By Dominique Jacquet

On February 14, Carnival Corporation & Plc posted a market price of $ 49 for a market capitalization of more than $ 33 billion. But, obviously, cruise ship activity is particularly undermined by the pandemic and the price today shows $ 11 for a value of about 8 billion, or a destruction of 25 billion dollars representing about 75 % of the initial value.

At the same time, the S&P500 fell from 3,380 to 2,237 on March 23, a loss of 34%, to climb back to 2,800 on April 15. So, over the period, the S & P500 recorded a loss of 17% “only” …

Risk coefficient

If the econometric calculations suggested by financial theory are to be believed, with a systematic risk coefficient (ß) of 2, Carnival should have fallen twice 17%, or 34%, not 75%. This initial observation reminds us that, unfortunately, in exceptional circumstances, stock market trajectories experience “abnormal returns”. Researchers are still wondering how long it will take for so-called abnormal yields to disappear (or not).

The question is relevant to Carnival, because the business model of transporting 6,600 passengers for nearly 1,700 crew members in the all-new Costa Smeralda, which is a universe quite conducive to the spread of a virus, can lose any value.

An interesting corporate reaction

The company’s reaction is interesting: objective number 1, ensuring the survival of the firm, which requires short-term liquidity. In the balance sheet at the end of February, Carnival reveals a net debt of $ 11.6 billion, mostly long-term. However, short-term debt is almost $ 2 billion higher than cash, which is a real liquidity risk. So, on April 6, while the stock price went up from $ 7.5 to $ 11, the firm announced 3 fundraisers:

• – A capital increase of $ 575 million at a price of $ 8 per share
• – An issue of convertible bonds of 2 billion, maturing in 2023 with a coupon of 5.75%
• – A conventional debt issue of up to 4 billion, same maturity 2023 and remunerated by interest of 11.5%.

Liquidity at any cost! It is indeed the primary mission of a finance department which largely prevails, in these “exceptional” circumstances, on the optimization of the cost of capital or leverage effect …

But there are a lot of reservations

Contrary to what I have read, the maintenance of the rating of the firm can be justified at the investment grade level, because the financial structure is strengthened. At least until 2023 … Then we’ll see, but the Los Angeles Times announces that cruise bookings for 2021 show a significant increase compared to 2019! Clearly, some reservations are simple postponements, the cruise lines having added an effort of additional services to the postponed tickets. However, it seems that customer motivation is quite resilient, confirming the rebound in activity after the September 11 attacks, again an overall risk related to passenger safety. So, the outlook may be favorable again in 2023.

And then, remember, the Costa Concordia had sunk in January 2012 and the stock price had gone from $ 30 on January 1 to $ 34 on June 1 of the same year. So, don’t panic, especially since there is no risk of finding the captain of the Costa Concordia on board, at least in the short term since he is in prison until 2030 …