Royal Caribbean Cruises (NYSE:RCL) is falling this morning on news that the company is conducting a private debt offering. The world’s second-largest cruise line operator has issued $900 million in senior convertible bonds, set to mature in 2025. After a week of mostly steady growth, this news has sent RCL stock into free fall.
It began today by plunging straight down, and after a failed attempt at a rally, it is already falling again. As of this writing, it is down almost 10% for the day. And if the current trajectory is any indication, it will drop even further before markets close.
A private debt offering is usually a sign of difficult times for a company. But Royal just issued a positive outlook for the third quarter of 2022, predicting a return to profitability. Let’s take a closer look at why RCL stock is falling on this news.
What It Means for RCL Stock
MarketWatch reports, “the company will repurchase part of its 2.875% notes due Nov. 15, 2023, and 4.25% convertible bonds due June 15, 2023.”
As noted, the initial reason for RCL’s plunge is clear — when a company issues convertible bonds, it signals to investors that times are tough. As Investopedia explains, “When money is tight, and stock prices are growing, even very credit-worthy companies will issue convertible securities in an effort to reduce their cost of obtaining scarce capital.”
The logic of the issuing companies is that if share prices rise in the future, the bonds will be converted into common stock at the new high price. Thus, they will yield a healthy profit when they sell the newly converted stock.
The outlet also notes, though, that “financing with convertible securities runs the risk of diluting not only the [earnings per share] of the company’s common stock but also the control of the company.” With that in mind, it’s easy to see why RCL stock is falling today. Investors are taking the offering as a sign the company may be facing leaner-than-forecasted times, and they don’t want to see their holdings diluted as bearish energy pushes RCL down.
CFO Naftali Holtz has addressed this. As she notes, “The purpose of the offering is to replace some of the existing near-term maturities of convertible bonds with new longer-term convertible bonds in a manner which is non-dilutive to shareholders.”
While that may be the case, her reassurance has done little to help RCL stock stay elevated following the news. The private debt offering might not dilute shares in the long run, but it has spurred the kind of energy that pushes shares down by virtue of the domino effect.
The Bottom Line
The fact that shares are falling as quickly as they are is telling — investors are still nervous and losing confidence in RCL stock. It’s been a difficult time for cruise stocks in general. With Covid-19 cases rising again, investors were already worried about the immediate future of cruise lines, even amid a summer marked by travel demand. In late July, Royal’s peer Carnival (NYSE:CCL) issued a $1 billion stock offering which sent shares down across the sector.
Today, this news from Royal Caribbean has sent all the same cruise stocks into the red. While this may ultimately benefit future investors, RCL stock is likely to keep falling for now as current investors jump ship.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.