WHAT’S HAPPENED IN THE LODGING AND LEISURE SECTOR SINCE THE COVID-19 OUTBREAK?

Containment efforts have clearly had a severe impact on the sector. Many firms have moved to cut operating expenses, which have come mostly in the form of employee furloughs, reduction in annual capital expenditures and cuts in dividends. Many have also drawn down their corporate revolvers for near-term liquidity.

We’ve stress tested our models assuming some fairly large revenue and EBITDA margin declines in the second quarter and second half of 2020. We’re also monitoring cash burn and watching near-term liquidity across all the companies we follow. Whether or not ratings agencies choose to "look through the cycle" will be a major factor in whether a number of investment grade-rated (IG) issuers maintain their ratings. At this point, I believe that some of the large national hotel chains will be able to maintain their IG ratings, but this will hinge on the ultimate duration of the virus and strength of rebound in corporate and leisure travel.

WHAT AREA WITHIN THE SECTOR HAS BEEN HARDEST HIT?

Cruise lines have taken the biggest hit from containment measures and some fairly negative publicity. The entire cruise industry announced a month-long suspension of sailings in March and I would expect that to be extended through June. This could extend the pain and further reduce liquidity across the cruise industry. Carnival noted that bookings for the second half of 2020 were “meaningfully lower.”

Many cruise lines have bolstered their liquidity by raising secured debt, issuing equity and drawing their bank lines, which should help them meet their near-term debt maturities, fund minimum capex and return deposits for canceled trips to customers. Relationships with the export finance agencies that provide low-cost financing for new ships remain a key strategic relationship. However, without a rebound in the second half of 2020, I would expect companies to burn through their cash quickly. The two largest global cruise line companies are likely to lose their IG status.

WHAT’S YOUR OUTLOOK FOR THE SECTOR?

My outlook is currently negative for the vast majority of companies we cover in the sector, and I would expect to maintain the negative outlook until we can better gauge the duration of the virus and impact on the economy.

Our 2021 projections assume cash flows recover over 2020 but remain below 2019's healthy results. I’d highlight that our margin of error is likely higher for our cruise line projections as we don’t have a good sense of what capacity will be put back into service once sailings resume and whether certain fixed costs could become variable.

Fiscal support from the US government is a big unknown, and it could have the greatest impact. Because cruise lines are not US taxpayers and have a large international staff, we believe a federal bailout is unlikely as it would be less politically palatable.