SEC Filing | Carnival Corporation & plc

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ccl-20200531

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-9610 Commission file number: 001-15136

Carnival Corporation

https://cdn.kscope.io/271f0e698f9dd2686b29de4ab6297dfe-ccl-20200531_g1.jpg

Carnival plc

(Exact name of registrant as
specified in its charter)

Republic of Panama

England and Wales

(State or other jurisdiction of
incorporation or organization)

59-1562976

98-0357772

(I.R.S. Employer Identification No.)

3655 N.W. 87th Avenue

Carnival House, 100 Harbour Parade

Miami,

Florida

33178-2428

Southampton

SO15 1ST

United Kingdom

(Address of principal
executive offices)
(Zip Code)


(305)	599-2600	011	44 23 8065 5000
(Registrant’s telephone number, including area code)			(Registrant’s telephone number, including area code)

None			None
(Former name, former address and former fiscal year, if changed since last report)			(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock ($0.01 par value)	CCL	New York Stock Exchange, Inc.
Ordinary Shares each represented by American Depository Shares ($1.66 par value), Special Voting Share, GBP 1.00 par value and Trust Shares of beneficial interest in the P&O Princess Special Voting Trust	CUK	New York Stock Exchange, Inc.
1.625% Senior Notes due 2021	CCL21	New York Stock Exchange LLC
1.875% Senior Notes due 2022	CUK22	New York Stock Exchange LLC
1.000% Senior Notes due 2029	CUK29	New York Stock Exchange LLC

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, smaller reporting companies, or emerging growth companies. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filers

☑

Accelerated filers

☐

Non-accelerated filers

☐

Smaller reporting companies

☐

Emerging growth companies

☐

If emerging growth companies, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑


At July 1, 2020, Carnival Corporation had outstanding 600,663,402 shares of Common Stock, $0.01 par value.						At July 1, 2020, Carnival plc had outstanding 182,572,740 Ordinary Shares $1.66 par value, one Special Voting Share, GBP 1.00 par value and 600,663,402 Trust Shares of beneficial interest in the P&O Princess Special Voting Trust.

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CARNIVAL CORPORATION & PLC

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.

Exhibits

SIGNATURES

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)

(in millions, except per share data)


	Three Months Ended May 31,						Six Months Ended May 31,
	2020		2019		2020		2019
Revenues
Passenger ticket	$	446	$	3,257	$	3,680	$	6,456
Onboard and other	294		1,580		1,849		3,054
	740		4,838		5,529		9,511
Operating Costs and Expenses
Commissions, transportation and other	297		613		1,064		1,322
Onboard and other	114		485		585		952
Payroll and related	705		566		1,315		1,123
Fuel	201		423		598		804
Food	108		269		385		538
Ship and other impairments	589		—		919		—
Other operating	471		803		1,142		1,562
	2,484		3,159		6,007		6,301
Selling and administrative	492		621		1,170		1,250
Depreciation and amortization	577		542		1,147		1,059
Goodwill impairment	1,364		—		2,096		—
	4,918		4,323		10,420		8,609
Operating Income (Loss)	(4,177)		515		(4,891)		902
Nonoperating Income (Expense)
Interest income	6		5		11		9
Interest expense, net of capitalized interest	(182)		(54)		(237)		(105)

Other income (expense), net	(32)		(7)		(39)		(9)
	(208)		(56)		(265)		(105)
Income (Loss) Before Income Taxes	(4,385)		459		(5,155)		797
Income Tax Benefit (Expense), Net	11		(8)		—		(10)
Net Income (Loss)	$	(4,374)	$	451	$	(5,155)	$	787
Earnings Per Share
Basic	$	(6.07)	$	0.65	$	(7.34)	$	1.14
Diluted	$	(6.07)	$	0.65	$	(7.34)	$	1.13

The accompanying notes are an integral part of these consolidated financial statements.

