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Troubled Waters: The Cruise Line Industry May Face an Uncertain Future

In what will come as a surprise to absolutely no one, we are already beginning to see the nascent signs of what may become significant distress in one of the industries likely to be most drastically impacted by the coronavirus outbreak: cruise lines.

The world’s largest carrier, Carnival Corporation, which accounts for nearly half of all passengers worldwide, has seen its share value plummet by more than 80% in 2020.  And, on Friday, S&P lowered its rating on Carnival’s unsecured debt from A- to BBB.   Other large cruise lines like Norwegian and Royal Caribbean have seen similar declines in share value.  Viking Cruises’ senior unsecured notes have traded well off their highs in recent weeks.

Obviously, this is not surprising.  Demand for travel and cruises is at or near an all-time low, while international travel restrictions have all but shut down the industry for an indefinite period.  Many regular ports-of-call are closed to cruise ships for periods of 60 days or longer, and the highly publicized outbreak of disease on several ships so far this year is almost certain to reduce demand, at least in the short term.

It would be premature, however (and, at this point, irresponsible), to predict the demise of the entire industry.  Most of the largest carriers had reasonably healthy balance sheets at the beginning of the year, and some were trading near all-time highs.  The scope and duration of the coronavirus outbreak remains unknown, but a modest or even sizable dent in these companies’ earnings for 2020 and 2021 should not necessarily spell certain financial doom.  But if the crisis does not subside in the next few months as many hope and expect, or if long-term demand does not return to pre-crisis levels, there could be a contraction in the market.

If a wave of insolvency cases does hit the cruise line industry, it will be marked by a host of challenging and novel legal issues because of the significant intersection of international law, maritime law, and bankruptcy law.  For example, Carnival Corporation is a Panamanian company with a parent organized under the laws of England and Wales and ships registered in several other countries.  A court-supervised restructuring of such a multinational enterprise would require significant cooperation across multiple jurisdictions and call on professionals from an array of disciplines.

We will continue to monitor the economic impacts of the coronavirus outbreak on this and other industries, particularly those that may be hardest hit.  In the meantime, we wish our readers safety and good health.