One of the hardest hit industries by the COVID-19 outbreak is the cruise industry, which has undergone a "triple-whammy," so to speak.
First, it's one of the most affected industries on a fundamental level, as no cruises can sail as long as the pandemic is a significant threat. Second, all of the cruise lines were heavily indebted prior to the outbreak, in order to fuel growth and capital returns. And third, the cruise lines aren't domiciled in the U.S. and don't pay U.S. corporate taxes, and therefore were left out of a potential bailout under the CARES Act stimulus package.
That left the cruise companies needing to tap other sources of capital in order to get them through the no-sail period, however long that lasts. Cruises are under a 100-day no-sail period as of March 14. That means no cruising until July, unless the Department of Health and Human Services deems COVID-19 not to be a public health emergency prior to then.
What is PIPE funding?
According to Reuters, Norwegian is exploring potential PIPE financing to get it through the crisis. PIPE means a "private investment in a public entity." A PIPE would likely result in Norwegian selling a large stake in the company to private investors, and potentially an established private equity firm.
A private investment wouldn't actually be that dissimilar to what Carnival Company & PLC (NYSE:CCL) did, raising a huge equity stake from investors in early April. Of course, Carnival also raised even more in debt than it did in equity. In doing so, Carnival didn't dilute its shareholders as much, but the company carries a heightened risk due to its new debt burden.
Should Norwegian go the all-equity route, it might dilute shareholders even more, but it could be less risky than taking on lots of high-yield debt as Carnival has.
Norwegian could be a strong private equity takeout candidate
A major cruise line could be a potential takeout target for a private equity firm. Private equity firms typically raise money from investors, then use that capital along with high-yield debt to buy beleaguered companies, fix the company up and improve operations, pay down the debt, then resell the company, either to another company or to the public via an IPO.
Of course, Norwegian is heavily indebted already, with about $6.9 billion at the end of 2019, or around 3.5 times its 2019 adjusted EBITDA. Having fallen from a 52-week high of almost $60 per share to just $12.38 per share today, Norwegian's market cap has fallen to just $2.6 billion -- actually a digestible size for a single PE firm. While there could be complications in refinancing the company's debt if a change in control happens, it's still a possibility.
That's because according to research firm Prequin, the private equity industry was sitting on a record $1.5 trillion in "dry powder" at the beginning of the year -- a record high for the industry and more than double from five years ago. Dry powder refers to money that has been raised from investors, but has not yet been deployed into new investments.
One can be sure that there will be a lot of deal-making in today's environment of market stress, but the cruise industry certainly seems like a good candidate for a PE takeout or PIPE investment. That's because cruise companies, by and large, have stable and growing revenue in normal times. According to the Cruise Lines International Association (CLIA), the cruise industry has grown at a 5.7% annual growth rate for the last 20 years, well above the pace of U.S. GDP growth. In fact, the industry has grown every single year since 2001, even including 9/11 and the Great Recession.
Cruises are damaged, but might be cheap enough to buy
If the cruise industry can get willing investors to help them along until they are able to go sailing again -- whenever that may be -- then their stocks could be some of the best values in the market today. However, until these companies secure enough capital, and until they begin sailing, it's unclear how much cash they will have to burn, or how much they will have to dilute their shareholders. Whether the "all-clear" is three months or 18 months from now makes a big difference.
In addition to Carnival, other troubled companies have still been able to raise capital in this environment, so I think Norwegian will be able to raise the funds. However, it's unclear how much it will raise, and on what terms.
Interested investors should keep their eyes peeled for news on the money raise, as well as when these companies might begin cruising again.