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CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in millions)


	Three Months Ended May 31,						Six Months Ended May 31,
	2020		2019		2020		2019
Net Income (Loss)	$	(4,374)	$	451	$	(5,155)	$	787
Items Included in Other Comprehensive Income (Loss)
Change in foreign currency translation adjustment	23		(194)		48		(114)
Other	43		(13)		56		(13)
Other Comprehensive Income (Loss)	65		(207)		103		(127)
Total Comprehensive Income (Loss)	$	(4,309)	$	244	$	(5,052)	$	660

The accompanying notes are an integral part of these consolidated financial statements.

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CARNIVAL CORPORATION & PLC

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in millions, except par values)


	May 31, 2020		November 30, 2019
ASSETS
Current Assets
Cash and cash equivalents	$	6,881	$	518
Trade and other receivables, net	604		444
Inventories	362		427
Prepaid expenses and other	374		671
Total current assets	8,222		2,059
Property and Equipment, Net	37,139		38,131
Operating Lease Right-of-Use Assets (a)	1,413		—
Goodwill	790		2,912
Other Intangibles	1,168		1,174
Other Assets	1,086		783
	$	49,817	$	45,058
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Short-term borrowings	$	3,562	$	231
Current portion of long-term debt	2,373		1,596
Current portion of operating lease liabilities (a)	153		—
Accounts payable	1,809		756
Accrued liabilities and other	1,343		1,809
Customer deposits	2,618		4,735
Total current liabilities	11,858		9,127
Long-Term Debt	14,870		9,675
Long-Term Operating Lease Liabilities (a)	1,292		—
Other Long-Term Liabilities	956		890
Contingencies
Shareholders’ Equity
Common stock of Carnival Corporation, $0.01 par value; 1,960 shares authorized; 731 shares at 2020 and 657 shares at 2019 issued	7		7
Ordinary shares of Carnival plc, $1.66 par value; 217 shares at 2020 and 2019 issued	360		358
Additional paid-in capital	9,683		8,807
Retained earnings	21,155		26,653
Accumulated other comprehensive income (loss) (“AOCI”)	(1,962)		(2,066)
Treasury stock, 130 shares at 2020 and 2019 of Carnival Corporation and 60 shares at 2020 and 2019 of Carnival plc, at cost	(8,404)		(8,394)
Total shareholders’ equity	20,840		25,365
	$	49,817	$	45,058

(a)We adopted the provisions of Leases on December 1, 2019.

The accompanying notes are an integral part of these consolidated financial statements.

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CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in millions)


	Six Months Ended May 31,
	2020		2019
OPERATING ACTIVITIES
Net income (loss)	$	(5,155)	$	787
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization	1,147		1,059
Impairments	3,015		2
Share-based compensation	38		27
Gain on ship sales and other, net	56		7
	(900)		1,883
Changes in operating assets and liabilities
Receivables	(202)		(50)
Inventories	58		5
Prepaid expenses and other	171		(302)
Accounts payable	1,052		68
Accrued liabilities and other	3		48
Customer deposits	(1,987)		1,516
Net cash provided by (used in) operating activities	(1,804)		3,169
INVESTING ACTIVITIES
Purchases of property and equipment	(1,668)		(3,021)
Proceeds from sales of ships	236		6
Payments of fuel derivative settlements	—		(6)
Purchase of minority interest	(81)		—
Derivative settlements and other, net	257		103
Net cash provided by (used in) investing activities	(1,256)		(2,918)
FINANCING ACTIVITIES
Proceeds from (repayments of) short-term borrowings, net	3,333		(357)
Principal repayments of long-term debt	(383)		(338)
Proceeds from issuance of long-term debt	6,674		1,722
Dividends paid	(689)		(694)
Purchases of treasury stock	(12)		(316)

Issuance of common stock, net	558		2
Other, net	(56)		(45)
Net cash provided by (used in) financing activities	9,425		(26)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	1		(5)
Net increase (decrease) in cash, cash equivalents and restricted cash	6,366		220
Cash, cash equivalents and restricted cash at beginning of period	530		996
Cash, cash equivalents and restricted cash at end of period	$	6,896	$	1,215

The accompanying notes are an integral part of these consolidated financial statements.

