May 13, 2020 / 8:18 PM / 19 days ago

Breakingviews - Corona Capital: Cruise ships, China/U.S. friction

SAN FRANCISCO/NEW YORK/DALLAS/LONDON/HONG KONG (Reuters Breakingviews) - Corona Capital is a daily column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.

Royal Caribbean Cruise Limited (RCCL) "Symphony of the Seas" ship leaves the STX Les Chantiers de l'Atlantique shipyard site in Saint-Nazaire, France, March 24, 2018. REUTERS/Stephane Mahe


- Cruise ships

- China/U.S. friction

CRUISING FOR A BRUISING. Royal Caribbean Cruises is the latest in its sector to raise debt secured on some of its ships – it’s targeting $3.3 billion. Whether the biggest floating city of all, Symphony of the Seas, is included is unclear. Another cruise group, Viking Cruises, offered bonds earlier this week secured on river vessels and yielding 13%, according to IFR.

Norwegian Cruise Line also tapped capital markets, and Carnival was early to the game with a $4 billion issue in March paying around 12%. That’s the hefty price of staying afloat financially with sailing essentially shut down. A few Carnival cruises might set off in early August if allowed, but its trips are mostly cancelled until at least September. Cruise Planners, one franchise network, reported a massive uptick in bookings on news some trips would resume – but the industry’s relaunch date still isn’t, really, in the calendar. (By Richard Beales)

RED SCARE. The main retirement fund for U.S. federal government employees on Wednesday delayed a plan to track an index that includes Chinese companies in its international portfolio. President Donald Trump has pressured the Federal Retirement Thrift Investment Board, which manages almost $600 billion for about 6 million workers, to drop the MSCI All Country World ex-U.S.A. Investable Market Index from its future investments.

The commander-in-chief gained leverage by nominating three new board members after the five-director body resisted past calls. Washington critics say investments in Chinese companies threaten U.S. national interests amid heightened tensions with Beijing over Covid-19.

While it’s another blow to U.S.-China relations, it may have limited effects. Trump doesn’t have power over how other state and local pension funds are managed. Still, it shows he has more tools than just tariffs to inflict financial pain. (By Gina Chon)

TWO BIRDS, ONE STONED. Cannabis producers have reason to rejoice at the Covid-19 relief bill proposed by U.S. Democrats on Tuesday. It revives legislation that would enable banks to finally count them as clients. The new act would, among other measures to combat the pandemic, give regulatory cover to lenders that do business with cannabis companies in one of the 34 states where weed is legal for medical or recreational use, even though it’s illegal at the federal level.

The coronavirus gives a new public health justification for doing this. Businesses that can’t use a bank often have to deal only in cash, and the exchange of paper money is theoretically a way to transmit the virus. Granted, the new rules would still have to pass the Senate, where previous cannabis banking legislation languished. But it shows how the crisis might give stalled reforms the chance for an opportunistic second toke. (By John Foley)

IS THERE NO SUCH THING AS BAD PIZZA? KKR can help pie connoisseurs answer that question. The buyout firm run by Henry Kravis invested $43 million in Slice, which offers local delivery and marketing technology for neighborhood pizzerias. Its business has become especially popular as people crave an out-of-home cooked meal while they are locked inside. The stock prices of big U.S. chains, like Papa John’s International and Domino’s Pizza, reflect recent popularity.

Slice partners with over 12,000 shops in 50 U.S. states, which means it not only offers a little variety as daily lockdown monotony drags on, but in effect the group of pizza makers trumps the number of stores that Papa John’s has, giving it size, too. It’s possible the pizza business is oversaturated. But Slice, like Grubhub, takes just a sliver of each transaction, putting it in a solid spot to feast on demand for pizza of all types. (By Lauren Silva Laughlin)

WHIP ROUND. AMS investors are once again being asked to present the other cheek. Buried in the invitational blurb for its June 3 annual meeting, the Austrian sensor maker revealed it was seeking permission to issue securities exchangeable into 27 million new shares – worth about 340 million euros at the current price. The capital hike, which would help pay for its ill-starred 4.6 billion-euro purchase of headlight maker Osram, comes less than two months after a 1.7 billion-euro rights issue.

