Shares of cruise line company Carnival (NYSE:CCL) have been on a rough ride the last month, popping or dropping depending on the news of the day. While short-term volatility will likely continue, as long-term investors we should consider whether Carnival can make it through this crisis.
To get a better idea if Carnival can survive the COVID-19 pandemic, let's look at where it's going to spend money this year and whether it will have enough cash to survive.
Carnival's debt picture
The first thing I want to look at is how much debt Carnival has and when it has to repay it. Companies that run into financial trouble often do so because debt markets close off to them when they need to refinance debt, so levels of cash and debt maturities are important. Here are Carnival's debt maturities by year as of Nov. 30, 2019.
|Year||Annual Debt Maturities|
Since that November date, Carnival withdrew the remaining $2.8 billion of its $3.0 billion revolving credit facility, which expires in 2024, to bolster the $518 million in cash it had on the balance sheet.
What investors will want to note is the debt that's coming due in the next year while this crisis will be in effect. I'll cover below how that will play with other spending the company already has planned.
The spending isn't over
As of Nov. 17, 2019, Carnival had a whopping 17 cruise ships scheduled to be delivered through 2025, with 10 of those by the end of 2021.
According to its 2019 10-K, Carnival has committed $4.81 billion in 2020 to new ships, $3.62 billion in 2021, and a total of $14.53 billion in future orders. Management recently said there's $2.8 billion of liquidity available to fund ships this year and $5.9 billion for deliveries in 2021 and beyond. But there will still be a shortfall of about $2 billion this year alone.
These new ships will not only result in cash outflows to complete and deliver, but they'll also increase operating costs just to keep them afloat. This is not a time when Carnival needs an expanding fleet.
A bailout looks unlikely
The number of industries that may need to be bailed out in some form by the government gets longer by the day. But investors shouldn't expect a bailout of cruise lines. One big reason is that they aren't an essential activity, but the biggest may be that they aren't U.S. companies.
Carnival is incorporated in Panama and pays very little in U.S. taxes. Workers also come from all around the world, making a bailout very difficult to justify for any specific government.
Congress has initially balked at the idea of a cruise line bailout for these reasons, and investors shouldn't count on a rescue anytime soon.
2020 is going to be rough
Let's now focus on Carnival's cash situation in 2020 because there's a lot of uncertainty in 2021 and beyond. If we look at just what we know about cash on the balance sheet, drawn-down debt, new ship commitments, and debt maturities, the company is already in a difficult position.
|Cash (Nov. 30, 2019)||$518 million|
|March 13, 2020, revolving credit drawdown||$2.8 billion|
|New ship commitments||($4.8 billion)|
|New ship liquidity||$2.8 billion|
|2020 debt maturities||($1.83 billion)|
This calculation doesn't include any operating costs to maintain ships while they're in port or any of the $2.5 billion in selling and administrative costs that will mount while operations are either shut down or at a highly reduced level.
Put another way, even if Carnival can reduce expenses by 80%, it's $17.5 billion of 2019 operating expenses would still lead to $3.5 billion in expenses over the next year. There's likely to be a big drain on the balance sheet as a result.
How Carnival gets through this
There are a few levers management could pull to get through the current crisis. It could delay the delivery of new ships, potentially putting off hundreds of millions of dollars in spending.
Management has also indicated that it can borrow against the value of ships, although we don't know how much appetite there will be in the market for giving the company even more debt.
The best path would be to get back to business as usual as soon as possible. But with COVID-19 cases continuing to grow worldwide, that seems unlikely anytime soon.
Based on the obligations Carnival has ahead, it has a challenging future, and investors buying now may simply be buying a sinking ship. They should be on the lookout for better-positioned companies in the market.