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CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in millions)


	Three Months Ended
	Common stock		Ordinary shares		Additional paid-in capital		Retained earnings		AOCI		Treasury stock		Total shareholders’ equity
At February 28, 2019	$	7	$	358	$	8,776	$	25,033	$	(1,869)	$	(8,063)	$	24,241
Net income (loss)	—		—		—		451		—		—		451
Other comprehensive income (loss)	—		—		—		—		(207)		—		(207)
Cash dividends declared ($0.50 per share)	—		—		—		(346)		—		—		(346)
Purchases of treasury stock under the Repurchase Program and other	—		—		9		—		—		(41)		(32)
At May 31, 2019	$	7	$	358	$	8,785	$	25,138	$	(2,076)	$	(8,104)	$	24,108

At February 29, 2020	$	7	$	358	$	8,829	$	25,527	$	(2,028)	$	(8,404)	$	24,290
Net income (loss)	—		—		—		(4,374)		—		—		(4,374)
Other comprehensive income (loss)	—		—		—		—		65		—		65
Issuance of common stock through underwritten public offering (net of offering expenses and underwriters’ discount)	1		—		555		—		—		—		556
Equity component of Convertible Senior Notes	—		—		286		—		—		—		286
Purchases of treasury stock under the Repurchase Program and other	—		2		12		2		—		—		16
At May 31, 2020	$	7	$	360	$	9,683	$	21,155	$	(1,962)	$	(8,404)	$	20,840

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	Six Months Ended
	Common stock		Ordinary shares		Additional paid-in capital		Retained earnings		AOCI		Treasury stock		Total shareholders’ equity
At November 30, 2018	$	7	$	358	$	8,756	$	25,066	$	(1,949)	$	(7,795)	$	24,443
Changes in accounting principles (a)	—		—		—		(24)		—		—		(24)
Net income (loss)	—		—		—		787		—		—		787
Other comprehensive income (loss)	—		—		—		—		(127)		—		(127)
Cash dividends declared ($1.00 per share)	—		—		—		(691)		—		—		(691)
Purchases of treasury stock under the Repurchase Program and other	—		—		29		—		—		(310)		(280)
At May 31, 2019	$	7	$	358	$	8,785	$	25,138	$	(2,076)	$	(8,104)	$	24,108

At November 30, 2019	$	7	$	358	$	8,807	$	26,653	$	(2,066)	$	(8,394)	$	25,365
Net income (loss)	—		—		—		(5,155)		—		—		(5,155)
Other comprehensive income (loss)	—		—		—		—		103		—		103
Cash dividends declared ($0.50 per share)	—		—		—		(342)		—		—		(342)
Issuance of common stock through underwritten public offering (net of offering expenses and underwriters’ discount)	1		—		555		—		—		—		556
Equity component of Convertible Senior Notes	—		—		286		—		—		—		286
Purchases of treasury stock under the Repurchase Program and other	—		2		35		—		—		(10)		27
At May 31, 2020	$	7	$	360	$	9,683	$	21,155	$	(1,962)	$	(8,404)	$	20,840

(a)We adopted the provisions of Revenue from Contracts with Customers and Derivatives and Hedging on December 1, 2018.

The accompanying notes are an integral part of these consolidated financial statements.

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CARNIVAL CORPORATION & PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – General

The consolidated financial statements include the accounts of Carnival Corporation and Carnival plc and their respective subsidiaries. Together with their consolidated subsidiaries, they are referred to collectively in these consolidated financial statements and elsewhere in this joint Quarterly Report on Form 10-Q as “Carnival Corporation & plc,” “our,” “us” and “we.”

Liquidity and Management’s Plans

Due to the spread of COVID-19, we previously announced a pause of our global cruise operations. Significant events affecting travel, including COVID-19, typically have an impact on booking patterns, with the full extent of the impact generally determined by the length of time the event influences travel decisions. We believe that the effects of COVID-19 on our operations and global bookings will continue to have a material negative impact on our financial results and liquidity, and such negative impact may continue well beyond the containment of such outbreak.

