Back in October 2020, in the depths of the COVID-19 pandemic, in a blog titled “why cruise lines could be worth buying again,” we proffered an investment thesis that the sharp drops in the share prices of the major listed cruise line companies did not reflect the then fast-advancing technology that would facilitate a reopening of global activity even in the absence of a vaccine, and that pent-up demand (82 per cent of passengers are repeat cruisers) for travel would see a surge in cruising activity exceeding the expectations then implied in share prices. 

Figure 1., displays the share price charts we published in that blog post (the embedded chart references refer to the blog post of October 21, 2020). 

Figure 1. Cruising for a bruising? Share price charts as of 21 October 2020.

Today, just three and half years later, the performances of the major cruise lines’ shares haven’t fully shaken off the effects of the pandemic. While Royal Caribbean (NYSE:RCL) is up 116 per cent, Norwegian Cruise Line (NYSE:NCLH) is up only 14 per cent and the highly indebted Carnival Corporation (NYSE:CCL) is just six per cent higher. 

Given that Carnival has performed the least impressively, it’s worth examining its current circumstances to help determine whether a recovery is possible. 

It seems navigating the high seas of the stock market has been a voyage fraught with risk and relatively unimpressive returns. That is certainly the case for investors who cast their lot with Carnival, the cruise industry titan then known for its vast fleet and now known for its equally vast debt.  

Recent developments have seen the company’s shares generally register modest gains, and these follow a setback triggered by the company’s latest financial disclosures. 

Carnival’s fiscal first-quarter performance offered a beacon of hope, with strong figures and optimistic projections for the remainder of 2024. However, these forecasts hadn’t accounted for an unexpected challenge: the collapse of the Francis Scott Key Bridge in Baltimore, necessitating the rerouting of several cruises to alternative harbours along the East Coast of the United States.  

The anticipated financial impact of this event was capped at a seemingly minor “up to U.S.$10 million”, equivalent to one cent per share. The figure gains significance, however, when viewed against Carnival’s financial position, which includes the revelation that a mere one per cent fluctuation in net yields could sway its financial outlook by as much as U.S.$135 million. 

Despite the lingering shadow of the pandemic, which had once pushed Carnival’s finances to the brink and plunged its debt to sub-investment grade, the company has been charting a steady, albeit long, ‘cruise’ toward recovery. Noteworthy are the significant debt prepayments. The roadmap for 2024 and 2025 now includes manageable debt maturities, laying the groundwork for Carnival’s potential return to a more stable financial position. 

Over the horizon, Carnival’s prospects are reported to be brightening. Thanks to a resurgence in occupancy rates, helped along by compelling pricing strategies, customer deposits have surged to around U.S.$7 billion, a marked increase from the pre-pandemic figure of less than U.S.$5 billion.  

Meanwhile, travellers are booking voyages further in advance and are reported to be indulging in higher-margin onboard luxuries at a significantly higher rate than before the pandemic. This uptick in consumer spending behaviour, especially evident during the peak cruise booking season known as “wave season,” suggests a strong sales period for Carnival. 

Of course, the journey ahead remains uncertain, with Carnival’s debt levels still a critical factor. As Carnival charts a course through its financial currents, its voyage towards stability and growth continues, and as the debt continues to decline, it will inevitably capture the attention of investors. 

The timeline for Carnival to fully retire its extra debt remains uncertain. Investors currently expect it should be cleared before 2034. Carnival generated U.S.$4.3 billion in cash from operations and U.S.$2.1 billion in adjusted free cash flow in 2023, and it plans to use these cash flows to continue paying off the debt. 

With the company’s market capitalisation less than five times cash flow from operations and just ten times adjusted free cash flow, investors with a patient disposition should keep the company’s shares on their watchlist. When the market becomes confident the debt will imminently be paid down, the share price could surge. 

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As the global economy continues to take new shape in its recovery from the Covid-19 pandemic, many companies are still reeling from the high costs and supply shortages the health crisis triggered.

And a significant number of them are filing for bankruptcy.

Related: Another company files for bankruptcy and Dave Ramsey has words

Major bankruptcy filings in 2023 included the working space company WeWork in November, drug store retailer Rite Aid in October, and Bed, Bath & Beyond in April.

The trend has continued in 2024. In fact, telecom company Airspan Networks Holdings  (MIMO)  filed for a prepackaged Chapter 11 bankruptcy in Delaware on March 31.

A lot of the news around bankruptcies involves how companies are restructuring their debts or going out of business entirely. But if a company that files for bankruptcy has a stock that is publicly traded, the question of what happens to shareholders is worth examining. 

In Airspan's case, existing holders of stock have been given two options. One is to receive their pro rata share of $450,000. The other is to elect for warrants instead of cash. But if more than 150 shareholders decide to take the warrants, no warrants at all will be given.

A pro rata share is the cash value of a proportionate number of owned shares based on the determined total value.

A warrant is similar to an option, where the holder can purchase a security at a specific price and quantity at a future time. But unlike options, warrants are issued by a company rather than a central exchange.

What bankruptcy means for the people affected

The thought of bankruptcy is scary for companies, their employees and shareholders.

The companies themselves would enter a reality where they are forced to ponder their very survival.

Employees, naturally, wonder about the security of their jobs.

The impact on shareholders of a company filing for bankruptcy has a few layers of complexity.

In Chapter 7 bankruptcy, a company is simply going out of business. It sells its assets to pay off debts. Shareholders are left to split what's left, if there is anything remaining at all. If there is not, shareholders can get nothing.

When a company is considering filing for Chapter 11 bankruptcy, it is likely looking to restructure and stage a comeback. If shareholders are brave enough to hold onto their shares during this process, which is risky, they at least stand the chance of making some money back.

For example, car rental company Hertz  (HTZ)  filed for Chapter 11 in May 2020 as the Covid-19 pandemic wounded the travel business generally. While the stock has struggled recently, the company did come out of bankruptcy in July 2021.

In bankruptcy events, shareholders are last in line

When a company goes bankrupt, hanging on to its shares is dicey business. Shareholders could wind up with little or nothing, but they may be rewarded for their patience. 

In the short term, the stock is probably already down at the filing and is destined to stay that way for a while. But in the long term, there may be hope for a revival.

Shareholders are the last ones to be considered for payouts. First to get any money from liquidated assets or cash advancements are secured creditors such as banks holding mortgage or equipment loans, for example. Unsecured creditors, including banks, suppliers and bondholders are next. Then come the shareholders.

"The stock could very well become completely worthless," writes The Balance. "But there’s always a chance that the company could emerge from bankruptcy stronger and stock prices may rise. In the short-term, however, the stock price is likely to stay very low during bankruptcy and immediately after."

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Credit: 2024 Poudel et al.

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