Like bears prepping for hibernation, cruise line operators have been gathering nourishment to get themselves through their next few months of dormancy. But instead of gobbling up berries, nuts, and fish, Carnival (NYSE:CCL)(NYSE:CUK), Royal Caribbean (NYSE:RCL), and Norwegian Cruise Line Holdings (NYSE:NCLH) are feasting on secondary stock offerings and fresh debt issuances.
Royal Caribbean just became the latest busker. After Thursday's market close, it filed to sell $1 billion in new stock to beef up its liquidity. Investors know the drill. They may initially penalize a company for a dilutive stock offering or a balance-sheet-straining debt round, but the market understands that the cruise line operators need to raise money now, and deal with the consequences later.
Waves of winter
Norwegian Cruise Line and Carnival raised more money in mid-November. Royal Caribbean's previous equity-and-debt bake sale fundraiser came in October. It makes sense for the cruise lines to lean more on stock offerings and less on debt these days, even if it will bloat their outstanding share counts and dilute earnings on a per-share basis.
The cruise industry is already heavily leveraged. Thursday's filing showed that Royal Caribbean is carrying $19.4 billion in total debt after its October financing moves, and even in today's low-interest-rate climate, it's not as if investors will buy these troubled companies' bonds unless they come with a hearty yield. Printing new stock also makes more sense because their share prices have been climbing in recent months.
Carnival, Royal Caribbean, and Norwegian Cruise Line remain among Wall Street's biggest losers of 2020, but in the months since they hit their springtime lows, Royal Caribbean has more than quadrupled, while its peers have roughly tripled. Those stock gains are pretty remarkable considering that their ships won't be sailing until some point next year, but you don't look a gift uptick in the mouth when you need to raise money and your share price is surprisingly buoyant relative to where it was just months if not weeks before.
Just as bears have different caloric needs during hibernation based on their size, these cruise line operators have different cash-burn rates. Here's how much money each operator is going through as its ships remain dormant.
- Carnival's monthly projected cash-burn rate right now is $530 million.
- Royal Caribbean is chewing through $250 million to $290 million a month.
- As the "Baby Bear" of the lot, Norwegian Cruise Line's monthly cash burn is roughly $160 million.
If the projections stick, by raising $1 billion, Royal Caribbean is adding another three to four months under normal conditions to its cash cushion. With debts maturing -- largely in a couple of years, but $1.3 billion worth will mature through 2021 -- that money might not last as long as the cash-burn rates suggest. No one knows for sure when cruise lines will start sailing again, and between the global recession and the regulatory mandates they will face, the three giants aren't likely to leap straight back to profitability as soon as passengers are sipping margaritas on the pool decks again.
Raising money is the right call for Royal Caribbean. And given that its stock has been, relatively speaking, the best industry performer in 2020, a secondary stock offering is the smart decision despite the dilution.