Carnival’s cash burn will persist as cruise industry navigates choppy waters

Carnival Cruise Line will continue to burn cash this year and perhaps for years to come, as the industry attempts to return to normalcy, according to four sources following the company. The borrower’s cash burn will stay at inflated levels as it ramps up capex spending to increase capacity and keep up with its mountain of interest expense, the sources added.   

The cruise line operator announced in June that it plans to return to guest operations with eight brands this summer, including Carnival Vista, Carnival Breeze, Carnival Miracle and Carnival Horizon. However, the reopening of cruise line operations will be far from seamless, given the ever-changing COVID rules and restrictions in the sector.   

At the moment, these cruises are available for guests who have received their final dose of a CDC-approved COVID-19 vaccine at least 14 days prior to the beginning of the cruise and have proof of vaccination, in accordance with current guidelines from the US Centers for Disease Control and Prevention (CDC).  But the restrictions could change depending on world vaccination rates. Fellow cruise liner Royal Caribbean postponed the first sailing of its cruise ship Odyssey of the Seas after eight vaccinated crew members tested positive for COVID-19.  

Carnival will also face headwinds, given the industry’s seasonal nature, competing with other vacation options and the sector’s exposure to weather-related and political events, according to the sources. For example, states with cruise ports such as Florida, Texas and Alabama passed laws preventing businesses from requiring vaccine passports or proof of vaccination.  

Still, the pandemic left the cruise line space with pent-up demand and limited supply, which should lead to a faster EBITDA recovery, the sources added. The demand is supported by a strong customer base, with roughly two-thirds of annual cruise passengers being repeat customers, two of the sources said.   

Carnival’s monthly average cash burn rate for the first quarter of 2021 was USD 500m, while the expected monthly average cash burn rate for 1H21 is USD 550m. The largest contributor to cash burn for the next few years will be capex, the sources said. Capex will be high initially as the company brings ships out of pause mode, crew members return to ships, implementing enhanced health and safety protocols and spending on new ships.   

Carnival uses cash to fund working capital as the company stocks and unpauses ships, two of the sources said. However, the company also uses future cruise credits or customer deposits to offset how much cash is put into funding working capital, they added.   

The company is predicting USD 4.2bn of capex to be spent in 2021, USD 6.2bn in 2022, USD 3.8bn in 2023, USD 3.8bn in 2024 and USD 3.1bn in 2025, SEC filings showed.    

In 2020, Carnival burned roughly USD 8bn of cash through negative USD 3.5bn of adjusted EBITDA, USD 3.62bn capex and USD 895m of interest expense, according to company documents.   

In comparison, the sources expect the company to burn USD 7.7bn in 2021 through negative USD 2.5bn of EBITDA, USD 4bn of capex and USD 1.2bn of interest expense.   

Prior to the pandemic, cruise lines have generally operated at above 100% capacity, but that figure collapsed amid the pandemic, the sources said.   

By the end of 2022, the company may be able to operate at least full capacity after dealing with the fallout from the pandemic, driving positive free cash flow towards the second half of the year, said two of the sources.    

Two of the sources projected that the company would take a year minimum or around 2H22 before crossing over to positive free cash flow. Annually, for 2022, they predict the company will burn USD 3.2bn of cash through positive USD 4bn of adjusted EBITDA less USD 6bn of capex less USD 1.2bn of interest expense.   

On the conservative side, the other two sources said that it may take the company until 2024 to achieve positive free cash flow, estimating USD 1bn of free cash flow in 2024 through USD 6bn of adjusted EBITDA less USD 3.8bn of capex less USD 1.2bn of interest expense.   

However, on a quarterly basis, two of the sources expect EBITDA to break even in 4Q21 as its ships remain idle in 1H21 and accounting for one-time reopening costs for the remainder of the year. Meanwhile, EBITDA is expected to amount to roughly USD 500m in 1Q22, the sources added.  

On a normalized basis, the company could generate USD 300m of free cash flow through USD 5.5bn of adjusted EBITDA, USD 4bn of capex and USD 1.2bn of interest expense, two of the sources said.   

As of 28 February, the company held USD 11.5bn of cash and short-term investments. The company also has access to USD 6.5bn of committed export credit facilities to fund ship deliveries planned through 2025.  

For comparison, sources place Royal Caribbean slightly tight of Carnival as they deem Royal to be a better operator, even though Royal’s debtload is slightly higher.   

With an active market and yields tightening, spreads are tighter than ever before. The average high yield on bonds is at 4.12% today, according to ICE BofA US High Yield Index. For single-B companies, the average yield on bonds is 4.49%, according to the index.   

If spreads weren’t so tight, sources say that Carnival’s bonds should trade roughly 300bps wider than they are now.   

Of note, Carnival was also one of the first issues to tap the market amid the pandemic, ultimately pricing an upsized offering of USD 4bn senior secured notes due 2023 at 99 with an 11.5% coupon.  

Carnival’s USD 4bn 11.5% senior secured notes due 2023 traded today at 113.875 to yield 2.198%, in line with recent levels, according to MarketAxess.  

The company’s equity traded at a recent high of USD 31.31 per share and has since settled today at USD 28.35 per share and a market cap of USD 33.78bn, down 0.25% from yesterday’s close.   

Royal Caribbean Cruises’ USD 2.32bn 11.5% senior secured notes due 2025 traded yesterday (17 June) at 115.75 to yield 3.47%, in line with recent levels, according to MarketAxess.   

RCL’s equity traded at a recent high of USD 94.06 per share on 31 May and has since settled today at USD 86.20 per share and a market cap of USD 21.94bn, down 0.25% from yesterday’s close.  

Carnival declined to comment.

2021 Debtwire

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