On Tuesday, cruise line operator Carnival Corp. (CCL) saw its debt cut to junk status by S&P, from BBB- to BB-, with a negative outlook. The same day Moody's cut CCL debt to Ba2 from Ba1. The day before CCL announced it was extending its moratorium on cruises until September 30th. The question is when CCL and other cruise names will catch a break, and the answer is likely not anytime soon.
Last Thursday's second quarter earnings release for CCL revealed a loss of $3.30 per share, well worse than the already low consensus estimate of -$1.76. Revenue of $700 million was down more than 85% versus the same period last year. It's difficult to generate revenue when your business is not operating.
The company has taken steps to shore up liquidity through the issuance of $6.6 billion of stock and debt, drawdown of it's $3 billion credit facility, and suspension of its dividend. It is clear, however, that this will be a very different company once Covid-19 is behind us; one that is more highly leveraged with significant equity dilution. But these are unprecedented circumstances - that I'm not sure we yet fully understand as it applies to this and certain other industries - and moves made by CCL and others are about survival. That should not be comforting to those so low in the capital structure, the stockholders.
What may make this situation seem all the more real is the fact that CCL will be selling six of its ships in the next three months, and is on the path to sell even more. Keep in mind, however selling ships is not uncommon, and the sale of the six in question is just an acceleration of sales that would have likely taken place anyway. CCL's entire fleet is large at 104 ships, but keep an eye on how many more they end up putting on the market.
At least for traders, there's been money to be made on CCL the past four months, as it fell from the low $40's to $8, and has rebounded to the current $18. The market has been and still is highly inefficient, which can be a great environment if you are an adept trader. This is not a buy and hold situation, and thus, not my game.
As shareholders, we need to remember that companies can survive dire times, but that does not mean our equity will. We are the low man on the pole in terms of the capital structure, and there's a lot of folks ahead of us, especially when there's significant debt. That's why you want to take a look at enterprise value (Market Cap + Debt - Cash), and not just market cap when reviewing a company.
I still believe the cruise industry will survive. Low cost vacations on ships has been one of the great travel innovations of the past couple of decades. The question is what the operators will look like once they are able to resume operations, and who will be left standing.