The pandemic may have dealt a crushing blow to cruise line operator Carnival (CCL 0.44%) (CUK 0.28%). The company packed on an extraordinary amount of debt to get through its pandemic docking. Now that ships are finally setting sail, Carnival may still have rough seas ahead. 

Sink or swim

Not surprisingly, cruise lines were some of the hardest-hit companies during the COVID-19 pandemic's stay-at-home travel restrictions. After all, cramming thousands of vacationers onto a single, sea-going vessel doesn't exactly fit the description of an "essential business." Carnival borrowed heavily to survive a war of attrition against travel restrictions.

A cruise ship on the water.

Image source: Getty Images.

As vaccines became available, non-essential businesses were allowed to open, and Carnival's cruise fanatics finally set sail again on July 3, 2021. Between COVID-19's onset and the company's reopening voyage, its top line was basically zero. Though Carnival was able to cut certain operating expenses and furlough workers, it suffered steep quarterly losses accumulating to $8.3 billion over the five quarters from its second fiscal quarter starting in March 2020 through the same quarter of 2021, covering its first cruise after reopening.

Carnival amassed a gargantuan amount of debt to cover losses over that time. Prior to its second fiscal quarter, the company owed a manageable $9.7 billion in long-term debt. By its quarter ended May 2021, it had nearly tripled its long-term debt load to $26 billion.

Unfortunately, the red ink hasn't yet subsided. Carnival accumulated another $9.2 billion in losses for the next four quarters through its latest quarterly earnings report.

As a result, Carnival added another $3.2 billion in debt to bring its most up-to-date total long-term debt to $29.2 billion. In addition, it has short-term debt of $2.7 billion as well as long-term debt of $3.2 billion that comes due within the next year.

What does it all mean?

Carnival's new, eye-popping debt load may not necessarily bring the company to its knees. In its most recent quarterly earnings report, newly appointed CEO Josh Weinstein noted  strong bookings and that over 90% of its fleet is back in operation. So the company's top line may return to pre-pandemic levels.

The risks lie elsewhere on the balance sheet. Getting a fleet of gigantic cruise ships back on the water requires significant capital expenditure in an already capital-intensive business. Interest payments on its new debt will also add pressure to earnings. For instance, last quarter's interest expense was $370 million, and there was an operating loss of $1.47 billion. That implies a negative interest coverage ratio.

If Carnival is to return to profitability, it will have to do it quickly. The company's fully drawn $3.1 billion revolving credit facility includes a covenant that says it must reach an interest coverage ratio of two by Feb. 28, 2023. If Carnival cannot comply with the rules, it will have to negotiate with the lender, refinance the revolver, or owe the entire balance immediately.

Carnival's debt issues may not necessarily bring the company to its knees. It has $7 billion in cash on its balance sheet to help it through its issues. But returning to its former financial position will be a challenging task. The stock market has been beaten down this year, and there are plenty of great opportunities for long-term investors. The risk embedded in Carnival's balance sheet may exempt it from being one of those opportunities.