The Wall Street Journal reported Monday that the Federal Reserve “saved Carnival,” but not because of anything the Fed did for the cruise line directly or specifically. Rather, the Fed’s broad actions to improve liquidity in corporate lending made it easier for Carnival to borrow money in the bond market. This is a benefit I pointed out a couple of weeks ago, when I wrote about how the cruise industry shouldn’t get a bailout in part because it already stood to benefit from general government actions to support the economic recovery:
Even though entities overseen by the Fed will not be able to lend directly to the cruise lines, their actions to push down the interest rates on corporate bonds and expand the supply of available credit should make it easier and cheaper for cruise operators to borrow money from private lenders. Essentially, when the government buys up bonds from other large corporations, that leaves more private capital around for the cruise companies to borrow.
And this is what the Journal reports happened: Carnival, strapped for the cash it needs to refund customers for canceled cruises, had been in talks in March to borrow money from hedge funds at very high interest rates, over 15 percent. But when the Fed announced its programs to start buying up corporate debt en masse, market participants became much more willing to lend to corporations at lower rates than that. So Carnival was able to do a public bond issuance and didn’t need a hedge-fund loan.
Still, the Journal reports that the bonds Carnival sold last month bear an interest rate of 11.5 percent, which isn’t exactly low. Carnival is paying about triple what an ordinary consumer might pay on a home mortgage. Other troubled firms that sought to raise cash in recent weeks have found that credit is available but not exactly cheap: Ford issued new bonds that pay a yield of 9.625 percent, while Airbnb has borrowed at over 10 percent. These yields reflect investors’ uncertainty about the economy in general and about the specific outlooks for firms that have been especially disrupted by the crisis, like automakers and travel companies.
One of the more controversial aspects of the Fed’s program to support credit markets has been the Fed’s decision to buy securities of “fallen angels” — that is, companies like Ford that used to have an investment-grade credit rating but lost it during the crisis. Some conservatives and market participants have argued that this amounts to “picking winners and losers,” propping up weaker companies instead of letting prices be discovered in the market so capital goes toward stronger firms instead. But what you can see from these high yields for these issuers is that price signals remain in effect. The Fed has put its thumb on the scale, which was the point — we don’t want a rash of corporate liquidations due to temporary disruptions associated with the crisis. But in cases where there is substantial risk of longer-run problems, borrowers are still paying a material premium to borrow. That includes cruise lines.