Morning Commentary: Cruise line bonds plunge on analyst's bearish note; Fortress eyed

By Paul A. Harris

Portland, Ore., June 29 – Cruise line bonds rode low in the water on Wednesday morning following a report from analysts at Morgan Stanley that the value of Carnival Corp.’s stock could drop to zero if the cruise industry is forced to ride out another demand shock and/or the high-yield new issue market fails to reopen for purposes of debt refinancing at sustainable costs of capital, sources said.

With Carnival's stock (NYSE: CCL) down 15% in the early going, bonds were down 2 points to 3 points, traders said.

The Carnival Corp. 10½% senior notes due June 2030, the most active issue on the morning, was down 3 points at 84¾ bid at mid-morning, a trader said. Another trader had them 84½ bid.

With impeccable timing Carnival priced $1 billion of that paper on May 18, just prior to the fangs of the Fed coming into full view, igniting full-on risk aversion, which continues to grip the markets.

It was the eighth deal the Miami-based cruise line priced since the onset of the coronavirus pandemic in early 2020. Over the course of those eight deals Carnival raised $16 billion.

That's the worry, said a trader, who added that whatever its cash position the company is almost certain to need access to the high-yield new issue market sooner than later for purposes of addressing that debt, and that any refinancing will need to be accomplished at a sustainable cost of capital.

The analysts' note on Carnival generated follow-on price drops in other bonds from the cruise sector, traders said.

The Royal Caribbean Cruises Ltd. 5½% senior notes due April 2028 were 71 bid, down 1½ points in round lot trading, a source said.

The $1.5 billion issue came at par in late March.

The NCL Corp. Ltd. (Norwegian Cruise Line Holdings) 7¾% senior notes due February 2029 were 79 bid, 79½ offered versus their Tuesday close at 80 5/8, a sellside source said.

Away from the cruise lines, high-yield bonds were unchanged to down 1/8 point on Wednesday morning, sources said.

In a new issue market brought nearly to a standstill by volatility and risk aversion, one deal is in the market.

Fortress Transportation and Infrastructure Investors LLC is attempting to place $500 million of FTAI Escrow Holdings, LLC five-year senior secured notes (B2/B-).

As the market awaits an update on price talk and timing, the Fortress deal is on a timeline that has it expected to price later on Wednesday.

Initial guidance has the deal – backing the spinoff of FTAI Infrastructure Inc. – coming with a coupon of 10¼% to 10½% at an original issue discount to yield 11%.

The Fortress order book was around deal-size on Wednesday morning, according to the sellsider, who added that orders are heard to be large and predominantly from buy-and-hold investors.

Tuesday outflows

The dedicated high-yield bond funds sustained $557 million of net outflows on Tuesday, according to a market source.

High-yield ETFs saw $480 million of outflows on the day.

Actively managed high-yield funds sustained $77 million of outflows on Tuesday, the source said.

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