As the cruise line sector hoped to get good news on restarting cruises in the U.S., Norwegian Cruise Line (NCLH) shareholders got hit with a double whammy. Not only did the Center for Disease Control and Prevention delay vessels sailing from U.S. waters, but also the company diluted shareholders again via another equity offering.
The cruise lines aren’t investable with no ability to plan cruises in large parts of their markets. With the additional risk of a virus infection on one of the initial cruises setting the restart plans back possibly months and until a vaccine exists, Norwegian isn’t worth the risk.
On July 16, the CDC extended a no-sail order until the end of September. The health organization had an order on file until July 24, but Carnival Corporation had already given the market an indication that the CDC wasn’t even working on a return to approving cruises.
The Cruise Lines International Association had already agreed to suspend trips until September 15. My view was that this decision only served to give the CDC cover to continue suspending cruises with no risk to a health organization not trying to run a business.
Norwegian had previously suspended cruises until September 30 with an exception with Seattle-based Alaska voyages. The new no-sail order by the CDC makes restarting cruises in October nearly impossible considering the unknown timetable for actual approval considering the health organization could easily extend the suspension date.
More Equity Dilution
While shareholders were looking forward to positive news from the CDC on a restart plan, Norwegian rushed out a secondary equity offering of 16.7 million shares. With the over-allotment amount of 2.5 million, the company sold a total of 19.2 million shares at $15 raising ~$288 million to fund ongoing monthly cash burn rates.
The cruise line has a market cap of $4 billion making this deal ~7% dilutive to shareholders. In addition, Norwegian raised $750 million in senior secure notes and $400 million in exchangeable senior notes.
These fund raisings come after a big $2.4 billion raised during the original shutdown and another $400 million recent in a private deal. The company had estimated ongoing monthly cash burn rates in the $140 million range.
The cruise line is set to burn some $350 million in cash between now and the updated CDC no-sail date. Any additional delays such as pushing the restart date into 2021 would cost the cruise line another $420 million of cash burn to just wait on the sidelines.
The key investor takeaway is that cruise lines just aren’t investable with an unknown restart date in the key U.S. market. Norwegian Cruise Line continues to raise billions in capital to survive the suspension of cruises.
Investors should wait until a viable restart plan exists and the company’s financials can be accurately analyzed. The cruise line is now flush with cash to survive this shutdown for well over a year, but the stock has already doubled off the lows. This risk here is for a retest of those lows as the market faces the extended suspension of operations.
Unsurprisingly, investor sentiment is very negative, with individual portfolios in the TipRanks database showing a net pullback from NCLH.
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Disclosure: No position.