By Claire Ruckin
LONDON (LPC) - US cruise line operator Carnival is looking to raise its first leveraged loan as it seeks alternative forms of liquidity to shore up its business, which has been sunk by the coronavirus pandemic.
The US$1.5bn dual-currency loan launched just before S&P lowered Carnival's credit rating to junk on Tuesday. Losing its investment-grade status was the latest blow to the beleaguered company that has been struggling with cancelled sailings since mid-March at an estimated cost of US$250m per month.
"Whatever the ratings metrics it is a cruise company, and there are the technicals of the ratings versus people's perception of the credit," a capital markets head said.
The five-year term loan B includes a minimum EUR500m tranche and is guided to pay 675bp-700bp, at 96 OID. The dollar TLB will have a 1% floor and the euro TLB a 0% floor. The loan is offered with call protection of NC1/102/par.
The cruise industry has been hit particularly hard by the coronavirus and Carnival's revenues dropped to US$700m in the three months to May 31 from US$4.8bn a year earlier, contributing to a second-quarter net loss of US$4.4bn.
As such, Carnival will pay up for its debt.
"While lots of deals with near I-grade ratings are structured and priced as crossover credits, on this deal the clue is in the pricing. With a yield of up to 8% the pricing is more akin to a B3/CCC," the capital markets head said.
STAY AFLOAT
Carnival secured a US$6.25bn debt-plus-equity recapitalisation in April that was designed to keep the cruise ship operator afloat for the next year.
It raised US$4bn from the sale of three-year debt, paying an 11.5% coupon at 99 OID and another US$2.25bn from equity-linked securities.
While still technically investment-grade at that time, Carnival's US$4bn secured debt offering was marketed as high-yield bonds and featured a covenant package to match.
This loan will similarly tap into leveraged loan market liquidity to help keep it functioning, even if normal business doesn't resume for the foreseeable future.
"The punchline of the April offerings was that the company was raising enough liquidity to get through to the end of the fiscal year in November with no revenue. Now at the same time they have a number of debt that matures in 2021 and capital commitments for new build ships in 2021 so the premise around this whole exercise is that there is an insurance policy to protect against downside risk for whatever reason they may need it, such as a second wave of Covid," a senior banker said.
While it was tempting to return to the bond market to raise the liquidity, there was a concern that investors would have capacity constraints from deploying more money to the sector.
Instead, bankers are targeting CLOs that are desperate for some highly rated paper, having been inundated with portfolios that have suffered downgrades to B3 and CCC.
"It struck as an opportunity to go to a more CLO base and have a part of the buyer universe that was not addressed in the bond to give the company additional flexibility," the senior banker said.
RISKY BUSINESS
It is extremely rare to encounter a near investment-grade borrower tapping leveraged liquidity, especially with such rich pricing.
While commercial bank lenders are more focused on relationship lending in the investment-grade market, the buyers of leveraged debt are more economically driven.
"The right economic package had to be put forward to make this a valid investment opportunity for the CLOs and funds," the senior banker said.
The risk-reward equation on this deal has had to take account of a possibility that a second wave of the virus could happen or the continuation of restrictions on cruise liners, which could impact Carnival's cashflows and its ability to support its debt.
"I can't think of an offering with this pricing with this rating. It's a risky investment as it is not in business and losing money. Some people will say no straight away due to the sector. But if you take a view it is a going concern, and business will return, then a Double B paying 675bp-700bp at 96 is a no-brainer," a second senior banker said.
JP Morgan is lead left and global coordinator with Goldman Sachs. Bank of America, BNP Paribas, Lloyds, NatWest, Citigroup, Mizuho, Banca IMI, HSBC, Santander, Deutsche Bank, SMBC and Siebert are bookrunners. Barclays, PNC, ANZ, DZ and Bank of China are co-managers.
(Editing by Christopher Mangham)
