How the historic container shipping boom funded a $2 billion cruise bailout
In March 2020, no one could have predicted how the pandemic would unfold. Stifel analyst Ben Nolan wrote at the time that “it’s fair to assume it’s not useful for container shipping.” He saw shipping company MSC as ‘specifically… at risk’ as it also had ‘a very large cruise operation, which you can imagine has seen better days’.
It turned out that the pandemic was exceptionally helpful to container shipping. Overburdened consumer spending and extreme port congestion have driven fares to stratospheric heights and kept them there, awarding shipping carriers hundreds of billions in profits.
But the first fears about the cruise were there. The pandemic was the worst thing to ever happen to the industry, resulting in tens of billions in losses in 2020-21.
So what happened with MSC, the owner of the world’s largest container company and the third largest cruise line?
Although MSC is private and does not disclose shipping results, its profits in 2021 were undoubtedly in the tens of billions. Maersk, with a slightly smaller container fleet than MSC, earned $24 billion last year. Zim (NYSE: ZIM), with a fleet about a tenth the size of MSC, earned $4.65 billion.
The results of MSC Cruises are public because it has listed bonds. It released its annual results on Thursday, revealing how much of its losses have been due to COVID and how much the parent company – enriched by the container boom – has stepped in with a lifeline.
MSC Cruises declared a net loss of $1.1 billion (935.1 million euros) for 2021. It lost $1.07 billion in 2020. The parent company has started to channel support to its company cruising in December 2020, after the container sector began to pick up speed, continuing this year. . The parent company has now provided $2.13 billion in equity and debt financing to MSC Cruises, plus a pledge of another $226 million. Total support is tied with the combined 2020-21 net loss of $2.17 billion.
The roots of cruising in maritime transport
There is a deep historical connection between freight transportation and the cruise industry. This connection has faded over the years, with the exception of MSC.
Pleasure cruising was born after the advent of commercial aviation and the disappearance of transoceanic liners. NCL was founded by Knut Kloster, a Norwegian shipowner, and Ted Arison, whose father ran an Israeli shipping agency. (Arison eventually parted ways with Kloster and founded Carnival.) Royal Caribbean was initially backed by Norwegian shipowners Sigurd Skaugen and Arne Wilhelmsen and London-based shipping company Gotaas-Larsen.
Other cruise lines – Cunard, Princess, Celebrity and Costa – have been started by families and businesses that previously operated passenger and cargo services.
Italian Gianluigi Aponte founded the Mediterranean Shipping Company in 1970. MSC entered the cruise business in 1988. It began building new ships in 2003 and has been rapidly expanding its fleet ever since. As MSC Cruises grew over the decades, it remained a privately owned family business that operated alongside the container shipping division. The president of MSC Cruises is Pierfrancesco Vago, husband of Aponte’s daughter, Alexa. She is a director and her father is vice-president.
The other three cruise giants — Carnival (NYSE: CCA), Royal Caribbean (NYSE: RLC) and NCL (NYSE: NCLH) – went public, took over other brands and severed shipping ties (except for a 4.5% stake in Royal Caribbean still owned by the Israeli Ofer family).
Carnival, Royal Caribbean and NCL were forced to turn to Wall Street after the COVID hit, selling distressed stocks and bonds. Their stock prices plummeted. MSC turned to the parent of the Aponte family, which had suddenly hit the jackpot in container shipping.
MSC Cruises explained in its annual report: “With the support of the MSC Group, we have been able to offset some of the critical challenges that the pandemic has brought. Thanks to the group’s financial solidity and its private and family structure, we kept our debt under control during the crisis. [and] ensured the sustainability of the company’s financial viability.
How MSC parents supported the cruise line
The parent company has now given up to $2.35 billion in support to its cruise line through equity and debt. (Currency conversions are based on the month of transaction or the average provided by MSC in the case of year-end and year-end conversions.)
In December 2020, the parent company purchased Italian travel agency Bluvacanze and transferred it to MSC Cruises for a nominal sum, increasing the cruise line’s equity by $133 million; under this agreement, MSC Cruises obtained $61 million in receivables in January 2021.
In the same month, the parent company provided its cruise line with a subordinated loan of $210 million, maturing in 2027, with the amount of the loan being increased to $505 million at the end of last year and part converted. in equity.
The parent company invested $237 million in new equity in the cruise group in July 2021, followed by another $228 million in November.
Last January, the parent company provided MSC Cruises with a $283 million shareholder loan and committed to an additional $226 million loan in February 2023, should the cruise line need it then. In February, the parent company loaned MSC Cruises $681 million, which will be used to repay a revolving credit facility by the end of this month.
Cruise and cargo balance
If cruise and container shipping had collapsed simultaneously, as feared at the start of the pandemic, MSC would have been bludgeoned from both sides. Instead, MSC has gained so much in container shipping that it has been able to strongly support its cruise line.
The cruise loss subsidy reduces some of MSC’s container shipping profits, however, ownership in both shipping sectors proves to be a good hedge.
Overall, container shipping suffered significant losses in the years leading up to COVID. In the five years from 2015 to 2019, when container fares were very low, MSC Cruises recorded an overall net income of $1.89 billion, offsetting market pressure on the container side.
What if omicron ends and the COVID era finally ends? According to one theory, consumers would spend more on services (including travel) and reduce their spending on goods, leading to lower imports, less congestion and lower freight rates. Cruise passenger occupancy would increase, more ships would return to service, and cruise profits would rebound. If so, MSC’s cruise revenues would recover just as its container revenues fell back to land – another hedge.
However, the cruise line is far from out of the woods and there is no guarantee that it will not need more help on the container side.
MSC Cruises operates under “debt relief” agreements that defer principal payments on its newbuild export credit facility loans. Its liabilities stood at $7.4 billion at the end of 2019, before the pandemic. Liabilities had increased by $3.4 billion or 46% to $10.8 billion at the end of last year.
The cruise is still operating under COVID restrictions, omicron may not be the final variant, and there is a war in Europe, the most important region for MSC Cruises in terms of itineraries and passenger supply.
“The cruise industry is at a critical juncture,” the company acknowledged in its annual report. “We know that the actions we take today will have a major impact on our prospects for decades to come.”
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