In personal finance, liquidity can mean do you have enough cash to cover a certain amount of spendings, say 6 months. In a company, I think it is similar, does the company have enough liquid assets and short term borrowing power to cover a certain amount of spendings, say 1 year. I am not sure whether this is the formal method to analyze liquidity. I use my common sense to make an estimation.

To analyze the liquidity of CCL, I will first find out the spendings of CCL (S) and current liabilities (CL) assumed that no sailings in 2020. Then I will find out the current assets (CA) it has and applied an arbitrage discounted (d%) on the value of current assets. I will look at the short term borrowing power (BR) of CCL. New ships’ payment (NS) and their financing (NSF) should also be considered in liquidity. Therefore, liquidity is calculated as follow:

L = CA * d% + BP - S - CL - NS + Min(NSF,NS)

Spendings If No Sailings

Income Statement

Operating costs and expenses related to cruise represents around 70% of the total. I will keep Payroll and related, Selling and administrative under Operating Costs and Expenses because I assumed that there will not be a major layoff (conservative assumption) and daily administrative tasks remain. For the remaining items under Cruise, I will apply a 90% discount instead of just removing them (conservative assumption). There are some non-operating incomes of which interest expense is relevant. I will use the year 2019 figure, 206 million, in the calculation of liquidity.

Another expense for CCL is maintenance capital expenditure which is the CapEx that is necessary for the company to continue operating in its current form. This is rather hard to estimate since we need to estimate, for example, the expenses incurred in taking care of the ships. I will just use the dirty formula which uses depreciation and amortization expense as maintenance capital expenditure.

It is also worth noting the future commitements table:

Future Commitements

Current Liabilities

The current liabilities of CCL is 9.127 of which 4.735 is customer deposits. Under the Coronavirus, cruise reservations refund policy has changed in some companies. Customers can either carry forward the tickets or refund at a discounted value. To ease our calculation, let’s assumption 50% of the customer will carry forward and 50% of them will request a full refund.

Short-term Borrowing Power

Borrowing Power

In the year 2020, the borrowing power of CCL is 7.2 Billion which included 3 Billion immediate liquidity and 6 Billion ships (4.2 Billion after discounted by 0.7 LTV) available to be pledged as collateral.

New Ship Growth Capital

New ship growth capital

In the financial report, there are 4 new ships expected to be delivered in 2020. In the future commitments table, the company stated that 4.81 Billion is committed to new ships. Meanwhile, there are 5.9 Billion export credit facilities that are available to fund ship deliveries. Therefore, new ship delivery may not be a problem for CCL’s liquidity.

Recent 8-K Disclosure of Q1 2020 Performance

According to the 8-K report, Q1 2020 net loss is 1.14 diluted EPS and net income is 0.48 diluted EPS. If no income is expected in the year 2020, the net loss of the whole year will be 6.48 diluted EPS (1.14+0.48)*4 (Neglecting the seasonality effect). That would be 4.02 Billion loss (0.62 Billion Shares).

Calculated Liquidity

Billion US2020Remarks
Current Assets2.059
Discount on Current Assets0.9
Borrowing Power7.23 Billion facilities and 6 million collateral discounted at 0.7 LTV
Payroll and related2.249
Selling and administrative2.48
Maintenance CapEx2.16
Interest expense0.206
Other spendings8.18Spendings if BAU
Discount on other spendings0.1Discount other spending to reflect no operations
Net current liabilities6.7595Minus 50% of customer deposits
Current Liabilities9.127
Customer deposits4.735

Under the above assumptions, liquidity is still short 5.6 Billion. CCL can work on its payroll, selling and administrative and maintenance CapEx to squeeze out some cash.

If we use the newly reported net loss expressed in diluted EPS and assumed that those are the spendings after stopping operations, the liquidity will be increased from -5.61 to -1.59 (-5.61+4.02).

It is a Marginal Case

It is a tough situation for CCL. If the operation is stopped for a year, CCL may be in serious financial distress. But, if the operation is stopped for only a half year, CCL may be able to survive.

Apart from that, as reported in the 8-K, CCL makes some sales of tickets in the coming year (2021) and there is a discussion on using CCL’s ships in fighting coronavirus. At last, the U.S. may bail out the company.

Nobody will know when the virus will be disappeared. Investing in CCL is more like a gamble that the virus will end in less than 1 year. The question then becomes whether CCL is worth betting.

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