Apple supplier AMS is riding out the coronavirus remarkably well. Osram is not. The German firm, whose fortunes are tied to the automobile industry, pulled its 2020 guidance in March and analysts have lopped nearly a third off their EBITDA forecasts. Even with the latest cash injection, AMS and Osram’s combined net debt will be over 4 times this year’s EBITDA. AMS shares fell 10% on Wednesday. It hardly makes for a convivial AGM. (By Ed Cropley)

DIE ANOTHER DAY. Formula 1 team owner Lawrence Stroll is probably familiar with money pits. Still, a torrid first-quarter loss of 76 million pounds from Aston Martin Lagonda on Wednesday – which sent shares down 11% – raises the question of whether the Canadian retail magnate’s recent 262 million pound investment will be enough to save the maker of James Bond’s preferred wheels.

Aston raised a combined 536 million pounds in April via a rights issue and share placement – in the process making Stroll its largest shareholder and executive chairman. Even so, its position has improved from critical to merely hazardous: cratering sales mean net debt stands at over 10 times trailing 12 months earnings before interest, tax, depreciation and amortisation. If Aston can deliver its feted first sport utility vehicle in the second half, as currently forecast, that dire ratio will improve as earnings bounce upwards. If not, Stroll may have to open his pockets again. (By Christopher Thompson)

TAXING TIMES. Plunging economic activity hasn’t stopped bureaucrats from worrying about the public finances – at least in the United Kingdom. Even as official statistics confirmed British GDP shrank by 5.8% in March, the Telegraph reported that Treasury officials are discussing freezing wages and hiking taxes to make up the budget shortfall.

The hole will be big. The Office for Budget Responsibility estimates the budget deficit will hit 14% of GDP this year, requiring the government to borrow 273 billion pounds. Absent a swift rebound, civil servants think the cost could be almost twice that. However, tax talk is at odds with Tuesday’s decision by Rishi Sunak, the UK chancellor, to extend subsidies for locked-down British workers to October. Raising sales and income taxes also lacks imagination. When Britain gets around to tightening fiscal policy, expect levies on wealth and corporate profits to feature more prominently. (By Peter Thal Larsen)

BARGAIN-BASEMENT JETS. Singapore-based BOC Aviation is lowballing struggling airlines for their idle planes, capitalising on industry stress to buy cheap and lease back – while cutting some slack to existing customers unable to make lease payments. Chief Executive Robert Martin told Reuters that he expects air traffic to recover to 80% of pre-pandemic levels quickly, with full revival by 2023. That’s optimistic, but then Martin is putting $5.5 billion where his mouth is. What might worry rivals is how BOC Aviation is taking advantage of a $2 billion credit line from its parent, state-owned Bank of China,. Companies directly backed by Beijing are well-positioned to borrow cheap funding to improve overseas positions at foreign competitors’ expense. That generous support might be repeated in other industries as Beijing looks to consolidate power. (By Pete Sweeney)

BATTEN DOWN THE HATCHES. Global shipping faces rough weather on two fronts. Besides a possible 25% slowdown in container demand in the next three months, green bans on high-sulphur fuel introduced this year are driving up costs for giants like Denmark’s $19 billion Moller-Maersk. Only companies with the strongest balance sheets can afford the luxury of staying in port.

With China in lockdown for most of the first quarter, Maersk scrapped 90 sailings, or 3.5% of its capacity, to prevent a collapse in freight rates. But overall fuel costs for the period rose 22% to $1.4 billion due to the new environmental rules. That means collapsing margins from April, when the trade slowdown intensified. 10 years ago, fallout from the financial crisis triggered a wave of M&A. With around 10 big players still plying the seas, there’s plenty more scope for consolidation. (By Ed Cropley)


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