What happened
It's the afternoon of the week's final trading day -- and it looks like it's going to end on a down note for cruise stock investors.
As of 12:30 p.m. ET, Norwegian Cruise Line Holdings (NCLH -0.77%) shares are sailing lower by 5.8%, rival Royal Caribbean (RCL 0.04%) is down 6%, and industry leader Carnival Corporation (CCL 1.49%) (CUK 1.34%) is down 6.6%.
So what
What's got cruise investors feeling so glum today? It's debt, most likely -- not theirs, personally, but the heavy debt loads being carried around by their cruise stocks.
With earnings season now a wrap, all three of America's big cruise stock companies have officially confirmed not only that they lost money for the year's second quarter, but that they're probably going to lose money in the third quarter as well. (Indeed, according to projections from S&P Global Market Intelligence, there's a good chance none of these cruise companies are going to earn a profit again before Q2 2023.) With no profits of their own to fund operations, Carnival has announced it is raising cash through a stock offering, and Royal Caribbean is raising debt. Norwegian is the only one of the three cruise companies not to have recently announced plans to raise cash -- but that could change.
The problem is, carrying debt costs money -- in the form of interest payments. And as CNBC reported this morning, minutes just released from the Federal Reserve's July meeting, as well as comments from St. Louis Federal Reserve President James Bullard, indicate that the Fed has no intention of slowing rate interest rate hikes in the near future. And as Royal Caribbean's $1 billion-plus debt offering at 11.625% this week demonstrates, those interest rates by the Fed are going to come at a huge cost to debt-laden cruise companies.
Now what
How worried should cruise investors be about this?
Out of the three major cruise stocks, Norwegian Cruise Line Holdings is the only one to have successfully trimmed both its long- and short-term debt loads in Q2 (as compared to Q1). At Carnival, long-term debt slimmed by $625 million -- but the short-term portion of its long-term debts increased by $923 million. At Royal Caribbean, long-term debt declined by $2.2 billion -- which sounds good until you notice that the short-term portion of long-term debt grew by $2.9 billion.
And again, Royal Caribbean's debt offering this week confirms the company is simply not in a position to pay down debt any further, but rather must roll over old debt with newer debt -- at higher interest rates. Suffice it to say that this isn't a great financial situation for the cruise companies to be in.
It's not good news for their stock prices, either.
