Cube Midcap Report (2 April 2020) – Carnival shifts its debt chairs #CCL #EZJ

Cube Midcap Report (2 April 2020) – Carnival shifts its debt chairs #CCL #EZJ

Good morning!

There is plenty to digest in midcap news today.

I plan to start with two high-profile travel & leisure stocks:

  • Carnival (CCL)
  • Easyjet (EZJ)

Finished at 5.30pm. I got a bit carried away with my analysis of CCL and EZJ, so I’ll leave it there.

Carnival (CCL)

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Market cap £5.0 billion (based on 684 million shares)
RNS Carnival announces upsizing and pricing

Carnival announces pricing shares of common stock

Writer disclosure No position.

There has been a lot happening at this cruise operator in recent days.

On Tuesday afternoon, it issued an update with the following info:

  • net loss expected for the current financial year, ending November 2020 (not a surprise, since all of its operations have ceased)
  • its $3 billion credit facility was now fully drawn down

Publicity: “we have been the subject of negative publicity which would have a long term impact on the appeal of our brands”

Lawsuits: “we have received, and expect to continue to receive, lawsuits from passengers aboard the Grand Princess voyage in February 2020″

Insurance: “We cannot assure you that we will receive insurance proceeds that will compensate us fully for our liabilities, costs and expenses under these policies. We have no insurance coverage for loss of revenues or earnings from our ships or other operations.”

Uncertainty could not be any higher:

We cannot predict when any of our ships will begin to sail again and ports will reopen to our ships… As a result of all of the foregoing, we may be required to raise additional capital .

It was a calamitous RNS -as bad as could ever be imagined. It does not get worse then this, beyond outright bankruptcy.

Fundraising begins

The same day, we had a bond offering, to raise $4.75 billion (of which $3 billion was to be in the form of secured notes, and $1.75 billion in the form of convertibles). Both of these instruments would expire in 2023.

Use of proceeds: “general corporate purposes”. No flowery explanation is needed in these circumstances.

And we also had an equity offering for $1.25 billion.

How did it go?

Today we get the news about how the fundraising efforts went.

  • Senior secured notes: upsized by $1 billion to $4 billion. The interest rate is an eye-watering 11.5%.
  • Convertible notes: no change in size. $1.75 billion. Interest rate is 5.75%.

The lower rate of 5.75% on the convertibles reflects the value of the conversion option. These notes can be converted at $10 per share, which is not so very far away from the current share price.

Full conversion would result in 175 million new shares – important to bear in mind, when calculating the market cap.

  • New Equity: reduced by $750 million to $500 million, and priced at $8 per share.

New balance sheet

The balance sheet as of November 2019 looked like this, using rounded and simplified numbers, leaving out line items that aren’t relevant such as goodwill.

Assets are roughly as follows:

  • PPE $38 billion
  • Cash & working capital $1.3 billion

Liabilities were roughly as follows:

  • Long-term debt $9.7 billion
  • Other current liabilities $7 billion (mostly customer deposits)
  • Short-term borrowings and current portion of long-term debt $2 billion

The assets are still there, but aren’t generating any revenues – and the debt of course still needs to be serviced.

The new balance sheet gets a cash injection of $6.25 billion, but this is nearly all in the form of new debt that matures in 2023 (reducing only if the share price exceeds $10 between now and then, and the noteholders exercise their conversion option).

The equity component helps a lot more, but nobody knows the scale of the losses which Carnival is about to experience. $500 million might not turn out to be a very big number, compared to the losses we are about to see.

My view

I’d be much more interested to invest in CCL shares if I thought its  debt overhang had been substantially reduced.

What we have instead is breathing room for the company, to clear its immediate cash flow threats.

From the annual results, we know that the maturity profile for CCL’s $11.6 billion total debt load was as follows:

As I have highlighted in the table above, nearly $4 billion was coming due this year and next year.

Therefore, the $6.25 billion raised effectively lets the company pay off the debt that is coming due over the next 18 months, and the losses it is about to incur (assuming they only run into the low billions).

It may have saved Carnival in the short-run, but it doesn’t make for a much safer company.

Valuation: the adjusted share count, by my calculations is as follow:

  • 684 million existing
  • 62.5 million from new equity raise
  • up to an extra 175 million, in exchange for the reduction of $500 million in debt if the convertibles are exercised.

Let’s call it a share count of 750 million for now.

At the latest share price of 650p, we get a market cap of c. US $6 billion.

On the basis that the funds raised will only be used to pay off existing debts and absorb losses, I would see the outstanding debts as being still in the region of $12 billion.

We therefore get an enterprise value of $18 billion for ships and equipment with tangible book value of $38 billion (as of November 2019, before writedowns and impairments).

