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One of the industries most affected by the COVID-19 outbreak is the cruise industry, which has suffered a “triple whammy,” so to speak.
First, it is one of the industries hardest hit on a fundamental level, as no cruise ship can navigate while the pandemic is a significant threat. Second, all the cruise lines were heavily in debt before the outbreak, to fuel growth and capital returns. And third, cruise lines are not domiciled in the US. USA And they don’t pay US corporate taxes. Therefore, they were left out of a possible rescue under the stimulus package of the CARES Act.
That left cruise companies needing to tap other sources of capital to get through the period without navigation, for as long as it lasts. Cruises are under a 100-day period without navigation beginning March 14. That means there will be no cruises until July, unless the Department of Health and Human Services considers COVID-19 not to be a public health emergency before then.
More recent, Norwegian cruise lines (NYSE: NCLH) contracted investment bank Goldman Sachs (NYSE: GS) seek financing, which may include the sale of part of the company to private equity.
Image source: Getty Images.
What is PIPE financing?
According to Reuters, Norwegian is exploring PIPE’s potential financing to overcome the crisis. PIPE means “private investment in a public entity”. A PIPE would likely result in Norwegian selling a large stake in the company to private investors, and potentially an established private equity firm.
A private investment would not really be that different from what Carnival Company and PLC (NYSE: CCL) It did, raising a large shareholding in early April that was purchased primarily by the Saudi Arabian Public Investment Fund (PIF). Of course, Carnival also raised even more in debt than in equity. In doing so, Carnival did not dilute its shareholders as much, but the company is at greater risk due to its new debt burden.
Should Norwegian go the equities route, it could dilute shareholders even more, but it could be less risky than taking on a large amount of high-yield debt like Carnival.
Norwegian could be a strong candidate for private equity to carry
A major cruise line could be an important target for a private equity firm. Private equity firms generally raise money from investors, then use that capital along with high-yield debt to buy besieged companies, fix the company and improve operations, pay the debt, and then resell it, either to another company or to the company. public through an IPO.
In this case, a physical education company might not even use additional debt, considering Norwegian is already heavily in debt, at around $ 6.9 billion at the end of 2019, or around 3.5 times its 2019 adjusted EBITDA. After having Dropped from a 52-week high of nearly $ 60 a share to just $ 12.38 a share today, Norwegian’s market cap has fallen to just $ 2.6 billion, actually a digestible size for a single physical education company.
According to research firm Prequin, the private equity industry had a record $ 1.5 trillion in “dry powder” earlier in the year, a record for the industry and more than double that of five years ago. Dry powder refers to money that has been raised from investors, but has not yet been deployed in new investments.
One can be sure that there will be many deals in today’s stressful market environment, but the cruise industry certainly seems to be a good candidate for a PE or PIPE investment. That’s because cruise companies generally have stable and growing incomes in normal times. According to the International Cruise Lines Association (CLIA), the cruise industry has grown at an annual growth rate of 5.7% for the past 20 years, well above the growth rate of US GDP. USA In fact, the industry has grown every year since 2001, including September 11 and the Great Recession.
Cruises are damaged, but can be cheap enough to buy
If the cruise industry can get investors willing to help them until they can navigate again, whenever possible, then their stocks could be some of the best stocks on the market today. However, until these companies raise enough capital and until they start browsing, it is unclear how much money they will have to spend, or how much they will have to dilute their shareholders. Whether the “all clear” is in three months or 18 months makes a big difference.
In addition to Carnival, other troublesome companies have still been able to raise capital in this environment, so I think Norwegian will be able to raise the funds. However, it is unclear how much it will increase and on what terms.
Interested investors should be on the lookout for news of the money surge, as well as when these companies may start browsing again.
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