What happened
Stock markets are in the green again on Thursday, with the S&P 500 rising 1.5%, and the Nasdaq up 2%. Few stocks are doing so well, however, as cruise line stocks.
As of 10:25 a.m. ET, shares of Royal Caribbean (RCL 1.23%) stock are surging ahead 6.6%, while Carnival (CCL -0.42%) is tacking on 7.5%, and Norwegian Cruise Line Holdings (NCLH 0.66%) leads the sector higher with a 9.2% gain. The question is: Why?
Carnival collects some cool cash -- but wait, is that an iceberg on the horizon? Image source: Getty Images.
So what
There's not a lot of news in cruise land today, after all, although on balance, I'd say the small amount of news is good. StreetInsider.com just reported that a single director at Norwegian Cruise spent $1.5 million to acquire 100,000 shares of the stock on Monday. And last night, Carnival announced that it has just sold $1 billion worth of "senior unsecured notes due 2030."
Of the two news items, the second is more significant. Carnival said it plans to use the cash raised from this debt offering to meet its obligations to pay back the principal on its other debts in 2023, as well as for other "general corporate purposes," which may include paying down other debt. This is good news because one, it pushes out by a year the risk that Carnival might for any reason be forced to miss a debt payment, and two, it provides evidence that bankers are still willing to lend to the cruise industry -- which isn't a given, given its perilous financial state. (Carnival alone carries a net debt load of $29.3 billion, and Royal Caribbean and Norwegian are pretty debt-laden as well).
Now what
That said, Carnival will pay 10.5% interest on its new debt -- not a cheap rate. Judging from the $1.6 billion in interest payments Carnival has reported on its financial statements over the past year, as calculated by S&P Global Market Intelligence, I'd estimate Carnival's average interest rate on debt right now is about 5.5% -- so this new debt could be nearly twice as expensive as the debt it's being used to pay off.
Now consider that the U.S. Bureau of Economic Analysis just revised the U.S. GDP lower for the first quarter of 2022. Turns out that the economy shrank by 1.5% instead of 1.4% -- potentially the start of the next U.S. recession. And on top of that, yesterday the Federal Reserve published its minutes suggesting it plans to raise interest rates by 50 basis points (i.e., 0.5%) each in "the next couple of meetings." The Fed mentioned "inflation" as a concern 60 times in its notes and implied it may be necessary to raise interest rates past the market's expected endpoint of 2.5% to 2.75% by year-end -- implying that two 50-point rate hikes might not be the end of this.
And of course, the higher interest rates go, the more expensive debt becomes.
All things considered, this doesn't seem a particularly good time to get excited about owning stocks carrying heaping portions of debt -- e.g., cruise stocks. I fear investors who are rushing back into cruise stocks today may be making exactly the wrong move.
