Shares of indebted cruise lines fall as Fed raises interest rates and fears of recession mount

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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 raised interest rates again, raising concerns about cruise lines’ massive debt burden and their ability to recover from a broader economic downturn.

The cruise stock declines come as the industry tries to recover from the pandemic, with bookings rising after the US Centers for Disease Control and Prevention lifted Covid-19 guidelines from ships.

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

As of September 1, Truist estimates Carnival has $35 billion in debt, Royal Caribbean $25 billion and Norwegian $14 billion. The values โ€‹โ€‹of the companies in the stock market are approximately $11.01 billion, $11.18 billion and $5.61 billion, respectively.

The declines came amid a sell-off in the broader market, as the three major indices have taken a beating since the Fed’s decision on Wednesday.

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

โ€œI think the reason stocks fell sharply on Wednesday was because you just had a fear that the companies would have to pay more for their debt,โ€ said Deutsche Bank analyst Chris Woronka. The companies’ losses continued throughout the week.

At the same time, Woronka said their earnings may not recover as strongly in a broader economic downturn if people spend less time on leisure.

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

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Still, some investors are optimistic about debt cruise lines. Earlier this month, Stifel analyst Steven Wieczynski reiterated a buy recommendation for Norwegian, noting that cruise bookings have risen, particularly for luxury lines targeting higher-income customers.

Scholes says Norwegian is best positioned with a high share of luxury options. But between high interest charges and earnings still recovering, he said none of the cruise lines are “out of the woods” yet.

Carnival’s shares are down about 55% this year, while Norwegian stocks are down about 35% and Royal Caribbean is down about 43%.

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