Why did Royal Caribbean stock plummet 10% today?

What happened

In a surprise announcement this morning, the cruise line Royal Caribbean (RCL -7.54%) – which just finished posting better-than-expected (but still unprofitable) financial results last week, boosting its share price – is rapidly collapsing on news that the company has decided to issue at least 900 million dollars, and possibly as much as $1 billion, of new debt.

As of 9:50 a.m. ET, Royal Caribbean stock is already down 9.6% and its news is sinking peer cruise lines Norwegian Cruise Line Holdings (NCLH -1.40%) and carnival society (CCL -1.54%) (TAIL -1.10%) by his side. The Norwegian stock is down 4.2% and Carnival is down 4.5%.

So what

Just a month ago, Carnival Corporation released its second-quarter results in which it warned that, contrary to analysts’ expectations, it would in fact make no profit in the third quarter. As if to underline the point, three weeks later Carnival announced that it would raise between $1 billion and $1.15 billion in cash through a new stock offering to hold out until the profitability returns.

Today, Royal Caribbean appears to be following the same playbook: announcing earnings, warning that there will be no third quarter earnings, and then raising funds. Specifically, Royal Caribbean advised investors this morning that it will sell up to $900 million of “convertible senior notes to be issued by the company due 2025”, plus an additional $135 million if underwriters exercise their over-allotment option (so more than $1 billion in total).

Now what

Royal Caribbean intends to use the new debt to roll over the old debt – two batches of convertible debt paying 2.875% and 4.25% interest respectively – and thus extend the time it has to pay off its debts. . The company did not specify the interest rate its new debt will pay. Presumably, however, with rising interest rates, new debt will be more expensive than old, and Royal Caribbean’s interest charges will rise accordingly.

And so I’m afraid what we have here, folks, is a pattern. Two of the Big Three cruise lines said they lost money in the second quarter, promised to continue losing money for at least the third quarter and raised funds to prepare for tougher times. Today’s news is more specifically about Royal Caribbean, which is why it’s the hardest hit. But there is still one cruise line to report: Norwegian Cruise Line, whose results are due Aug. 9.

If you’re an investor in the cruise industry, I think it’s probably best to assume that Norwegian’s news next week will be similar to all the others. The gains will be negative. (Indeed, analysts are predicting a loss of $0.86 per share.) Norwegian will warn that it will also not be profitable in the third quarter. And there’s a good chance that Norwegian will announce a debt or equity offering – or both – soon after the results are released.

Cruise ship investors should assume that interest charges will be higher, that positive profits will take longer to return, and when they do, this industry as a whole will be much less profitable than it was. before the pandemic. Invest accordingly.