What happened

Shares of Carnival (CCL -3.10%) struck an iceberg on Wednesday and are sinking fast -- down 13.7% as of 11:40 a.m. EST after the cruise operator announced that it will issue $1 billion worth of new debt as it tries to roll over older, higher-interest debt taken on to get it through the pandemic.

So what

As Carnival explained Tuesday night, its new debt (technically, convertible senior notes) will pay holders 5.75% annual interest and come due on Dec. 1, 2027. The company will float at least $1 billion worth of these notes, but potentially as much as $1.15 billion if underwriters exercise their overallotment options.  

Carnival says it will use the proceeds from this debt offering to pay off principal on existing debt (i.e., roll over the old debt), as well as for general corporate purposes. In theory, this should mean that Carnival will be paying off notes that carry higher interest rates, with money from new notes that cost it less in interest.

Logically, when we consider that interest rates have been trending higher as the Fed continues to hike its targeted federal funds rate, it seems more likely that Carnival would end up paying more on any new debt it issues, than what it pays on the debt it's replacing. And indeed, data from S&P Global Market Intelligence suggest that Carnival's average interest rate on its debt over the past 12 months has been about 4.3%, a lower rate than the 5.75% interest the company will pay on its new debt.  

Now what

But here's the good news: While Carnival didn't say specifically which old debt it will be paying off with money from its new debt, we can see from data provided by S&P Global that the most likely object of Carnival's debt rollover plan is the $2 billion worth of corporate debentures that are coming due in April 2023. And the good news here is that these debentures -- issued at the height of the pandemic and the time of greatest concern about Carnival's viability in April 2020 -- are currently costing Carnival 11.5% interest annually.  

If Carnival takes out new debt at 5.75%, and uses it to pay off old debt at 11.5%, that sounds like good news to me. And the fact that investors won't have to worry about the new debt coming due until 2027 -- whereas the old debt must be paid off less than six months from now -- would give Carnival a bit of extra breathing room on its debt obligations.

Assuming this is what's really happening at Carnival, then net-net, I think today's debt issuance news is good news for the cruise company -- and investors who are selling off the stock in response to it are overreacting.