What happened
The stock of cruise line operator Carnival (CCL 1.49%) (CUK 1.34%) was down as much as 4.3% at midday Tuesday after the company announced a big debt repurchase. Shares were down 4.1% at 12:55 p.m. EDT today and were bouncing near their lows for the day.
So what
Carnival has announced a tender offer for its 11.5% senior secured notes due 2023, which could cost up to $2 billion. The offer is for a total consideration of $1,142.50 per $1,000 in principal value of notes. This amounts to paying nearly a year's worth of interest up front just to buy back the debt right now.
Image source: Getty Images.
The company ended the first quarter of 2021 with $9.3 billion of cash and expects an average cash burn per month of $500 million in the first half of 2021. That rate should fall rapidly as more voyages with paying customers are launched around the world in the second half of the year.
Now what
Carnival took out billions in debt and sold stock as well just to survive the pandemic. And now that it can see the other side of the crisis, it's trying to de-leverage the balance sheet. This is a move in that direction, but it's costly given the premium Carnival is offering for the debt.
For shareholders, this could significantly reduce the cash cushion the company has, increasing risk if there are further disruptions or if demand doesn't return as hoped. But that's why the stock is down today as some investors take gains.