We cannot assure you that our assumptions used to estimate our liquidity requirements will be correct because we have never previously experienced a complete cessation of our guest cruise operations, and as a consequence, our ability to be predictive is uncertain. In addition, the magnitude, duration and speed of the global pandemic are uncertain. As a consequence, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with reasonable certainty, but we continue to expect a net loss on both a U.S. GAAP and adjusted basis for the second half of 2020. We have taken and continue to take actions to improve our liquidity, including capital expenditure and operating expense reductions, suspending dividend payments on, and the repurchase of, common stock of Carnival Corporation and ordinary shares of Carnival plc and pursuing various financing transactions. In May 2020, we announced a combination of layoffs, furloughs and salary reductions across the company, including senior management.

Based on these actions and assumptions regarding the impact of COVID-19, we have concluded that we will be able to generate sufficient liquidity to satisfy our obligations for at least the next twelve months.

Basis of Presentation

The Consolidated Statements of Income (Loss), the Consolidated Statements of Comprehensive Income (Loss), the Consolidated Statements of Cash Flows and the Consolidated Statements of Shareholders’ Equity for the three and six months ended May 31, 2020 and 2019, and the Consolidated Balance Sheet at May 31, 2020 are unaudited and, in the opinion of our management, contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement. Our interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes included in the Carnival Corporation & plc 2019 joint Annual Report on Form 10-K (“Form 10-K”) and Form 10-K/A filed with the U.S. Securities and Exchange Commission on January 28, 2020 and March 31, 2020, respectively.

For the three and six months ended May 31, 2019, we reclassified $71 million and $99 million from tour and other revenues to onboard and other revenues as well as $61 million and $90 million from tour and other costs and expenses to other operating cost and expenses in order to conform to the current year presentation.

COVID-19 Use of Estimates and Risks and Uncertainty

The preparation of our interim consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported and disclosed. The full extent to which the effects of COVID-19 will directly or indirectly impact our business, operations, results of operations and financial condition, including our valuation of goodwill and trademarks, impairment of ships, collectability of trade and notes receivables as well as provisions for pending litigation, will depend on future developments that are highly uncertain. We believe that we have made reasonable estimates and judgments of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods.

Accounting Pronouncements

On December 1, 2019, we adopted the FASB issued guidance, Leases, using the modified retrospective approach, which allows entities to either apply the new lease standard to the beginning of the earliest period presented or only to the consolidated financial statements in the period of adoption without restating prior periods. We have elected to apply the new guidance at the date of adoption without restating prior periods.

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We have implemented changes to our internal controls to address the collection, recording, and accounting for leases in accordance with the new guidance. Upon adoption of the new guidance, the most significant impact was the recognition of $1.4 billion of right-of-use assets and lease liabilities relating to operating leases, reported within operating lease right-of-use assets and long-term operating lease liabilities, with the current portion of the liability reported within current portion of operating lease liabilities, in our Consolidated Balance Sheet as of December 1, 2019. There was no cumulative effect of applying the new standard and accordingly there was no adjustment to our retained earnings upon adoption. This guidance had an immaterial impact on our Consolidated Statements of Income (Loss), Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Cash Flows and the compliance with debt covenants under our current agreements.

The FASB issued amended guidance, Intangibles - Goodwill and Other - Internal-Use Software, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred. The expense related to deferred implementation costs is required to be presented in the same net income (loss) line item as the related hosting fees. Additionally, the payments for deferred implementation costs are required to be presented in the same line item in the Consolidated Statements of Cash Flows as payments for the related hosting fees. This guidance is required to be adopted by us in the first quarter of 2021 and must be applied using either a prospective or a retrospective approach. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

The FASB issued amended guidance, Financial Instruments - Credit Losses, which requires an entity to present the net amount expected to be collected for certain financial assets, including trade receivables. On initial recognition and at each reporting period, this guidance will require an entity to recognize an allowance that reflects the entity's current estimate of credit losses expected to be incurred over the life of the financial instrument. This guidance is required to be adopted by us in the first quarter of 2021 and will be applied prospectively with a cumulative-effect adjustment to retained earnings. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

