How a US Fed liferaft saved cruise ship giant Carnival

In mid-March, vultures were circling embattled cruise ship giant Carnival, owner of Ruby Princess. Then, the US Fed intervened.

The Ruby Princess sails from Port Kembla on April 23 after being linked to multiple coronavirus deaths and infections among its passengers. Picture: AAP

It was mid-March and the vultures were circling America’s Carnival, the largest cruise-line operator in the world.

The company, which sails from Australian ports and which owns the coronavirus-hit “Ruby Princess” cruise ship and others in the “Princess” brand, was forced to virtually shut down by the coronavirus outbreak, needing billions of dollars fast.

With financial markets frozen, executives were forced to consider a high-interest loan from a band of hedge funds who called themselves “the consortium.”

The group included Apollo Management Group, Elliott Management and other distressed-debt investors that sometimes take over the companies they lend to, people familiar with the matter said.

That all changed on March 23 when the US Federal Reserve defibrillated bond markets with an unprecedented lending program.

Within days, Carnival’s investment bankers at JPMorgan Chase & Co were talking to conventional investors such as AllianceBernstein Holding and Vanguard Group about a deal. By April 1, the company had raised almost $US6bn in bond markets, paying rates far below those executives had discussed just days earlier.

The previously unreported tale of Carnival’s rescue shows how effective the Fed has been in turning the debt spigot back on for large corporations. Carnival may still founder if tourists shun cruises over the long term, and its new debt carries a far heftier price tag than previous offerings. But the immediate survival of the company, which employs about 150,000 people, is no longer in question.

Elliott’s owner, Paul Singer, and others have warned that this success story comes at a cost. The Fed could be setting the US economy up for a harder fall down the road, they contend, by flooding markets with cash and spurring investors to prop up firms that may not be fit to survive.

Regardless, dozens of large companies have taken the Fed’s lead and raised billions of dollars in the weeks since Carnival helped reopen the market. Airbnb obtained a $US1bn financing a few days after Carnival. Ford recently sold an $US8bn junk bond, the biggest ever, and Delta Air Lines is looking to raise $US3bn in debt markets to bolster its cash pile, according to S&P Global Market Intelligence.

This account of Carnival’s rescue is based on interviews with investors and others involved in the company’s financial decision making over the past six weeks.

Miami-based Carnival was in growth mode last fall, building its largest liner ever — an 18-deck, 180,000-tonne behemoth — and using its high credit rating to borrow in debt markets at a 1 per cent interest rate.

Cruise ship passengers disembark from the Carnival-owned owned Ruby Princess in Sydney on March 19. An inquiry is now under way into why passengers were allowed to disembark when some showed coronavirus symptoms. Picture: AAP

The forecast turned bleak early this year as COVID-19 outbreaks hit the cruise industry. By early February, Carnival was slashing prices to attract customers. The company lost its single-A credit rating from Moody’s Investors Service March 11. Two days later, it stopped cruise operations and drew down its entire $US3bn credit line from bank lenders.

Even with most ships docked, chief financial officer David Bernstein calculated Carnival needed $US1bn a month to cover customer refunds, debt payments and operational costs. But corporate bond markets were seizing up and fund managers were rushing to dump investments in travel-and-leisure companies. Carnival’s bonds fell to 70c on the dollar by mid-March from 100c in late February, according to analytics firm AdvantageData, and its stock lost about 75 per cent over the same period.

As the new reality sank in, senior management asked several Wall Street banks to find alternative lenders who would be willing to make a deal.

Hedge funds that traffic in distressed debt such as Apollo have been raising money from clients for years, waiting for the day the post-2008 credit market expansion would end. When the pandemic spread in late February, they began analysing companies they thought would be most in need of cash, ranging from online ticketing services such as Live Nation Entertainment and Expedia Group to theatre chain AMC Entertainment Holdings and Carnival.

Their strategy was to make loans backed by the borrowers’ assets that would pay high yields if the companies avoided default and let the funds take ownership if they didn’t. The hedge funds favoured such big-ticket deals in part because they wanted to invest large amounts quickly.

JPMorgan let funds interested in Carnival know the company was looking for $US4bn-$US6bn. On March 20, the consortium including Apollo, Centerbridge Partners, Elliott, GSO Capital Partners and Oaktree Capital Management proposed a deal that would cost Carnival an annual interest rate exceeding 15 per cent and potentially give the lenders a stake in the company.

At the same time, Carnival had been approached by credit-investing firm Sixth Street Partners with a very different plan: Sixth Street proposed to buy up to $US1.5bn of secured debt that could convert into Carnival equity, contingent upon the company raising an additional $US5bn-$US7bn in stock and debt markets.

Mr Bernstein was still debating options on March 23 when Fed chairman Jerome Powell expanded the central bank’s market intervention to include loans to companies with investment-grade ratings as well as purchases of their bonds.

Mutual funds and other institutional investors started buying corporate bonds again in anticipation of the Fed’s purchases. JPMorgan entered confidential negotiations with several large firms about a public bond backed by Carnival’s fleet at a 13 per cent interest rate. By Sunday, March 29, the bank had unofficial orders for about $US2.5bn, and the following day Mr Bernstein decided to try a sale of public bonds with JPMorgan, leaving the hedge funds pursuing him in the lurch.

The idea of a cruise company raising so much new debt even as the pandemic worsened caught many by surprise. Nevertheless, fear of missing out attracted more investors. When Carnival officially sold a $US4bn bond on April 1, it had enough demand to cut the interest rate down to 11.5 per cent and issue a $US1.75bn bond that could convert into stock.

“We’ve made good progress,” Boston Fed president Eric Rosengren said that day. Companies “are still accessing the market at a premium, but they are accessing the market.”

The Wall Street Journal