Why Carnival Corporation Shares Fallen Today

What happened

Actions of Carnival Society (NYSE: CCL) fell 2.7% through 10:35 a.m. EDT on Tuesday after the cruise line announced after market close yesterday that it had closed a previously announced “incremental first priority secured term loan facility for a total principal amount of $ 2.3 billion. “

So what

Investors are likely reacting to the reminder that Carnival Corporation has a lot of debt – nearly $ 25 billion more than its cash – and now appears to be taking $ 2.3 billion more. In fact, however, this is not really the case.

As Carnival explained yesterday, all of the proceeds from its new loan will be used to redeem a batch of “11.500% First-Priority Senior Secured Notes due 2023”. So what’s really going on here is Carnival is renewing old high-interest debt and taking on new low-interest debt to replace it.

The new loan, according to the company, will mature five years later, in 2028, and cost Carnival only “adjusted LIBOR with a floor of 0.75%, plus a margin equal to 3.25%.”

Image source: Getty Images.

Now what

Translated from banking parlance, this means that Carnival will pay 3.25% plus the floating rate LIBOR – currently less than 0.1% but “adjusted” upwards to 0.75% – for a total of maybe 4%, That’s about a third of the interest rate it was paying on its 2023 notes.

Carnival expects to save $ 135 million in interest a year by refinancing this debt, and it will have an additional five years to pay it off. In other words, this is unqualified good news for Carnival and its shareholders – and not a good reason to sell the stock.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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