Royal Caribbean, Carnival and Norwegian Cruise Line stock up for cruel winter

Much like bears preparing for hibernation, cruise line operators feed to survive their next months of dormancy. But instead of swallowing berries and nuts and fish, Carnival (NYSE: CCL)(NYSE: CUK), Royal Caribbean (NYSE: RCL), and Norwegian Cruise Line Holdings (NASDAQ: NCLH) feast on secondary equity offerings and new debt issues.

Royal Caribbean became the last traveling musician. After the market closed on Thursday, it filed a request to sell $ 1 billion in new shares to boost its liquidity. Investors know the drill. They may penalize a company for a dilutive stock offering or a balance sheet fundraiser at first, but the market understands that cruise lines need to raise money now and face the consequences later.

Winter waves

Norwegian Cruise Line and Carnival raised more money in mid-November. Royal Caribbean’s previous equity and debt fundraiser took place in October. It makes sense that cruise lines are relying more on stock offerings and less on debt these days, even if that inflates the number of shares outstanding and dilutes earnings per share.

The cruise industry is already heavily exploited. Thursday’s filing showed Royal Caribbean had a total debt of $ 19.4 billion after its October financings, and even in today’s climate of low interest rates, it’s not like investors will buy. bonds of these troubled companies unless they offer a good yield. Printing new stocks also makes more sense as their stock prices have climbed in recent months.

Carnival, Royal Caribbean and Norwegian Cruise Line remain among Wall Street’s biggest losers in 2020, but in the months since their spring trough, Royal Caribbean has more than quadrupled, while its peers roughly tripled. These stock market gains are quite remarkable considering that their ships won’t be sailing for some time next year, but you don’t look at a freebie on the upside when you need to raise money and your stock price is surprisingly high. high relative was just months if not weeks before.

Just as bears have different calorie needs during hibernation depending on their size, these cruise line operators have different rates of cash consumption. Here’s how much money each operator spends while their ships are idle.

If projections hold, by raising $ 1 billion, Royal Caribbean adds another three to four months under normal conditions to its cash cushion. With the debts coming due – much of it in a few years, but $ 1.3 billion will mature until 2021 – that money might not last as long as cash consumption rates suggest. No one knows for sure when cruise lines will resume sailing, and between the global recession and the regulatory mandates they will face, the Big Three are unlikely to return directly to profitability as soon as passengers sip margaritas on the decks of the swimming pool. again.

Fundraising is the right call for Royal Caribbean. And given that its stock was, relatively speaking, the best performing in the industry in 2020, a secondary stock offering is the smart move despite the dilution.