Carnival widens bond guidance but increases size
NEW YORK, Oct 9 (IFR) - Carnival Corp was forced to widen guidance by 25bp from initial price thoughts on a seven-year bond on Wednesday in order to get enough investors to print a US$700m offering.
The deal, originally announced as a US$500m seven-year trade, was first whispered at Treasuries plus 175bp - but emerged a few hours later with a 200bp area price guidance.
That enabled the cruise operator to salvage its transaction by increasing it to US$700m, but only after setting the pricing level at T+195bp - or 20bp wider than the original whispers.
Bankers away from the deal saw it as a lesson learned for a new issue market that has remained firm this week amid Washington's paralysis and ongoing uncertainty over when the Fed will begin to taper.
"What this deal tells you is that when it comes to certain credits with some hair around them, you have to be a bit more careful and flexible when setting the initial price thoughts," said one investment grade syndicate manager not involved in the Carnival transaction.
"Cash credit has been firm all week, and new issues have all gone exceptionally well up until the Carnival deal," he said. "But then again, most trades have been solid credits."
Carnival, rated Baa1/BBB+, has suffered a string of negative headlines in recent years related to ship mishaps, including the January 2012 Costa Concordia disaster off the coast of Italy.
In February this year, Carnival Triumph was adrift for days in the Gulf of Mexico following an engine fire, leaving passengers stranded in uncomfortable conditions.
The company also had to cut short a Caribbean cruise after engine problems idled the Carnival Dream in St. Maarten.
Carnival has responded to the negative publicity with increased promotional spending and discounted cruises, but the impact on its business has been telling.
It warned last month that it could report an adjusted loss for the current quarter, after posting a drop in third-quarter net income to US$934m from US$1.33bn in 3Q 2012.
At 175bp, the new seven-year transaction seemed to have been whispered at fair value based on outstanding comparables, according to market sources not involved in the trade.
Carnival has 1.20% February 2016s trading at 90bp over Treasuries, or a G-spread of 110bp, as well as 1.875% December 2017s at T+110bp or G+139bp.
Some market participants attributed a wider than normal industrial corporate credit curve for Carnival, given its bad headlines.
If a 40bp credit curve is used for Carnival paper between five- and 10-year maturities, then that would suggest fair value on a new 10-year deal at around 180-185bp.
Deducting 10-15bp from that 10-year fair value for the credit curve would put a seven-year issue's fair value at around 170-175bp.
Carnival doesn't have peers with comparable bonds, so analysts such as Joscelyn MacKay at Morningstar looked at other consumer cyclical triple-B names like auto parts retailer O'Reilly.
O'Reilly has outstanding 2021 notes quoted at around T+177bp.
"Carnival should trade around 10-15bp wide of the auto parts retailers given its inherently volatile cash flows due to the large capital requirements to finance ship builds," said MacKay.
Her analysis put fair value on the new seven-year notes at around 185-190bp.
Active bookrunners are Bank of America Merrill Lynch, JP Morgan, and Wells Fargo Securities. Carnival has about US$1bn of debt due in 2014.
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