March 11, 2020 / 4:31 PM / 5 months ago

Air and cruise lines shore up liquidity as coronavirus hits travel industry

NEW YORK, March 11 (LPC) - Travel and leisure companies have tapped their relationship banks for new loans to bolster liquidity and shore up investor confidence as the global spread of coronavirus heightens fears over passenger travel and canceled reservations pile up.

Cruise ship operators Norwegian Cruise Line and Royal Caribbean, along with air carrier United Airlines lined up approximately US$3.23bn in new money collectively on Tuesday, one day after the virus epidemic caused a sell-off across global equity market indices with the Dow Jones Industrial Average dropping 7.8%.

United raised an incremental US$2bn term loan with a group of banks, while Norwegian signed a US$675m revolving credit facility and Royal Caribbean increased its existing revolving credit line by US$550m to roughly US$2.28bn, the companies said in respective filings with the US Securities and Exchange Commission.

The respiratory virus, which originated in Wuhan, China, has since spread globally and demand for travel has dwindled as businesses cut out non-essential staff travel, and tourists cancel holidays. Airlines, meanwhile, have been forced to slash economic forecasts, revise flight schedules and in some cases, peddle jaw-dropping discounts to lure unfazed travelers.

"You'll see more liquidity facilities. This is something we were expecting in certain sectors, like airlines, gaming and cruises," a banker said.

Airlines’ operating margins are expected to be less than 5% for 2020, down from expectations of 9% before the coronavirus outbreak, Moody’s Investors Service said in a report.

“At a time like this, there is no shame in bolstering liquidity,” Jonathan Root, a senior vice president at Moody’s said in an interview.

CASHED UP

Chicago-headquartered United said the new secured US$2bn loan lifts total liquidity to US$8bn and the airline plans to reduce its proposed capital expenditure for 2020 by roughly one-third to US$4.5bn. United expects to post a loss for the first quarter, while Chief Executive Officer Oscar Munoz and President Scott Kirby both said they will forego their base salaries until at least June 30.

“Eight billion US dollars (in liquidity) is a solid amount and now (United) has a cushion to meet obligations that come its way,” added Root.

Norwegian, which signed the one-year credit line with JP Morgan as its administrative agent, has yet to draw on either the new US$675m loan or its existing US$875m bank facility, giving it US$1.55bn in available cash, the company said in its filing.

Shares in the two cruise liners pared losses after US President Donald Trump said the administration will support both the cruise and airline industries, Reuters reported on Tuesday.

United’s share price opened at US$50.53 on Wednesday, down from US$89.74 on January 2.

Norwegian’s stock has sunk since the outbreak, opening at US$19.55 on Wednesday, down from US$52.49 a month earlier.

Royal Caribbean withdrew its first quarter and full-year financial forecasts for 2020 due to the uncertainty of the coronavirus, while its stock opened at US$48.33 on Wednesday, down almost 66% year-to-date.

As more companies move to mitigate disruptions from the virus, lenders anticipate that borrowers across sectors such as transportation, leisure and energy will require immediate financial cover in the form of short-term loans.

“Companies are usually good at forecasting their needs, but this is an unusual situation,” said a second banker. “As they assess what their needs are, banks will provide that support to companies that have those relationships.” (Reporting by Daniela Guzman and Aaron Weinman. Editing by Michelle Sierra and Kristen Haunss.)

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