Faced with the unprecedented total shutdown of their operations, generating no income and with large liabilities in the form of passenger deposits for canceled cruises, the cruise industry has had to scramble to develop methods to strengthen their balance sheets and improve liquidity.
The largest public companies turned to the financial markets each structuring offerings to raise capital while many of the smaller firms have been left to look for other means of managing their finances. Just today, for example, reports surfaced that British cruise company Cruise and Maritime Voyages after having been forced to extend its cruise suspension to the end of August is scrambling to raise funds. The Guardian newspaper published a report saying the company had failed to complete a loan putting it into an emergency situation. Currently operating six cruise ships and with commitments to acquire two additional ships from Carnival Corporation in 2021, CMV’s collapse could send shockwaves through the industry.
Anxious to maintain their shipbuilding industries and conscious of the threat as cruise lines continue to search for means to improve liquidity during the ongoing suspension of operations, the governments of Germany, Finland, France, Italy, and Norway this spring worked to create a financial lifeline for the cruise industry. Traditionally cruise ship construction financing includes export credit/government guarantees which are provided by the export credit facility of the countries where the shipyards are located and used to raise debt to pay for the construction. Cruise lines place new orders contingent on completing the financing.
When the efforts to provide relief began in April, it appeared that it would mostly be applied to completed cruise ships that entered into business in the past few years. However, Norwegian Cruise Line Holdings recently became the first of the companies to extend the debt holiday to its newbuilds. Working with the syndicate for its loans on two new builds ordered with Fincantieri in Italy for delivery in 2022 and 2023, NCLH received a suspension of the financial covenants from April 1, 2020 to March 31, 2021. This was done in parallel with the banks creating a one year debt holiday on the loans pertaining to four of its in-service cruise ships also built in Italy, which had entered service between 2010 and 2020. Previously, Norwegian had amended $386 million of export credit backed facilities incorporating a 12-month debt holiday through March 31, 2021, on loans that financed the construction of five cruise ships built at Meyer Werft in Germany between 2013 and 2019. The company also secured deferrals and extensions to 2021 and 2022 on loans related to other ships.
With large portions of the shipbuilders’ order books committed to the cruise lines, Europe’s shipyard and the broad networks of subcontractors and suppliers were concerned over the potential losses and long-term impact it might have on their businesses and the overall economy. With the cruise lines looking to delay or defer or even cancel parts of the total order book valued at over $60 billion, the governments of the major shipbuilding nations agreed on moves that would allow the cruise companies to pause their repayments of debt that was backed by public-sector export guarantees.
Announcing the arrangement, Germany’s Federal Government Maritime Coordinator Norbert Brackmann said, “The agreement reached with our European partners benefits the maritime industry in Germany and its suppliers. We are easing the pressure on cruise lines’ liquidity and thereby helping to stabilize the long-term business relations entertained by European shipyards during this crisis. There was an urgent need for this, given that the cruise business has been virtually paused by the coronavirus pandemic. The measures we have taken are designed to also ringfence thousands of jobs in European shipyards in their many suppliers. At the same time, we are also reducing the risk for the Federal Government in terms of repayments of government-backed financing for ships.”
Norwegian was not the only large cruise line to take advantage of this option from the export-import banks. Royal Caribbean Cruise Ltd. took similar actions for its brands Royal Caribbean International and Celebrity Cruises. During April, the company amended the export-credit backed loan facilities incurred to finance eight cruise ships built in Germany starting in 2008 and three built in France, including the recently delivered Celebrity Apex. Under the agreements, deferred debt amortization of approximately $800 million will be paid over a period of four years after the 12-month deferral period which ends in the spring of 2021.
There had been speculation that these debt holidays might only be extended to the largest cruise companies that were seen as having the most opportunities to strengthen their balance sheets. However, recently niche cruise operator Lindblad Expeditions Holdings announced that it had also reached an agreement with lenders for the facility tied to its new construction due to deliver in 2021. Similar to the large cruise companies. Lindblad was able to defer scheduled amortization payments for four quarters from June 2020 through March 2021.
While these efforts have been important steps for the cruise lines to enhance their short-term liquidity, one investment analyst reports that they were asked not to include the debt holidays in their liquidity calculations as the cruise companies recognized that they are debt extensions and not debt forgiveness. However, they proved to be an important step as the companies worked to manage cash flow during a period of no revenues.
“It would not surprise me that other cruise companies and or additional ships would be extended debt holidays given the importance of shipbuilding in these countries’ economies,” said C. Patrick Scholes, an equity analyst at SunTrust Robinson Humphrey.
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