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Short-End Steepening: CCL update

01 April 2020 by jbchevrel

Carnival Corp. (CCL) is a now-famous cruise line operator. Today we have seen a decent steepening (or more exactly, de-inversion) of the 1y-5y segment of the CDS curve. The 5y CDS is wider by +44bp on the day, closing at a context of 29%/34% (+100bp running) on our European close. The 1s5s 2s5s curves have steepened by +100bp and the 3s5s have steepened by +80bp. The news that came today is that CCL was boosting the size of its bond offering. They seek to raise $6.5 billion from debt and stock sales in order to boost liquidity. For context, CCL has $3B cash and they are burning in the area of $600-700M a month. Useless to say how devastating the COVID19 impact on that industry has been. Cruise operators cash burn rate ballooned with rising deposit returns on advanced ticket sales, although partially offset by deposits on new bookings and cash from secured financing. So people in these order books are betting that CCL will sail again after a series of virus outbreaks at sea. They will benefit from the fact that CCL bonds will be secured by a 1st-priority claim on the company’s assets such as its vessels and intellectual property. One positive aspect is that the mix of customers opting to take cruise vouchers in lieu of receiving cash on deposits has rebounded from a low ~10% about 2w ago. CCL is taking new bookings for 2021 sailings. Two potential positives: 1/ deposits on new bookings are ~ 10% of the ticket price, so a modest but incremental cash infusion 2/ dedicated cruise customers aren’t paying attention to ubiquitous media commentary that the industry is forever hobbled. Adding to the positive risks for this credit is the potential for US government support. Public comments of support for the industry are encouraging (Florida is a key swing state), but nothing concrete, atm. Potential low-interest loans would preserve industry jobs and, when the time comes, help kick-start operations at a lower cost of capital than having to borrow more, secured, against fleet as collat. For the time being. CCL has increased the bond sale to $4 billion after order books crossed $11 billion (!) A lot of cash looking for allocation, at this juncture. CCL coupon was also cut to about 12% from 12.5%, according to the anonymous sources quoted by BBG. CCL is still IG on the paper, but the bond sale is unsurprisingly being managed by HY syndicate desks, one of the highest coupons ever offered (even at the reduced ~12%), and most orders are from HY accounts. This theme is far from over, there is a lot of cash looking for allocation and which can flow into bond offerings such as CCL’s, in the short term, more of that can help steepen number of IG curves. Based on the 3s5s, CCL was the biggest mover today, but closely followed by some oil names (OXY DVN HES HAL), and other high-betas (ALLY JWN). Another observation is that what has been seen in IG has not been seen in HY in a comparable scale, so another consequence of this theme could be more decompression to come. As far as CCL is concerned, it still has ships at sea bearing sick passengers that are seeking to dock, so the focus will probably shift back to that once the deal is done.