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Is Carnival PLC going to be able to survive?


We continue to be amazed at the ongoing investor interest in the cruise lines business. If there was one sector that was going to be hit hard by COVID-19, and stay hit, it was going to be cruise lines. Not only were liners an ideal place for the infection to spread in the first place, but they were going to have to wait in line behind airlines before being given the green light to reopen for business.

What is the Carnival share price forecast?

Part of the issue for Carnival plc (LSE:CCL) is going to be how long the company can survive before it can start taking bookings again. S&P has downgraded the company’s bonds to junk status, saying that its credit measures will remain “very weak” through 2021. Adjusted leverage may potentially exceed 10x the ratings agency explained.

Carnival saw its credit rating cut from BBB- to BB- by S&P in the wake of a similar cut from Moody’s Investors Service. To raise cash, Carnival has been forced to use a $3 billion credit line and issue $6.6 billion on bonds and equity. Carnival is estimated to be burning through around $250 million every month as it tries to survive.

Carnival is known to be trying to sell some $1.5 billion in loans in the European and US credit markets. This follows a $4 billion bond sale in April and comes on top of $9.7 billion in long term debt that company was sitting on at the end of February.

Carnival has told analysts it has around 11 months of liquidity assuming zero revenue throughout the next 12 months (Q2 earnings call) and assuming no other changes. It says it is seeing growing demand for cruises and may still look to offer cruises this year, which is extremely bullish in our view. It points to a possible liquidity crunch at some point in the future if the cruise market remains in sustained lockdown.

When will Carnival be able to start cruising again?

The light may be at the end of the tunnel for Carnival, or it may just be the proverbial oncoming train. The Cruise Lines International Association, which is the cruise industry trade body, has said there will be no voyages from US ports until 15 September at the earliest. With a second wave of Covid-19 now affecting several US states, it is entirely likely that date is going to be pushed back deep into the year, or possibly into 2021. That leaves Carnival with the prospect of staying alive for many months to come.

Shares in Carnival have remained fairly lacklustre compared with some competitors, having sunk from GBX 3656 in mid-January to hit a low of GBX 581, which is incredibly cheap for a company of this size and with these assets. It has crept back to hit around GBX 1573 on 8 June, but following that earnings call, many investors are looking more askance at CCL at the moment.

The big factor here is that second wave of the virus: there is every chance the US authorities will seek a further lockdown and suspension of international travel deep into Q4 which will have severe repercussions for the cruise sector. Investors who rode this one down into the abyss will be tempted to hold on in the hopes they will see GBX 3500 again, but there is now a growing danger with the S&P downgrade that Carnival plc will be locked into its own battle for survival.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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