Why Royal Caribbean shares crashed 10% today

what happened

In a surprise announcement this morning for Cruise Line Royal Caribbean (RCL 0.67%) — which just finished reporting better-than-expected (but still unprofitable) financial results last week, driving up its share price — is sinking fast with news that the company has decided to issue at least $900 million, and possibly up to to one billion dollars in new debt.

As of 9:50 a.m. ET, Royal Caribbean’s stock is already down 9.6%, news of it sinking peer cruise companies Norwegian Cruise Line Holdings (NCLH 1.08%) And the Carnival Company (CCL 2.19%) (cook 1.24%) beside her. Norway is down 4.2%, while Carnival is down 4.5%.

so what

About a month ago, Carnival Corporation reported second-quarter earnings in which it warned that, contrary to analyst expectations, it won’t actually turn a profit in the third quarter. As if to underscore 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 beat it until profitability returns.

Today, Royal Caribbean appears to be following the same rules of the game: announce earnings, warn of no earnings in the third quarter, and then raise money. Specifically, Royal Caribbean told investors this morning that it will sell up to $900 million of the company’s “major convertible bonds due in 2025”, plus another $135 million if underwriters exercise the total repayment option (i.e. $1 billion). Plus all).

What now

Royal Caribbean intends to use the new debt to roll over the old debt – two convertible debt payments that pay interest of 2.875% and 4.25% respectively – thus extending the period of time it has to pay off its debts. The company did not say what interest rate its new debt would pay. Presumably, as interest rates rise, new debt will be more expensive than old debt, and Royal Caribbean’s interest costs will rise accordingly.

And so I’m afraid what we have here, folks, is a pattern. Two of the big three cruise companies reported losing money in the second quarter, promising to continue losing money through at least the third quarter — and raising money to prepare for more tough times. Today’s news concerns Royal Caribbean in particular, which is why it’s getting the most damage. But there’s still another cruise company you need to report: Norwegian Cruise Line, whose earnings are due on August 9.

If you’re an investor in the cruise sector, I think it’s probably best to assume that Norwegian news next week will be similar to all the other news. Profits will be negative. (In fact, analysts expect a loss of $0.86 per share.) And the Norwegians warn that it will be unprofitable in the third quarter as well. Chances are good that the Norwegian will announce a bond or stock offering – or both – soon after earnings appear.

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

Rich Smith does not hold a position in any of the stocks mentioned. Motley Fool recommends Carnival. Motley Fool has a disclosure policy.

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