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Carnival Returns to Bond Market Without Ships as Collateral

Ruth McGavin and LibCherry
·3 min read

(Bloomberg) -- For the first time since the pandemic, cruise operator Carnival Corp. is selling debt without pledging its ships as collateral, testing the depths of a market rally that has seen bond buyers betting big on hard-hit industries now that a Covid vaccine is in sight.

Carnival, which earlier this year raised almost $9 billion by issuing bonds and loans backed by its idled ships, is planning to price the equivalent of about $2 billion of unsecured notes in dollars and euros by the end of the week, according to people familiar with the matter.

The company is reverting to unsecured bonds after reaching a cap on the amount of its fleet backing debt, one of the people said. Carnival told investors earlier this year that it wouldn’t pledge more than 33% of the value of its ships, the person said. Carnival didn’t immediately respond to an email seeking comment.

The latest offering is on the heels of a rally that pushed U.S. junk-bond yields to the lowest ever after progress on Covid-19 vaccines prompted investors to flock back to leisure industries and other businesses battered by the pandemic. Carnival, which is building a cash pile intended to keep it operating through the end of next year, also issued stock this week to repay convertible notes worth about $590 million.

“The fact that they did come to the market and they can still come to the market shows the confidence of the market in this company,” said Andrew Wilmont, senior investment manager at Pictet Asset Management.

The debt issued by Carnival this year has been among the biggest winners in a market rebound that was initially spurred by unprecedented steps by the Federal Reserve to keep credit flowing amid the pandemic. A $4 billion secured notes offering that priced in April to yield just under 12% is now trading at a significant premium and yielding around 5%.

Those returns may bode well for the company as investors facing increasingly meager yields seek to capitalize on riskier debt.

Carnival increased the size of the dollar offering to $1.425 billion from $1 billion originally, according to the people. The dollar and euro portions could price with a yield in the 8% area, lower than the mid-to-high 8% range initially discussed, the people said.

Outside of an April offering of convertible notes, Carnival’s latest offering is the first unsecured deal this year. Proceeds will be used for general corporate purposes, Bloomberg reported earlier.

The bonds benefit from a guarantee that means in the event of a liquidation they would rank ahead of Carnival’s other unsecured debt -- but behind the secured -- in the queue for repayment, said the people familiar with the deal, who asked not to be identified because the terms are private. Including this latest debt raising, the company should have sufficient liquidity to last to the end of 2021, based on a monthly cash burn of about $650 million, they added.

Read more: Carnival Joins American Airlines in Cashing In on Vaccine Rally

(Adds increased deal size, price talk in eighth paragraph.)

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