CafeBruno

Feel free to disagree! Yes I tried to keep a very complex topic simple, since most readers here are not corporate finance experts or CPA’s. I’m a long time partner in a big national CPA firm and I can use a lot more technical jargon to explain why Carnival is in much better financial shape than some are postulating, but I don’t think that would be of interest to most readers. Couple of clarifications – I did not do a “debt to asset assessment”, in fact that’s not really a thing. I did a Debt to Equity ratio, same as Wall Street uses. There’s a huge difference between assets and equity. As the SEC 10Q filing shows, only $7B of CCL’s total debt is secured by actual CCL assets, and $28B is unsecured (uncollateralized). So if CCL can’t make their debt payments, and the lender wants to repossess the assets, they can only repossess $7B of assets (but its unlikely they would do that, they would just renegotiate the terms). The debt holders for the remaining $28B of debt have no collateral, and no recourse except to try and force CCL into bankruptcy. They could do that, but it’s more likely they will just negotiate new terms, like extended maturities. So what if the debt covenants have an acceleration clause? If CCL defaults, and the debt holders demand to accelerate the debt, that will just force a renegotiation of the terms, because no lender wants to foreclose and take possession of collateral assets. Banks and other lenders don’t want to be in the cruise business, they just want terms that CCL can live with to pay off the loans. On the comparison to the airlines – I am not suggesting American and United are in worse financial shape than CCL; this is an indisputable fact. Take a look at American’s latest 10Q – as I said, their assets total $83.8B, and their liabilities total $76.4B, and therefore the difference is negative equity of $8.4B. That’s the definition of “underwater” or an upside down balance sheet – when your liabilities exceed your assets. CCL is not that position, as after the $1B stock offering, they will show assets of $53.9B, liabilities of $44.7B, and positive equity of $9.2B. So its just not factual to say that American or United is in better financial shape than CCL. Finally, I never said CCL would not sell off Seaborne, HAL or anyone else. they could, for any number of legitimate reasons. I am just saying that the data shows CCL is not in nearly as bad of financial shape as some are saying. Again, feel free to disagree, but I will continue to stick to facts and data.

Let me offer a different perspective on this discussion. (1) while Carnival has added to its debt load tremendously since early 2020, their overall debt load is still very reasonable, and in fact proportionately much, much lower compared to major airlines, who were obviously also greatly affected by the pandemic. Carnival definitely does NOT have an upside down balance sheet, as was stated earlier. And (2) as DaveOKC said, its smarter and healthier for Carnival to raise an additional $1B through the stock offering discussed here, rather than a debt offering. Why do I say their total debt load is still reasonable and ok? One way the financial analysts evaluate this is by calculating what’s called the “debt to equity” ratio. It’s total liabilities (all the company’s debts to all creditors) divided by total equity (total capitalization from common stock offerings and from accumulated prior earnings; also equal to total assets minus total liabilities). Carnival’s 5/31/22 financials show total liabilities of $44.7B (of which $35B is loans), and total equity of $8.2B, which will become $9.2B after the $1B stock sale closes, so the debt/equity ratio after the stock sale will be 44.7/9.2 = 4.85/1. Is that good or bad? Well, it’s much worse than it was prior to the pandemic – the ratio was .77/1 in Carnival’s 11/30/19 financials. But its way better than the airlines. Well wait, you may say, its unhealthy to have any debt at all!! How can they ever pay off over $35B of loans!! The answer is, they won’t ever pay it all off – it’s unhealthy for big corporations to do that. They SHOULD carry debt, at a debt/ratio of at least 1:1 to 2:1, or maybe more. This is called “Leverage” – and its how all corporations operate – using other people’s money (debt) to a greater degree than using their own money. So while Carnival will likely pay down some of the $35B debt once they return to profitability, most of it they will just continue to refinance into the future. And as (if) they return to profitability, equity will go up and their debt/equity ratio will go down to a healthier range. Also – only $9.7B of Carnival’s $35B total debt is secured, and the rest is unsecured, meaning if they go Chapter 11, the unsecured creditors are entitled to nothing except what is negotiated, while the secured creditors get the ships and other assets. That means Carnival will have a lot of leverage if it ever gets to bankruptcy. Finally, in comparison to Carnival, the major airlines have much, much higher debt/equity ratios, meaning they are in much worse financial shape than Carnival, yet people don’t seem concerned about the airlines. For example, United Airlines’ 6/30/22 financials show total debts of $66.4B, and equity of $3.96B, for a debt/equity ratio of 16.8 – 3 times that of Carnival’s! And American Airlines is even worse, showing debts at 6/30/22 of $76.4B and equity of negative $8.4B, so the debt/equity ratio is infinite (and infinitely bad!) Yes, American has negative total equity, meaning they are technically insolvent, because their liabilities are $8.4B higher than their assets. Carnival’s total equity is way less than it was pre-pandemic, but at least it’s still positive at $9.2B. Yet, we still fly American. Anyway, all that to say that the gloom and doom about the future of Carnival and HAL is overblown. The numbers simply don’t support the idea that HAL is upside down, a house of cards ready to tumble down, or close to a reorganization/Chapter 11. Should we resist giving HAL any $$? Up to you. I myself have 4 HAL cruises booked, for 60 cruise days, in 2022-2023, and I’m looking forward to each of them. If anyone wants to verify my numbers, you can go to the SEC’s website of public filings – for example search “Carnival 10Q” and it should be the first link.

On our recent Alaska Cruise Tour, we packed my wife's CPAP machine in the suitcase that went with us to each stop, and I hand carried my CPAP, and my backpack, with me on the bus/train. When we left the bus for restroom stops, I just left the CPAP on the bus. No problem, you can carry it with you, no medical form needed for the typical ResMed CPAP bag.