Since COVID-19 began dominating market headlines in March, Carnival's (NYSE:CCL) stock price has fallen more than 80% alongside the rest of the cruise industry. The U.S. cruise industry voluntarily suspended operations through at least Oct. 31, extending beyond the latest Centers for Disease Control & Prevention (CDC) no-sail advisory, which goes through September. There is no guarantee the most recent extension will be the last.

Surviving the coronavirus

To help mitigate the COVID-related costs, Carnival accessed both credit and debt markets. Saudi Arabia's sovereign wealth fund in April announced an 8.2% equity stake in the world's largest cruise operator. The average purchase price of these newly issued shares was $10.21, nearly 40% below where the stock price sits today.

A cruise ship

Image source: Getty Images.

Around the same time, Carnival issued nearly $6 billion in debt to cover high fixed costs while revenue stays at zero. Carnival is paying a steep price of 11.5% for this cash infusion. Competitors such as Royal Caribbean and Norwegian Cruise are paying similar rates on new debt. This high-interest burden will cap profit margins for the sector going forward until it is paid off. Carnival's credit rating was downgraded three notches in June by the S&P to junk bond status as a result.

Carnival raised a total of $10 billion combined. With a monthly cash burn of $650 million, that buys the company 15 full months of zero-revenue liquidity.

Moreover, Carnival's response to COVID-19 outbreaks on its ships is currently being investigated by Congress. The investigation centers around Carnival's seemingly slow response to protecting passengers from outbreaks. On its Diamond Princess cruise ship in March, nearly 800 people were infected and 10 people died. Norwegian and Royal Caribbean are not part of the investigation.

You'd be hard pressed to find an industry more challenged by the current pandemic than the cruise lines and Carnival may be the worst hit. The virus has entirely halted its operations for the foreseeable future with expensive equity and debt deals the only way to make it to the other side. Proceed with caution when contemplating Carnival, you may get sea sick.

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