Carnival plc's (LON: CCL) share price plunged 13.1% after announcing the offering of senior convertible notes worth $1 billion in aggregate principal amount with an interest rate of 5.75%. The senior convertible notes are due in 2027.
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Investors reacted negatively to the news, given that Carnival will use the proceeds raised via the offer to repay some of its debts maturing in 2024. There seems to be an ongoing cycle of new debt being incurred by Carnival as part of its financial planning as its business slowly recovered from the COVID-19 pandemic’s impact.
The cruise ship operator has issued multiple convertible loan notes this year, which have found buyers, but one cannot wonder how long the company can keep kicking the can down the road. Taking on more debt to repay existing debts is a vicious cycle that can keep a company in debt for years.
Carnival needs to find a better solution than debt to shore up its finances and boost its balance sheet, but its options are limited. The other viable option for the company is to raise funds by offering new ordinary shares to investors, which would dilute existing shareholders but would not load the company with more debt.
However, each company must maintain a crucial balance between debt and equity as the primary funding sources. Sometimes, a company should raise funds by issuing more debt than by issuing new shares. However, the opposite is true about situations where the company might be better off issuing new shares than taking on more debt.
Carnival expects to generate record revenues next year as the cruise ship industry recovers despite the high cost of living facing most consumers. However, the company’s massive debt pile, which stood at about $35 billion in September, will remain a source for concern.
As an investor, I steer clear of companies with significant debt since they are always at risk of default if something drastic happens.
*This is not investment advice.
Carnival share price.
The Carnival share price plunged 13.34% to trade at 731.2p, falling from Tuesday’s closing price of 843.8p
