Shares of Norwegian Cruise Line Holdings (NCLH 1.74%) took a tumble on Thursday after the cruise line operator announced plans to sell as much as $2.1 billion worth of senior secured notes due in 2027, senior unsecured notes due in 2029, and exchangeable senior notes due in 2027 -- none of which terms investors need to pay close attention to. Just think of them all as debt.
The company will use the cash raised from the sale of these notes to roll over debt that it sold previously, such that the net result of all this activity should be ... Norwegian Cruise Line Holdings remaining essentially as far in debt as it was before.
As of 2:35 p.m. ET, Norwegian Cruise stock was down by 2.6%.
Is that a good reason for investors to be selling off Norwegian Cruise stock, though? Perhaps not, especially as the company's stated reason for this financial maneuvering is to get rid of debt that's costing it anywhere from 10.25% to 12.25% annually, and replace it with lower-interest debt.
That being said, there was other news Thursday that may be contributing to the stock's decline. To wit, investment bank Citigroup announced that it has downgraded Norwegian Cruise from buy to neutral, with a $25 price target that implies there's only about 8% upside left in the stock over the next 12 months.
Citi's downbeat assessment of Norwegian Cruise's worth is a more likely reason why investors are selling it lower. As the analyst pointed out, the COVID-19 "inflicted substantial and lasting damage" on the company, reports TheFly.com. Its efforts to stay afloat through the pandemic left Norwegian Cruise loaded up with more than $13.1 billion in debt -- debt that this rollover will do nothing to diminish. And the need to pay interest on all that debt (even if it succeeds in securing more palatable interest rates) has done "significant damage" to the company's future earnings power.
This, in a nutshell, is why Citi is downgrading Norwegian Cruise Line Holdings stock. It's also why -- at a valuation of 58.5 times forward earnings -- Citigroup doesn't think the stock is worth buying, and I cannot say I disagree.