Covid-19 Resurgence Raises Borrowing Costs for Travel-and-Leisure Companies

Cruise operator Royal Caribbean borrowed $1 billion in bond markets Wednesday, but at a higher yield than a few weeks ago.


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The rapid spread of the Covid-19 Delta variant is raising borrowing costs for leisure-and-travel companies as debt investors recalculate the risks facing those industries.

Cruise operator

Royal Caribbean Group

borrowed $1 billion in bond markets Wednesday but the deal came at a hefty premium relative to the interest rate the company paid just a few weeks ago. Investors demanded a yield of 5.5% on the new five-year debt, up from the 4.25% they accepted when the company issued a similar bond in July. Royal Caribbean didn’t immediately return requests for comment.

Bond yields remain well below the elevated levels companies were forced to pay to raise cash during the spring of 2020. But the spread of Delta is forcing airlines, cruise operators, hotel companies and others to reduce revenue forecasts for the rest of the year.

The difference, or spread, between the yield of junk-rated bonds in the leisure industry and the yield of U.S. Treasurys has jumped 0.42 percentage point since June to 3.80 percentage points, according to research firm CreditSights.

Loan prices for such companies with below-investment-grade credit ratings also are taking a hit.

The worst-performing leveraged loan over the seven-day period ended Wednesday was a revolving credit line to global theater chain

Cineworld Group

PLC, according to AdvantageData Inc. The price of the $4.4 billion loan fell about 9% to 80 cents on the dollar on Wednesday, the day before the company announced second-quarter earnings. Loans of meme-stock favorite

AMC Entertainment Holdings Inc.

have fallen about 3% since the start of August to 86.50 cents on the dollar.

Companies are still borrowing despite the climb in yields because interest rates remain near record lows. In many cases, they are using the money to retire more-expensive bonds issued at the pandemic’s height, when many observers feared a wave of bankruptcies and defaults. Royal Caribbean is adding the $1 billion raised this week to its corporate cash pile, which it can use to repay early secured bonds it issued in 2020 at an interest rate of about 11.5%.

The cruise industry is treading delicately as it begins sailing again in the U.S. WSJ’s Dave Sebastian explains the complicated maneuvers the industry faces as it works to return to pre-pandemic levels. Photo: Apu Gomes/AFP/Getty Images

With tourists still leery of booking vacations, cruise operators are burning cash and absent a rise in sales “the best way to minimize cash burn is to reduce the cost of capital,” said CreditSights analyst James Dunn.

Royal Caribbean will save just under $50 million annually in interest expense if it uses the recent bond proceeds to retire more-expensive debt, he said.

Write to Matt Wirz at [email protected]

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Appeared in the August 14, 2021, print edition as ‘Covid Surge Raises Travel, Leisure Borrowing Costs Travel, Leisure Borrowing Hit By Covid Resurgence.’