In early-April 2020, Carnival issued USD 6 billion worth of bonds at relatively low interest rates following an unprecedented debt purchase by the Federal Reserve (USA's central bank). The Federal Reserve (USD 5,9+ trillion of assets on its books) intervenes in money markets since 2019-Q3 when the cash shortage led to the jump in short-term borrowing rates.
Policymakers had planned in 2020 to scale back operations in the market for repurchase agreements (repo) through which dealers can borrow cash. However, as the economic threat posed by the COVID-19 increased, the Fed offered almost unlimited support in the overnight lending markets for cash.
Prior to the intervention by the Federal Reserve, the Miami-based Carnival Corporation was having trouble finding a lender that would give the company the billions of USD in cash to overcome the crisis. Carnival was in talks with hedge funds (including Elliott Management Group and Apollo Management Group) offering high-interest loans.
The hedge funds are known as distressed debt investors buying a company’s debt at a low price and then turn a profit if the company turns around its fortunes. Not only would the hedge funds buy the debt, but in many cases, they end up taking over the company. If a company goes bankrupt, the hedge funds buying up masses amount of debt will be the first to get paid in a restructuring.
After the massive intervention of the Fed in the lending markets, Carnival Cruise Line was able to secure USD 6 billion via the bond markets at more attractive interest rates than what was available a few weeks beforehand. This is expected to allow the Miami-based company to survive for the foreseeable future.
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