Debt-loaded cruise lines’ shares fall as Fed hikes rate and recession fears grow

People come out to watch the new Carnival Cruise Line ship Mardi Gras as it departs on its maiden voyage, a seven-day cruise to the Caribbean from Port Canaveral, Florida on July 31, 2021.

Paul Hennessy | Anadolu Agency | Getty Images

Shares of Carnival, Norwegian and Royal Caribbean fell this week after the Federal Reserve again hiked rates, raising worries about cruise companies’ huge debt loads and their ability to recover in a broader economic downturn.

The declines in cruise stocks come as the industry is working to recover from the pandemic, with bookings ticking up after the U.S. Centers for Disease Control and Prevention lifted Covid-19 guidelines from ships.

“There’s a lot of one step forward, one step back going on,” Truist analyst Patrick Scholes said. He also noted the debt cruise companies racked up while their ships were anchored during the pandemic.

As of Sept. 1, Truist estimates that Carnival holds $35 billion in debt, Royal Caribbean has $25 billion and Norwegian owes $14 billion. Respectively, the companies’ values in the stock market are about $11.01 billion, $11.18 billion and $5.61 billion.

The declines came during a selloff in the broader market, as the three major indices have taken a beating since the Fed’s decision Wednesday.

Norwegian, Carnival and Royal Caribbean did not respond to request for comment.

“The reason the stocks, in my opinion, went down a bunch on Wednesday was because you just had this fear that the companies are going to have to pay more for their debt,” Deutsche Bank analyst Chris Woronka said. The companies’ losses persisted throughout the week.

At the same time, Woronka said their revenues might not recover as strongly in a broader economic downturn if people are spending less on leisure.

On Thursday, Bloomberg reported that Royal Caribbean will use high-yield corporate bonds, or “junk-bonds,” to help refinance $2 billion of debt due next year.

Still, some investors have been bullish on debt-ridden cruise lines. Earlier this month, Stifel analyst Steven Wieczynski reiterated a buy rating for Norwegian, noting that cruise bookings have climbed, particularly for luxury lines that cater to higher-income customers.

Scholes says that Norwegian is best-positioned with a high proportion of luxury options. But between high interest expenses and revenues that are still recovering, he said none of the cruise companies are yet “out of the woods.”

Carnival shares are down about 55% this year, while Norwegian stock is down about 35% and Royal Caribbean has fallen about 43%.

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