Leisure travel company Carnival (LSE:CCL) has had its operations and profitability severely impacted by the coronavirus pandemic. It is issuing a further bond placing to keep it afloat and its half-year results do not make positive reading. Yet the CCL share price is now rising on speculation of a potential Covid-19 vaccine. Is this FTSE 250 stock now a bargain buy?
Carnival bond sale
Today it began with the sale of bonds to institutional investors. These are to the value of $775m and €425m, for maturity in February 2026. The offering closes on July 20 and the proceeds are for the general running of the company. The dollar notes have a 10.5% annual interest rate and the euro notes have a 10.125% annual interest rate. These will pay interest to bondholders semi-annually. Carnival secures these bonds on the company’s collateral and assets, but they are marked as second-priority lien, which means they have lower priority of repayment in case of bankruptcy or liquidation of assets. These interest rates are enticing to buyers but a high price for Carnival to pay. This is the second such bond issue as it already issued a rescue bond package of $4bn in April. The CCL share price was rising on the news.
Covid-19 and other external challenges
Covid-19 is likely to continue affecting the success of Carnival for the foreseeable future. The pandemic rages on globally without an end in sight. It has affected consumers’ ability and desire to travel, and there is no clarity on how long this will go on. In its half-year report, Carnival confirmed the pandemic will continue to have a negative impact on its financial results and liquidity long after the pandemic is brought under control.
This future uncertainty has already had a significant impact on Carnival’s financial state and has reduced its ability to secure financing. If it does not get normal operations running again soon, it could default on its compliance with a maintenance covenant in a debt facility due May 2021.
Aside from coronavirus, the UK has Brexit to conclude and global warming continues to cause adverse weather and natural disasters, all of which could further affect the viability of the cruise line industry and the CCL share price. It is also facing many additional challenges to growth and profitability. These include competition, exchange rate fluctuations, geopolitical tensions, rising interest rates, ship repair and maintenance costs, meeting increased hygiene standards and recruiting staff willing to travel for lengthy periods in adverse conditions.
The future of the CCL share price
Carnival’s price-to-earnings ratio is 3, and earnings per share are £3.45. Its Holland America Line is to sell four ships in 2020 and cancel cruises already booked. It has already suspended dividends, reduced capital and operating expenditure, repurchased stock and is now issuing bonds. It has also cut jobs and salaries. From these cost-cutting measures, Carnival predicts it will withstand the next year. Despite this, it has never dealt with this level of disruption before and confirms it cannot accurately predict if its business will survive.Â
But news of an experimental Covid-19 vaccine has investors excited, helping boost the share price. However, this is still very speculative and even it works out, recovery for Carnival will be slow. Buying shares in CCL seems as risky to me as penny stock trading, and I will steer clear.