Yesterday was a good day to own shares in cruise line companies -- today, not so much.
Reports of strong bookings at Carnival (CCL 3.74%) for the start of this week sent shares of not just Carnival soaring, but peer cruise stocks Royal Caribbean (RCL 3.14%) and Norwegian Cruise Line Holdings (NCLH 6.58%) as well, in Tuesday trading. Hidden behind the good news, however, was a bit of bad news: It seems cruise companies may need to take on even more debt as they wait to turn profitable again.
And as of 1:20 p.m. ET, this revelation has shares of Royal Caribbean, Norwegian Cruise, and Carnival stocks falling 5%, 5.4%, and 5.5%, respectively.
Remember how I warned, back in July, that in light of its continued losses, Carnival had decided to raise more than $1 billion in new cash through a stock offering? Remember how I warned, just two weeks ago, that Royal Caribbean was raising close to $1 billion itself through a debt offering, and using the money to roll over old debt? Remember how I said this is starting to look like a trend?
Well, it looks even more like a trend this week, after Royal Caribbean announced on Monday that it is increasing the size of its debt offering from $900 million to $1.25 billion -- a 39% increase in the amount of cash the company has decided to raise.
And granted, yes, Royal Caribbean will be primarily using the money to roll over old debt, so that its total amount of debt outstanding won't really increase. That being said, the company has now confirmed that its new debt will cost 11.625% in annual interest. That's more than triple what the old debt that gets rolled over used to cost, inasmuch as that old debt was paying only between 2.875% and 4.25%.
This is a dramatic increase in the expense Royal Caribbean will incur to service its $23.8 billion debt load in future years. Very roughly, if Royal Caribbean spent $1.3 billion on the interest on its debt in 2021, a tripling in interest rates would seem to imply that investors can expect interest costs to approach $3 billion or even $4 billion annually if this keeps up.
Given that even in its most profitable year ever -- 2019 -- Royal Caribbean didn't generate even $2.1 billion in operating profit, the potential for interest costs rising past $3 billion even calls into question Royal Caribbean's ability to ever return to profitability. Meanwhile, if Carnival and Norwegian Cruise sail a similar route, their interest costs could soar toward $4.5 billion and $1.8 billion, respectively. And -- you guessed it -- according to historical data from S&P Global Market Intelligence, neither Carnival nor Norwegian Cruise have ever earned that amount of pre-interest costs operating profit, either, potentially putting those two in a similar bind.
Simply put, for any of these companies to find a path back to profitability, their spiraling debt costs must first be brought back under control. Until you see evidence of that happening, it's probably best to steer clear of cruise stocks.