NOTE 2 – Revenue and Expense Recognition

Guest cruise deposits are initially included in customer deposit liabilities when received. Customer deposits are subsequently recognized as cruise revenues, together with revenues from onboard and other activities, and all associated direct costs and expenses of a voyage are recognized as cruise costs and expenses, upon completion of voyages with durations of ten nights or less and on a pro rata basis for voyages in excess of ten nights. The impact of recognizing these shorter duration cruise revenues and costs and expenses on a completed voyage basis versus on a pro rata basis is not significant. Certain of our product offerings are bundled and we allocate the value of the bundled services and goods between passenger ticket revenues and onboard and other revenues based upon the estimated standalone selling prices of those goods and services. Guest cancellation fees, when applicable, are recognized in cruise passenger ticket revenues at the time of cancellation.

Our sales to guests of air and other transportation to and from airports near the home ports of our ships are included in passenger ticket revenues, and the related costs of purchasing these services are included in transportation costs. The proceeds that we collect from the sales of third-party shore excursions are included in onboard and other revenues and the related costs are included in onboard and other costs. The amounts collected on behalf of our onboard concessionaires, net of the amounts remitted to them, are included in onboard and other revenues as concession revenues. All of these amounts are recognized on a completed voyage or pro rata basis as discussed above.

Passenger ticket revenues include fees, taxes and charges collected by us from our guests. A portion of these fees, taxes and charges vary with guest head counts and are directly imposed on a revenue-producing arrangement. This portion of the fees, taxes and charges is expensed in commissions, transportation and other costs when the corresponding revenues are recognized. For the three and six months ended May 31, fees, taxes and charges included in commissions, transportation and other costs were $41 million and $215 million in 2020 and $154 million and $317 million in 2019. The remaining portion of fees, taxes and charges are expensed in other operating expenses when the corresponding revenues are recognized.

Revenues and expenses from our hotel and transportation operations, which are included in our Tour and Other segment, are recognized at the time the services are performed. Revenues from the long-term leasing of ships, which are also included in our Tour and Other segment, are recognized ratably over the term of the agreement.

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Customer Deposits

Our payment terms generally require an initial deposit to confirm a reservation, with the balance due prior to the voyage. Cash received from guests in advance of the cruise is recorded in customer deposits and in other long-term liabilities on our Consolidated Balance Sheets. These amounts include refundable deposits. We are providing flexibility to guests with bookings on sailings cancelled due to the pause in cruise operations by allowing guests to receive enhanced future cruise credits ("FCC") or elect to receive refunds in cash. We expect to be required to pay cash refunds of customer deposits with respect to a portion of these cancelled cruises. The amount of cash refunds to be paid may depend on the length of the pause and level of guest acceptance of FCCs. We record a liability for FCCs to the extent we have received cash from guests with bookings on cancelled sailings. We had customer deposits of $2.9 billion as of May 31, 2020 and $4.9 billion as of November 30, 2019. The current portion of our customer deposits was $2.6 billion as of May 31, 2020. These amounts include deposits related to cancelled cruises prior to the election of a cash refund by guests. Refunds payable to guests who have elected cash refunds are recorded in accounts payable. Due to the uncertainty associated with the duration and extent of COVID-19, we are unable to estimate the amount of the May 31, 2020 customer deposits that will be recognized in earnings compared to amounts that will be refunded to customers or issued as a credit for future travel. During the six months ended May 31, 2020 and 2019, we recognized revenues of $3.5 billion and $3.7 billion related to our customer deposits as of November 30, 2019 and December 1, 2018. Historically, our customer deposits balance changes due to the seasonal nature of cash collections, the recognition of revenue, refund of customer deposits and foreign currency translation.

Contract Receivables

Although we generally require full payment from our customers prior to or concurrently with their cruise, we grant credit terms to a relatively small portion of our revenue source. We also have receivables from credit card merchants for cruise ticket purchases and onboard revenue. These receivables are included within trade and other receivables, net.

