Carnival stock dropped almost 14% on Wednesday after the company made an announcement on financial restructuring. Carnival said on Tuesday, November 15, it will issue $1 billion worth of new debt as it attempts to eliminate high-interest debt taken on during the pandemic.
The restructuring comes after the stock price increased significantly over the last month, following a hit it took after disappointing 3rd quarter results at the end of September.
So, is Carnival Corporation a bad bet on the stock market again, or is the company on the way to finding its way out of the 28 billion dollars of debt with which it came out of the pandemic?
Carnival Takes on New Debt
Carnival Corporation announced on Tuesday, November 15, it plans to issue 1 billion worth of senior convertible notes to pay off the debt that will mature within six months from now.
Senior convertible notes are a financial term for a structure where the note holder has the option to convert the debt into equity in the company. In other words, if a company does well and the share price goes up, the holder can convert the notes to valuable shares.
Carnival Corporation expects to use the net proceeds of the offering to make principal payments on debt and for general corporate purposes. Currently, various reports state that Carnival is paying around 4.3% interest on its debt, while the new offerings are at 5,75%.
The Miami-based company is taking on more debt at a seemingly higher interest rate than what it is paying right now. Carnival Corporation already owes 28 billion dollars, so is taking on even more debt a good idea? Not according to investors, as the stock price took a hit on Wednesday, going down nearly 14%.
After the disappointing third-quarter financial results the company released in September 2022, Carnival Corporation stocks actually performed relatively well. Stock prices went from an all-time low of $6.38 on October 10 to $11.16 on November 15. At the time of writing, the stock was at $9.64.
But that’s not the entire story. First of all, Carnival Corporation is still trading more than 30% higher than a month ago. Second, taking on new debt could be a good thing for the world’s largest cruise operator.
Pay off the Old
Carnival Corporation’s 28 billion dollars of debt is a collection of various issuances, consisting of the issuance of senior convertible notes but also long-term business debt not secured by any collateral, also known as debentures.
In April of 2023, 2 billion dollars of these debentures will be due that were issued during the pandemic, when confidence in the viability of the company’s future was in doubt. This is why this debt is currently costing Carnival Corporation 11.5% in interest payments.
The consensus is that Carnival will use the new debt, which is due in 2027 and has an interest rate of 5.75%, to pay off the 11.5% debt. So not only will the cruise company be paying off debt at high-interest rates, it would be giving itself some breathing room as well.
If this scenario does play out like this, it could be good news for Carnival Corporation, and the upward trend for its stock price will resume again. However, it doesn’t mean that Carnival is out of the deep just yet; it still has a massive amount of debt it will need to deal with before it returns to its former glory.