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Stock Market News: Why Norwegian Led Cruise Stocks Lower Monday Morning

By Dan Caplinger – May 11, 2020 at 11:46AM

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Investors are still betting on cruise ship operators, but the risks are increasing.

The stock market was mixed on Monday morning, as investors continued to see some disparities among stocks in different sectors. The general concern about the economic impact of the novel coronavirus pandemic has taken a big toll on shares of "old economy" stocks, especially in areas like financials and materials stocks. However, investors remain confident about the ability of tech companies to survive and even benefit in the wake of the pandemic. Just before 11 a.m. EDT, the Dow Jones Industrial Average (^DJI -1.71%) was down 209 points to 24,122, and the S&P 500 (^GSPC -1.51%) dropped 16 points to 2,914. However, the Nasdaq Composite (^IXIC -1.51%) picked up 15 points to 9,136.

Cruise ship operators have been among the stocks hit hardest by the COVID-19 outbreak, and the suspension of operations has put companies like Carnival (CCL -23.25%) and Royal Caribbean Cruises (RCL -13.15%) under significant financial pressure. This morning, Norwegian Cruise Line Holdings (NCLH -18.04%) revealed the latest information about what it took to get more investment capital at a particularly difficult time. Even though Norwegian's ability to get a deal done at all speaks to the demand among investors to help the company, there's still considerable uncertainty about what the future could look like for it and its rivals on the high seas.

Cruise ship with colorful designs painted on side, making a right turn on a calm sea.

Image source: Norwegian Cruise Line Holdings.

Norwegian raises capital -- at a price

Shares of Norwegian Cruise Line Holdings dropped more than 6% Monday morning. The company announced its success in getting investors to pony up more cash to add to its financial resources, but the cost of enticing them to do so was steep.

Norwegian used two different methods to raise cash. The first was a simple secondary stock offering, in which Norwegian sold 41.8 million shares of stock. The company managed to price the offering at $11 per share, which was more than 11% below Friday's closing price of $12.43. Norwegian will end up with about $460 million in proceeds from the offering, minus underwriting fees, with the underwriters fully exercising their options to obtain extra shares in the process.

Yet as tough as it is to accept an 11% discount on newly issued shares, the pricing of Norwegian's other securities offering provided even more insight. The company sold $862.5 million in exchangeable four-year notes. Investors will receive interest payments at 6% annually, with the option to trade the notes for special preferred shares of Norwegian stock. With each $1,000 in debt giving bondholders the right to receive just under 73 preferred shares, working out to a conversion price of about $13.75 per share -- 25% more than the $11 share offering, but only 11% higher than Friday's closing price.

Outlasting the coronavirus

The offering results didn't buoy sentiment about other players in the cruise line space. Shares of Royal Caribbean were down about 5% Monday morning, and Carnival weighed in with a drop of more than 3%.

Companies are working hard to try to preserve the cash they have on hand, but it's getting increasingly difficult as their stoppages continue. For instance, Royal Caribbean has encouraged its customers to book voyages by offering a cancellation policy that allows the use of credits for travel even further into the future. That's essential, given the uncertainty about when schedules will return to normal -- if ever.

Yet it's not guaranteed that all cruise line companies will survive or fail together. Brand strength will inevitably play a role, and some cruise stocks might jump even as others fall.

Economists fear that a recession could have a dramatic impact on the entire global economy, with travel taking a particularly large hit. If that happens, then it'll challenge Carnival, Royal Caribbean, and Norwegian, and it'll be interesting to see whether the different moves that each company makes will help or hurt their chances of survival in the long run.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Royal Caribbean Cruises Ltd. Stock Quote
Royal Caribbean Cruises Ltd.
$37.90 (-13.15%) $-5.74
Carnival Corporation Stock Quote
Carnival Corporation
$7.03 (-23.25%) $-2.13
Norwegian Cruise Line Holdings Ltd. Stock Quote
Norwegian Cruise Line Holdings Ltd.
$11.36 (-18.04%) $-2.50
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$28,725.51 (-1.71%) $-500.10
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,585.62 (-1.51%) $-54.85
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$10,575.62 (-1.51%) $-161.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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