The ships are therefore currently available at half price, versus their depreciated cost.

So, is there value to be had? I do think there could be, yes.

Though I’m not sure if I’d be brave enough to stick my neck out by owning the equity, except in very small amounts. Earning 11.75% on the debt would suit my temperament a whole lot more.


EasyJet (EZJ)

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Market cap £2.0 billion
RNS Requisition of general meeting
Writer disclosure No position.

easyJet announces that on 1 April 2020 it received a notice from easyGroup Holdings Limited (“easyGroup”) requisitioning a general meeting of the Company’s shareholders (the “Requisition Notice”). The Requisition Notice proposes a resolution to remove Andreas Bierwirth as a director of the Company.

easyGroup Holdings Limited. That sounds familiar.

It’s the holding company for Stelios Haji-Ioannou, easyJet’s founder and largest shareholder (c. 34%).

Stelios wrote to the Chairman of easyJet on Sunday night. You can find the contents of the letter online.

Allow me to share some of the “best bits” of this email:

The “elephant in the room” and main risk to survival of the company is the £4.5bn of payments to Airbus between 2020 and 2023 (as stated in the results presentation dated 19 November 2019) for the future delivery of 107 aircraft which the company CANNOT afford. That liability of paying Airbus £4.5bn dwarfs today’s easyJet market capitalisation of £2.4bn…

…it is unquestionable that the payments to Airbus constitute the largest single threat to the solvency of the company. Yet you refuse to even mention AIRBUS in your public announcements.

I have to agree with Stelios that this is unacceptable – I remember reading the easyJet RNS of 16 March, when they said there was “no debt refinancing until 2022”. As Stelios points out, “it was not made clear if the Airbus liability could be met before that date“.

He goes on to say:

Even with a resumption of air traffic, any income from passengers is likely to be too low to keep up with outgoings and would most likely render easyJet insolvent if it continues to pay Airbus for more aircraft. The extra 107 aircraft are simply shareholder value destroying. 

Stelios goes on to discuss how Airbus has admitted bribing airlines (on an “endemic” basis). He argues that shareholders of airlines bribed by Airbus may have a new problem:

…at a time of crisis, airline executives would be reluctant to cancel Airbus ordes because they may have received bribes: naturally they won’t want to fight Airbus in open court, risking exposure.

Stelios asks the easyJet Chairman if he has investigated how Airbus secured its orders. And he makes the following final points:

  • the current crisis is a “force majeure” event and overrides previous agreements
  • it would be cheaper to fight Airbus in court over a period of several years than to pay for 107 aircraft
  • unless the Chairman addresses his points, Stelios will attempt to fire a Non-Executive Director every 7 weeks, “until we find directors willing and able to carry out their duties to protect the company by terminating and if necessary renegotiating the Airbus contract”.
  • other airlines will probably cancel their Airbus orders, too (except where their directors were bribed)
  • Stelios will personally sue all of the directors for gross negligence, if easyJet makes any payments to Airbus while its fleet is grounded (on the basis that the directors are favouring one alleged creditor over another)
  • easyJet should raise fresh equity, and Stelios will put money in if the Airbus orders are cancelled.

It’s a stark warning about the need to raise fresh funds. The easyJet net debt position was small going into this crisis (£326 million as of November), but Stelios is explicit in his belief that more cash is needed, even if the Airbus orders are cancelled.

His willingness to participate in a fundraising does at least signal that those who do back a placing could do well (I presume that it would be priced around the current share price of 500p).

My view – I am disappointed that the scale of the upcoming aircraft purchases wasn’t made clear in the recent RNS announcements from EZJ. The Board needs to come up with a very good explanation with respect to what they are going to do about these orders, and defend the orders if they intend to go through with them.

Otherwise, I expect that Stelios will have enough support from other shareholders to sack this Board of Directors, and rightfully so.



In economic news, there were a horrendous 6.6 million weekly jobless claims in the US announced today. This smashes all previous records (including the record which was set last week). I expect that people will start asking if the Coronavirus “cure” (i.e. lockdowns) is worse than the disease!

Best wishes




Wordpress (3)
  • comment-avatar

    “of which $3 billion was in the form of secured notes”

    Is this the 3 year paper at 12.50% p.a. interest?? Scary!

  • comment-avatar

    Thanks for an interesting report Graham.

    As far as I can tell, some of the justification for the new aircraft would be replacement of older A319 planes, ordered in 2002 (actual age unclear), the lower running costs for the NEO variant and more passengers per plane. However, of course the timing is very bad ! I’ve operated a “no airlines” investment rule so far.

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