Please ensure Javascript is enabled for purposes of website accessibility

Why Carnival's Shares Fell 5.1% on Thursday

By Travis Hoium – Aug 6, 2020 at 1:27PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The cruise operator is reducing debt at the expense of shareholders.

What happened 

Shares of Carnival (CCL -4.21%) fell as much as 5.1% on Thursday after the company announced an exchange of equity for debt with investors. At 12:50 p.m. EDT today, shares were down 2.8%. 

So what

Carnival announced that it registered a direct offering of 99.2 million shares of common stock that will go to holders of $885.6 million of 5.75% convertible senior notes due in 2023. The deal won't result in any cash proceeds for Carnival but does reduce the company's debt load. 

Cruise ship near a beach on a sunny day.

Image source: Getty Images.

After the transaction is complete, management said it expects there to still be $1.1 billion of the notes outstanding, but the cash needed to pay them off when due will be cut nearly in half. 

This follows Carnival saying it will join the rest of the cruise industry by pausing all voyages until at least Oct. 31. This isn't the first time Carnival has pushed off restarting its business, and it may not be the last.

Now what

Exchanging stock for debt reduces Carnival's risk long term, but it also dilutes existing shareholders. That means when operations get back to normal, the upside for current shareholders is low, which is why shares are trading lower today.

This may be the right long-term move for Carnival's business, but it'll also hurt the share price in the short term and may make investors hesitant to bid up shares if more dilution comes along as Carnival burns through cash.  

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

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Carnival Stock Quote
Carnival
CCL
$9.32 (-4.21%) $0.41

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.