Contract Assets

Contract assets are amounts paid prior to the start of a voyage, which we record as an asset within prepaid expenses and other and which are subsequently recognized as commissions, transportation and other at the time of revenue recognition or at the time of voyage cancellation. We have contract assets of $9 million and $154 million as of May 31, 2020 and December 1, 2019.

NOTE 3 – Debt

At May 31, 2020, our short-term borrowings consisted primarily of $3.0 billion borrowing under our multicurrency revolving credit facility (the “Revolving Facility”), $467 million commercial paper, $58 million euro-denominated commercial paper and $31 million sterling-denominated commercial paper. For the six months ended May 31, 2020, we had borrowings of $525 million and no repayments of commercial paper with original maturities greater than three months. For the six months ended May 31, 2019, there were no borrowings or repayments of commercial paper with original maturities greater than three months.

In December 2019, we borrowed $823 million under an export credit facility due in semi-annual installments through fiscal year 2032.

2023 Secured Notes

In April 2020, we issued $4.0 billion aggregate principal amount of 11.5% first-priority senior secured notes due in 2023 (the “2023 Secured Notes”). The 2023 Secured Notes mature on April 1, 2023 unless earlier redeemed or repurchased. They are guaranteed by Carnival plc and certain of our subsidiaries that own or operate our vessels and material intellectual property, and are secured by collateral, which includes vessels and intellectual property with a net book value of $28.3 billion as of May 31, 2020 and certain other assets. Prior to January 1, 2023, we may redeem the 2023 Secured Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a “make-whole” premium and accrued and unpaid interest to the redemption date. On or after January 1, 2023, we may redeem the 2023 Secured Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the redemption date. We may also redeem the 2023 Secured Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, if Carnival Corporation or any guarantor would have to pay any additional amounts on the 2023 Secured Notes due to a change in tax laws, regulations or rulings or a change in the official application, administration or interpretation thereof. Upon the occurrence of certain change of control events, we are required to offer to repurchase the 2023 Secured Notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest to the purchase date.

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The indenture governing the 2023 Secured Notes contains covenants that limit our ability to, among other things: (i) incur additional indebtedness or issue certain preferred shares; (ii) make dividend payments on or make other distributions in respect of our capital stock or make other restricted payments; (iii) make certain investments; (iv) sell certain assets; (v) create liens on assets; (vi) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and (vii) enter into certain transactions with our affiliates. These covenants are subject to a number of important limitations and exceptions.

Convertible Notes

In April 2020, we issued $2.0 billion aggregate principal amount of 5.75% convertible senior notes due 2023 (the “Convertible Notes”). The Convertible Notes mature on April 1, 2023, unless earlier repurchased or redeemed by us or earlier converted in accordance with their terms prior to the maturity date. The Convertible Notes are guaranteed on a senior unsecured basis by Carnival plc and our subsidiaries that guarantee the 2023 Secured Notes.

The Convertible Notes are convertible by holders, subject to the conditions described below, into cash, shares of our common stock, or a combination thereof, at our election. The Convertible Notes have an initial conversion rate of 100 shares of our common stock per $1,000 principal amount of the Convertible Notes, equivalent to an initial conversion price of $10 per share of common stock. The initial conversion price is subject to certain anti-dilutive adjustments and may also increase if the Convertible Notes are converted in connection with a tax redemption or certain corporate events.

The Convertible Notes are convertible at any time prior to the close of business on the business day immediately preceding January 1, 2023, only under the following circumstances:

•during any fiscal quarter commencing after the fiscal quarter ended on May 31, 2020 (and only during such fiscal quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

•during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of common stock and the conversion rate on each such trading day;

•prior to the close of business on the second scheduled trading day immediately preceding any tax redemption date; or

•upon the occurrence of specified corporate events.

On or after January 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes at any time.

