What happened
Cruise ship stocks fell on Thursday after Norwegian Cruise Line Holdings (NCLH 0.81%) said it would seek to raise nearly $1.2 billion to endure the COVID-19 crisis.
By the close of trading, Norwegian's shares were down 15.6%. Royal Caribbean (RCL 2.00%) and Carnival's two stocks, Carnival Corporation (CCL 2.30%) and Carnival Plc (CUK +6.55%), also declined by 7.6%, 9.7%, and 6.3%, respectively.
So what
Norwegian is attempting to raise $925 million via debt offerings. It also intends to sell at least $250 million in stock. The beleaguered cruise ship company needs the cash to fund its operations while its vessels remain stuck at port due to sailing restrictions imposed by health authorities.
Rising debt levels are a dark cloud hanging over the cruise industry. Image source: Getty Images.
Norwegian's capital raises follow those of Carnival, which recently issued nearly $1.3 billion in debt. Carnival's debt was expensive; the notes it sold carried interest rates of more than 10%. Norwegian's notes may come at a similar cost.
Now what
With their ships unable to set sail, Royal Caribbean, Norwegian, and Carnival are leaking cash. Carnival alone is losing roughly $650 million per month.
To withstand such brutal losses, the major cruise lines have had no choice but to take on massive amounts of debt in recent months. The problem is that this debt comes with hefty interest payments, which will make it more difficult for Royal Caribbean, Norwegian, and Carnival to return to profitability -- especially if the COVID-19 crisis continues to reduce demand for cruise vacations into 2021.
