Stock Market Wrap-Up (Wednesday): Why Are Cruise Line Stocks Sailing Higher Again?

The stock market pushed higher on Wednesday, buoyed by comments from the Federal Reserve. The central bank said it stands ready to take whatever extraordinary monetary-policy measures might be necessary to support the economy, including keeping interest rates essentially at 0% for an extended period of time. Investors saw that as being as accommodative as the Fed could be, and that sent the Dow Jones Industrial Average (^DJI 0.09%), S&P 500 (^GSPC -0.07%), and Nasdaq Composite (^IXIC 0.10%) up between 2% and 4%.

Today's stock market

Data source: Yahoo! Finance.

Yet some stocks did far better than that. In particular, cruise line stocks like Carnival (CCL 1.09%), Royal Caribbean Cruises (RCL -0.79%), and Norwegian Cruise Line Holdings (NCLH -0.03%) posted gains of between 16% and 26% on the day. For these companies, whatever support they can get could mean the difference between making it through the coronavirus crisis intact or having to resort to more extreme measures to keep creditors at bay.

Betting on survival

At its core, the rise in the three major cruise line stocks reflects improved odds that the companies will be able to raise enough capital and cut spending to a sufficient extent to keep from having to declare bankruptcy. In distressed situations like this, stock prices get extremely volatile, because changing views on the odds of survival have massive implications for the equity value of the company. As the likelihood of a binary event that would wipe shareholders out goes down, the stocks will often soar.

Cruise stocks have also responded positively to the idea that states will start to allow businesses to reopen in the near future. Although cruise operations have been shut down by the Centers for Disease Control and Prevention's no sail order, the companies and their investors believe that once state governments make the decision to move forward, the CDC will follow suit.

Image source: Royal Caribbean Cruises.

What cruise companies are saying

Meanwhile, investors are watching every word that cruise line companies say about what's happening with them. The latest communications have generally been mixed but offered some hope. For instance:

• On April 27, Norwegian listed its assets that were still available as potential collateral for financing. They include two vessels worth $740 million and two island properties valued at between $260 million and $710 million. Norwegian also has 10 vessels worth about $8.8 billion that currently secure debt of about half that amount. Although Norwegian has liability for refunds of advance ticket sales, investors hope that the cruise operator will have enough liquidity to ride out the tough times.
• On April 24, Royal Caribbean announced a number of amendments to its credit arrangements and loan facilities. One set of amendments will take advantage of a 12-month debt holiday through March 2021, while another deals with vessel financing beyond the scope of that particular offer. All told, Royal Caribbean expects to get hundreds of millions of dollars of additional liquidity as a result of its efforts.
• On April 24, Carnival's Cunard luxury cruise line said it would cancel sailings through July 31 for its Queen Mary 2 and Queen Victoria ships. For the Queen Elizabeth vessel, Cunard will cancel the entire Alaska season through September 8.

Overall, the industry faces continued uncertainty about when it will be able to restore full operations. Yet it's also getting substantial financial support during the crisis, indicating the desire among both government entities and private financiers to keep the cruise lines afloat.

Risky bets are paying off so far

Many investors were skeptical about the chances of cruise line operators making it through the coronavirus crisis, especially given ongoing concerns about whether cruise operations can adapt to the post-outbreak health standards. Health officials in some quarters have been extremely critical of the cruise ship industry's track record on similar concerns.

Nevertheless, Carnival, Royal Caribbean, and Norwegian have seen their shares soar from their lowest levels. Although these companies still have a long way to go before mounting a full recovery, shareholders seem increasingly positive about their chances of doing so and thereby outpacing the returns from the overall stock market.