The rapid spread of the Covid-19 Delta variant is increasing borrowing costs for leisure and travel businesses as debt investors recalculate the risks these industries face.
Cruise line Royal Caribbean Group borrowed $ 1 billion in bond markets on Wednesday, but the deal came at a steep premium compared to the interest rate the company paid just weeks ago. Investors demanded a return of 5.5% on the new five-year debt, down from 4.25% they agreed to when the company issued a similar bond in July. Royal Caribbean did not immediately return requests for comment.
Bond yields remain well below the high levels companies were forced to pay to raise funds in the spring of 2020. But Delta’s spread is forcing airlines, cruise lines, hotel companies and others to cut their revenue forecasts for the rest of the year.
The difference, or spread, between the yield on rotten rated bonds in the leisure industry and the yield on U.S. Treasuries has jumped 0.42 percentage points since June to 3.80 percentage points, according to the CreditSights research company.
The loan prices for those companies whose credit rating is lower than the investment rating are also affected.
The worst performing leveraged loan during the seven-day period ended Wednesday was a revolving line of credit to global movie chain Cineworld Group PLC, according to AdvantageData Inc. The loan price of $ 4.4 billion fell about 9% to 80 cents on the dollar on Wednesday, the day before the company announced its second quarter results. Loans from favorite AMC Entertainment Holdings Inc.
have fallen about 3% since early August to 86.50 cents on the dollar.
Businesses continue to borrow despite rising yields as interest rates remain near record lows. In many cases, they are using the money to withdraw more expensive bonds issued at the height of the pandemic, when many observers feared a wave of bankruptcies and defaults. Royal Caribbean is adding the $ 1 billion raised this week to its corporate treasury, which it can use to repay the prepaid bonds it issued in 2020 at an interest rate of around 11.5%.
While tourists are still wary of vacation bookings, cruise lines burn money and in the absence of increased sales, “the best way to minimize cash consumption is to reduce the cost of capital.” said James Dunn, analyst at CreditSights.
Royal Caribbean will save just under $ 50 million a year in interest costs if it uses the proceeds from recent bonds to pay off more expensive debt, he said.
Write to Matt Wirz at [email protected]
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Appeared in the print edition of August 14, 2021 under the title “Covid Surge increases travel, leisure borrowing costs, leisure borrowing affected by Covid resurgence”.