Carnival is paying an 11.5% coupon on a cruise line-backed bond

Carnival, the world’s largest cruise line, has pledged a dozen ships as collateral in its latest $1.25 billion bond offering to refinance its massive debt left over from the pandemic.

Carnival is expected to pay a hefty coupon of about 11.5 percent for the six-year debt, two people briefed on the deal said. The issue is the company’s first foray into the junk bond market since May, when a 10.5 percent bond coupon spooked the stock market.

As part of the bond deal, Carnival’s parent company has transferred 12 ships, most of which have been commissioned in the past two years and have a combined value of $8.2 billion, to a subsidiary that will issue the bond with the ships as collateral.

John McClain, a high-yield portfolio manager at Brandywine Global Investment Management, said the bond shows Carnival is getting “creative” with collateral to avoid paying “overwhelming” interest rates. “I don’t think that without the ships they would have access to capital at a price they would have been happy with,” he said.

The share price has fallen 63 percent this year to just over $8, but rose more than 11 percent Tuesday after the bond announcement.

The structure of the bond puts the lenders “on top” for any claims on the 12 ships in the event Carnival fails to make the payments, said Ross Hallock, head of high-yield research at Covenant Review. He said this aims to make the bond “more attractive” to investors despite concerns about how a consumer downturn would affect the travel sector.

Carnival has had to deal with a skyrocketing mountain of debt in the wake of the pandemic. Its debt was about $35 billion in early September. Meanwhile, the recovery in cruise bookings continues to lag behind. Last month, the Miami-based company reported a $770 million net loss for the fiscal third quarter.

Carnival’s other dollar-denominated unsecured notes, which mature in 2026, were up as much as 4.5 percent on Tuesday in a sign of reassurance about the company’s cash flow, but they continue to trade well below par. At the start of the pandemic, the company offered bonds backed against its 80+ fleet to lure investors.

However, some traders said the cruise sector’s vulnerability to economic downturns and Carnival’s high level of debt meant the double-digit yield it was offering wasn’t high enough.

“When I see 11.5 percent for highly cyclical, heavily leveraged US companies and compare them to others in the market [that are offering similar yields], I’m not impressed,” said one investor. “It gets interesting north of 15 percent. . . It’s not difficult to find yield in this market.”