A Comeback in Cruise Spending Sends Leisure High-Yield Bonds Soaring

The leisure industry’s junk bonds are soaring as vacation-ready spenders board passenger ships, sparking a recovery for debt-laden cruiseliners.

(Bloomberg) — The leisure industry’s junk bonds are soaring as vacation-ready spenders board passenger ships, sparking a recovery for debt-laden cruiseliners.

A rebound in vacation spending has helped the sector’s debt rise more than 16% this year, beating all other US high-yield segments and returning about two-and-a-half times the 6.2% average for junk bonds, according to data compiled by Bloomberg.

Demand for travel, along with odds the US will dodge a deep recession, is luring investors from Pacific Investment Management Co. to Neuberger Berman Group to the securities. It’s also brightening the outlook of executives at cruise-ship operators such as Carnival Corp. 

“People view us and say, ‘Oh there is not as much risk,’” Carnival Chief Financial Officer David Bernstein said in an interview. “With the lower level of risk and the higher level of performance, their view of us paying back the bonds improves.”

One of Carnival’s most-traded bonds, a 5.75% note due March 2027, has risen 28 cents since October to change hands at about 92 cents on the dollar, according to Trace bond data. Carnival’s notes are among the year’s best performers in a Bloomberg gauge of high-yield leisure debt, which also includes bonds tied to movie theaters, amusement parks and concerts.

Royal Caribbean Cruises Ltd.’s 5.5% junk bond due April 2028, meanwhile, trades at about 93.5 cents — up from an all-time low of 67 cents in July 2022.

The rallies come as pandemic-era rules dissipate and confidence grows that Federal Reserve officials will pull off a so-called soft landing in the US, inspiring spenders to once again board cruise ships. It’s a welcome development for the industry, which suffered deeply after Covid spread on its vessels and ports closed, leaving ships with sickened travelers trapped at sea. 

Many operators tapped high-yield debt markets to weather the pandemic, spurring concern among some on Wall Street that the companies would struggle to repay the notes unless passengers returned.

Royal Caribbean impressed analysts with better-than-expected earnings and strong guidance in the second quarter. Advanced bookings have surpassed pre-pandemic watermarks at Royal Caribbean, Norwegian Cruise Line Holdings Ltd. and Carnival in recent quarters, according to Bloomberg Intelligence. 

Carnival, meantime, recently priced a $500 million junk bond and accelerated the deadline for its term loan offering as part of a plan to refinance debt and cut interest costs. The transaction helped the cruiseliner pay down some existing debt, resulting in annual savings of roughly $120 million in interest costs. 

Sonali Pier, a high-yield and multi-sector credit portfolio manager at Pimco, said she’s still constructive on the leisure industry, and some sub-sectors, like cruises. 

“Services are still pretty strong,” she said. “The consumer is healthy and unemployment is low. There are still some tailwinds.”

Read: Carnival Kicks Off Junk Bond, Accelerates Loan for Refinancing

That sentiment was echoed at Neuberger Berman, which has added modestly to leisure assets this year. The firm has also reallocated capital within the sector toward cruiseliners, which benefit from strong underlying trends, and away from offerings such as theme parks.

“There’s been a shift in consumer preferences toward experiences which were unavailable or difficult during the masking and proof-of-vaccination period of Covid, such as cruises or international travel,” said Ashok Bhatia, Neuberger Berman’s deputy chief investment officer for fixed income. 

The question now is whether cruise assets can enter 2024 with the same momentum, said Bloomberg Intelligence credit analyst Jody Lurie. 

James Dunn, a strategist at CreditSights Inc. said he sees potential for the bonds to keep outperforming. As long as consumers continue to dish out cash for services, he said, the sector will do well.

“We still think the consumer, with the strength they have, are not spending money on goods anymore,” said David Schiffman, lead portfolio manager for the Aquila High Income Fund at Aquila Investment Management. He likes secured debt in particular. 

“They want to get out,” he said, referring to consumers. “They want to travel.”

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