The cruise ships Carnival Liberty and Disney Dream docked in Port Canaveral at sunset.  Beautiful red-orange-blue sunset sky in the background


It will come as no surprise that all cruise lines have had a terrible couple of years. I remember covering pre-COVID cruise lines and the discussions were always about supply / demand dynamics. The name of the game was figuring out how expected passenger growth would be comparable to the rate of new ships in the pipeline. Small percentage swings in both cases would fuel margin assumptions in the coming years and analysts would read the tea leaves to decide whether there would be a marginal deficit or surplus in supply.

In hindsight, those were easy and predictable days. The actual collapse of the industry saw Carnival (NYSE: CCL) in the last two years they lose about the same net profit they made in the previous 10. Still, they live. Impressive, we didn’t see too much real heartache. And now the recovery is evident. It seems we are reaching the light at the end of the tunnel.

The obvious questions are: how do we profit from this, and is there enough lead to get to that light?

Permanent scars

It’s not as easy as assuming that cruises will resume pre-COVID and all will be well in the world. The problem with Carnival is that their budget has fallen apart. Cruise lines have always been exploited, appropriately, given the capital intensity of the industry. But let’s compare the passive side of the pre-COVID balance sheet (first image below) with what it looks like today:

The balance sheet of CCL

CCL 10-Q, 2019

The budget of Carnival

CCL 10-Q, 2022

You can see that there is an extra $ 2.2 billion in current liabilities and nearly $ 19 billion more in long-term debt. That’s a terrifying number for a company that peaked in EBITDA of around $ 5.5 billion in good times. For shareholders, there is your visible and significant impairment.

Worse still, this new capital structure may not necessarily be sustainable. Carnival’s unsecured bonds are trading at a yield to maturity of more than 20%, which implies a very high risk of default in the coming years. If all goes well – for example, if the economy doesn’t collapse, if COVID doesn’t have another phase, and if global geopolitics doesn’t degrade to the point that people are reluctant to travel – they will likely make it.

That’s a lot of if, though.

Recent trade

Let’s move on to the positives: the recent indicators forward. Two things struck me in the recent earnings call at the end of September. Both are exceptionally positive:

Prices for our 2023 book business are currently at significantly higher levels than in 2019, complying with the FCC.

… we have already seen a very significant improvement in booking volumes. We are now running much higher than 2019 levels.

I don’t want to oversimplify the business, but frankly these are the only two variables you really need to worry about. It’s a fixed-cost deal. If you carry more passengers and those passengers pay higher fares, you will earn more.

Just a few days ago, we also got the insight into the dynamics of Royal Caribbean (RCL). This is an even better view of how things are developing:

… When those protocols fell, we immediately saw a significant increase in the volume of reservations. And that volume continued to – it continued and accelerated.

The successful return of our business to full operations in positions in an environment of accelerating demand, as well as to meet our expectations for record returns and record adjusted EBITDA in 2023.

In short – things are spicy. There is clearly a significant element of pent-up demand in the system as consumers respond to the removal of COVID measures.

Even without that “rally” effect, there is a strong argument for being very bullish on demand over the medium term. Cruising was growing at an average figure before COVID, driven by demographic and other factors. These underlying drivers likely haven’t been altered by COVID, so in a normal environment, the market might be surprised at what a new base level of demand is.

How to play?

Let’s say you buy the cruise positive story and want visibility. How do you play it? Well, given the relative valuation of equity and unsecured bonds – which in the case of 2026 yield 20% at maturity – we should at least consider an investment in bonds.

In these kinds of situations, I like to build small gain comparisons, which might look like the following:

Potential structures

  • Direct investment in equity
  • Purchase of unsecured bonds 2026
  • Buying bonds and simultaneously investing in the $ 20 2025 call option for greater upside

Commercial deadline

  • Until early 2025, probably long enough to understand what post-COVID “normalcy” looks like

Bear case

There is a debt restructuring, equity is wiped out, and unsecured bonds get a haircut.

Base case

Carnival returns to about $ 6 billion in EBITDA, above the pre-COVID figure of $ 5.5 billion. The market gives Carnival a 7x EV / EBITDA multiple; slightly below the historical average of around 8.5x EV / EBITDA, but we are in a lower valuation environment and higher rates than in 2018, so we shouldn’t be too ambitious. This would equate to $ 11.12 per share.

Bull case

Strong demand for cruises and excellent price trends drive EBITDA up to $ 7 billion, substantially above pre-COVID levels. The earnings growth rate brings Carnival’s top-of-the-line repricing at 10x EV / EBITDA. This would equate to $ 33.40 per share.


I assumed that in the base case, the bond ends trading at 100. In the bullish case, I assumed 102. These are terminal YTMs of 7.6% and 6% respectively. In the case of the bear, I clearly assumed the recovery of 70 cents on the dollar for unsecured debt. Unless it’s truly disastrous, given the support here, it seems reasonable.

If I link the above parameters into a spreadsheet, I get a gain matrix that looks like the following image:

Pay-off matrix for various CCL investment options

Author’s calculations

If we then make some assumptions about the probabilities of each scenario, we can work out the expected returns for each of the transactions contemplated:

Expected value matrix for various CCL investment options

Author’s calculations

You can see that according to my assumptions – in which I am somewhat concerned about a negative shock pushing the company into a restructuring scenario, and not so optimistic about a truly bullish outcome – I have a strong preference for bonds.

You may have a different view. If I change the numbers and give the bull case a higher chance, I should prefer fairness. It could be your position. You may think that I am a little too pessimistic in perceiving a 20% probability of a debt restructuring scenario.


I have a soft spot for cruise businesses, but the 2022 Carnival isn’t my usual stock setup. Both the balance sheet and the likely cash flows are too uncertain to be happy about being an equity investor.

If you are, though, I recommend that you take a look at your goals and risk appetite and consider other exposures to the company. Perhaps you will find that 20% yield bonds are juicy enough for you, without taking the full downside risk.

Either way, the exercise will sharpen your thinking and make you consider where the average opportunity really is.

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