collateral in the case the company is forced to liquidate.

“They are opportunistic into a market buoyed by vaccine news,” said Luke Hickmore, investment manager at Aberdeen Standard Investments, who added that the market is “crying out for yield”.

The junk bonds maturing in 2026 are expected to offer investors an interest rate around 8 per cent, according to the term sheet, far lower than the 12 per cent paid by the company for its three-year secured bonds in April, underscoring the extent that the vaccine breakthroughs have enticed investors into the pandemic-stricken sector.

John McClain, a portfolio manager at Diamond Hill Capital Management, said the company’s recent moves to raise cash in equity markets had provided some protection to investors willing to lend in the bond deal. The cruise operator raised $1.5bn through a stock sale earlier this month, which followed a $1bn fundraising completed in October.

“In a world starved of yield, the coupon represents forward equity like returns,” he added. “Investors, rightfully so, are looking past the short term Covid-related headline.”

Carnival is seeking to raise $1bn on the US market, while the size of the deal’s euro portion was increased from €350m to €500m, three people briefed on the deal said. “The market wasn’t closed to them, they’ve just managed to get cheaper levels now,” said one leveraged finance banker.

A day earlier the company announced further delays to the restarting of cruises out of the US. Carnival expects to burn through $530m a month during the fourth quarter of 2020 as its cruise operations remain halted, according to its third quarter financial results.

Many large borrowers, even those in the riskier high-yield category, have maintained their access to capital through the pandemic thanks to programmes launched by central banks, including the US Federal Reserve, to shore up financial markets. The vaccine developments have added further lubrication and also sparked a broad rally in many markets.

Carnival’s new bonds were rated single B by agency S&P Global, which expects “significantly lower occupancy levels” on cruises throughout next year and said that promising vaccines are “merely the first step toward a return to social and economic normality”.

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