As of May 31, 2020, the conditions allowing holders of the Convertible Notes to convert have not been met and therefore the Convertible Notes are not yet convertible. Subsequent to May 31, 2020, the holders are entitled to convert all or any portion of their Convertible Notes at any time during the calendar quarter starting on July 1, 2020 and ending on September 30, 2020, at the conversion rate of 100 shares of common stock per $1,000 principal amount of Convertible Notes.

If we undergo certain corporate events (each, a “fundamental change”), subject to certain conditions, holders may require us to

repurchase for cash all or any portion of their Convertible Notes at a price equal to 100% of the principal amount of the

Convertible Notes to be repurchased, plus accrued and unpaid interest to the fundamental change repurchase date.

We may redeem the Convertible Notes, in whole but not in part, at any time on or prior to December 31, 2022 at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, if we or any guarantor would have to pay any additional amounts on the Convertible Notes due to a change in tax laws, regulations or rulings or a change in the official application, administration or interpretation thereof.

We account for the Convertible Notes as separate liability and equity components. We determined the carrying amount of the liability component as the present value of its cash flows.

The carrying amount of the equity component representing the conversion option was $286 million and was calculated by deducting the carrying value of the liability component from the initial proceeds from the Convertible Notes. The excess of the principal amount of the Convertible Notes over the carrying amount of the liability component represents a debt discount that is amortized to interest expense over the term of the Convertible Notes under the effective interest rate method using an effective

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interest rate of 12.9%. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.

The net carrying value of the liability component of the Convertible Notes was as follows:


(in millions)	May 31, 2020
Principal	$	2,013
Less: Unamortized debt discount and transaction costs	(333)
	$	1,680

The interest expense recognized related to the Convertible Notes was as follows:


(in millions)	Three and Six Months ended May 31, 2020
Contractual interest expense	$	17
Amortization of debt discount and transaction costs	15
	$	32

Modifications

In February 2020, we extended a $452 million sterling-denominated floating rate bank loan, originally maturing in 2022, to 2025 with an option to extend to 2026.

In April 2020, we amended and extended a $166 million euro-denominated fixed rate bank loan, originally maturing in September 2020, to a floating rate loan maturing in March 2021.

Certain export credit agencies have offered 12-month debt amortization and a financial covenant holiday ("Debt Holiday"). We entered into supplemental agreements or side letters for Debt Holiday amendments to defer certain principal repayments otherwise due through March 31, 2021 through the creation of separate tranches of loans under the facilities with repayments made over the following four years.

Debt Covenant Compliance

Many of our debt agreements contain one or more financial covenants that require us to:

•Maintain minimum debt service coverage

•Maintain minimum shareholders' equity

•Limit our debt to capital ratio

•Limit the amounts of our secured and other indebtedness

At May 31, 2020, we were in compliance with all of our debt covenants.

Under the terms of certain of our debt facilities, we are required to maintain minimum debt service coverage (EBITDA to consolidated net interest charges for the most recently ended four fiscal quarters) of not less than 3.0 to 1.0 at the end of each fiscal quarter. We have entered into supplemental agreements or side letters to amend our agreements with respect to this covenant to:

•Waive compliance, in conjunction with the Debt Holiday, for our export credit facilities through March 31, 2021, August 31, 2021 or December 31, 2021, as applicable. We will be required to comply beginning with the next testing date of May 31, 2021, November 30, 2021 or February 28, 2022, respectively.

•Waive compliance through November 30, 2021 for certain of our bank loans. We will be required to comply beginning with the next testing date of February 28, 2022.

•Waive compliance for the remaining applicable bank loans through their respective maturity dates.

Any covenant waiver may lead to increased costs, increased interest rates, additional restrictive covenants and other available lender protections that would be applicable. There can be no assurance that we would be able to obtain additional waivers in a timely manner, or on acceptable terms at all. If we were not able to obtain additional waivers or repay the debt facilities, this

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would lead to an event of default and potential acceleration of amounts due under all of our outstanding debt and derivative contract payables. As a result, the failure to obtain the additional waivers would have a material adverse effect on us.

Secured Term Loan Facility

In June 2020, we borrowed an aggregate principal amount of $2.8 billion in