That, in turn, is good enough to generate a juicy 11% yield-to-maturity on the company’s bonds. In the case of Norwegian, if you’re bullish on cruises picking back up, the company should be easily able to, at minimum, make its interest payments on its debt. But it’s a far different proposition between a stock being cheap or expensive and a company having enough assets and cash flows to merely keep the lights on. You can reasonably argue that the cruise line equities were way overvalued up until about a month ago. Still, as long as cash flows are positive and improving, that’s what bondholders really care about. That said, there’s a massive hole for the cruise lines to dig out of given their terrible balance sheets. And now, with oil prices falling at last, that should aid the cruise lines as well. People are engaging in what’s deemed “revenge travel” after being cooped up for so long. Yes, the global travel industry is swiftly recovering. It’s a fight for survival out there for the cruise lines. And there’s far more downside security in bonds than NCLH stock if the company’s financial outlook worsens. Overall, this works out to a more than 11% annualized return. And then, in a little over two years, they’d be repaid $10,000 of principal for their $8,400 investment, resulting in a $1,600 capital gain. For the next two years, they’d receive $362.50 per year in interest on their holding. They’d pay $8,400 for that $10k of paper. To give an example, suppose an investor bought $10,000 face value of those Norwegian 2024 bonds today. This works out to a yield-to-maturity of 11.2%. Given the uncertainty in the market right now, Norwegian bonds are being offered at 84 cents on the dollar today. However, that is based on the face value of a bond, which is 100. Now, 3.62% doesn’t sound like an appealing interest rate, and it’s not. 15, 2024, it will repay all the principle owed to its bondholders. The way a corporate bond works, Norwegian will distribute that 3.62% interest rate on its bonds in semi-annual payments. And Norwegian has offered corporate bonds to the general public, including its Dec. Most retail brokerages allow their clients to buy corporate bonds in addition to stocks and options. The Solution? Buy Bonds Instead of Stock. Given that the company only generated roughly $1.2 billion per year in operating income even during the good days prior to the pandemic, this will be a tall order. Right now, Norwegian has to make good on more than $10 billion of obligations. This means the company has net liabilities of $10.4 billion.Īnd, as any creditor will tell you, bondholders get paid first before the stock owners see a dime. However, the company has a total enterprise value of $15.6 billion. That might seem cheap for a company that reliably pulled in $6 billion or so a year of revenues prior to the pandemic. Right now, Norwegian has a market capitalization of $5.2 billion. That being the case, it still has an ocean of liabilities. Norwegian isn’t in the worst shape of the big three cruise operators. While the cruise industry isn’t in as bad a shape as people might think, there is still an elephant in the room: Debt. This isn’t guaranteed to keep happening as the economy worsens, but the general trajectory is still pointing upward for the travel sector. On the other hand, services and experience spend keeps recovering. People have been cutting back spending on discretionary goods. Meanwhile, there’s little indication that the global rebound in travel is coming to an end yet either. But if they slow down the economy enough, fuel prices will slide as well. Say what you will about the Federal Reserve’s rate hiking campaign. As we’ve seen over the past week, oil prices absolutely cratered on news of the Atlanta Fed GDP now indicator flipping into official recession territory along with bank analysts warning of oil dropping to the $60s in a recession. It seems unlikely that both of these would happen simultaneously. And if fuel costs keep surging, that crushes cruise operators as well.īut let’s slow down for a minute. In a huge recession, travel demand would slump. Either we get a bigger recession than currently expected, or oil prices continue to go sky-high. The primary risks for cruise operators are two-fold.
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