Carnival Corporation 2020: issuing bonds at record yields in the midst of COVID
How one of the companies hardest hit by the pandemic managed to raise liquidity when it seemed impossible
In April 2020, with ships stuck in ports and no revenue, Carnival Corporation issued 5-year bonds at 11.5% yield and raised $4 billion in hours. A case study on how markets price extreme risk.
April 2020: the worst of the COVID crisis
April 2020 was the darkest moment of the pandemic. Markets had lost 34%. Cruises were stopped, banned by authorities worldwide. Carnival had zero revenue and enormous fixed costs.
The impossible issuance
In the midst of this crisis, Carnival Corporation issued $4 billion of debt on the bond market in two tranches: 5-year senior secured bonds at 11.5% annual and convertibles with warrants. The order book was covered in hours.
Why it worked
Investors were attracted by the high yield in a zero-rate world, by the fact that the bonds were secured (backed by physical assets, namely the ships), and by the bet that cruises would resume. Demand exceeded supply: the book was oversubscribed.
Lessons
- Markets always price an expected future, not the present: investors bought the future recovery, not the current crisis.
- High yield compensates for perceived risk: those who bought those bonds at 11.5% got excellent returns in the recovery.
- Liquidity has a price: Carnival paid dearly for that liquidity — but it was survival.