NCLH lays it on the line

2020-04-28T09:17:38+00:00 April 28th, 2020|Finance|

Norwegian Cruise Line Holdings (NCLH) has provided a comprehensive business update in response to the coronavirus global pandemic.

NCLH had announced a voluntary suspension of all cruise voyages from 13th March to 30th June, 2020 for its three brands. All 28 ships in the company’s fleet are in safe haven in port or at anchor.

In addition, the US operations are subject to the Centres for Disease Control and Prevention (CDC) No Sail Order, which was extended on 9th April, 2020 to continue until the earliest of (i) the expiration of the US Secretary of Health and Human Services’ declaration that COVID-19 constitutes a public health emergency, (ii) the date the Director of the CDC rescinds or modifies the No Sail Order or (iii) 100 days after the order appears on the Federal Register, which would be 24th July, 2020.

Prior to the suspension of sailings, the company had begun to develop a comprehensive and multi-faceted strategy to enhance its rigorous health and safety protocols to address the unique public health challenges posed by COVID-19, including but not limited to, enhanced screening, upgraded cleaning and disinfection protocols and plans for social distancing. Several of these protocols were put in place prior to the voyage suspensions.

NCLH said it will continue to work with the CDC and other federal agencies, global public health authorities and national and local governments in areas where it operates to take all necessary measures to ensure the health, safety and security of guests, crew and the communities visited once operations resume.

“With the COVID-19 pandemic impacting communities worldwide, we continue to closely monitor the evolving global public health environment. We have also taken decisive action to protect the company’s future by shoring up our liquidity position through cost mitigation and cash conservation measures as well as pursuing additional sources of liquidity to help us weather this global pandemic,” said Frank Del Rio, NCLH’s President and CEO. “We believe the disruption to the travel industry, while swift and severe, will eventually subside. Our guests continue to demonstrate their desire for cruise vacations, as we continue to experience demand for voyages further in the future across our three brands. When the time comes, we will be ready to safely resume operations and welcome our loyal guests on board.”

Prior to the virus outbreak, this year got off to a strong start with all three brands entering the year in a record booked position and at higher prices on a comparable basis. For the first two months of the year, ships sailed full at prices that were higher than in 2019, despite healthy capacity growth of around 7%. The company has since experienced substantial impacts related to the emergence of the global pandemic, including a significant drop in near-term demand and elevated cancellations.

As of 17th April, advanced bookings for the remainder of 2020 were meaningfully lower than the previous year with pricing down low-single digits. Booking trends indicate demand for cruise vacations in the medium and longer term with the booked position for 2021 is essentially flat compared to 2019 at pricing that is down mid-single digits.

About half of the guests who have had their voyages cancelled have requested cash refunds as of 17th April. By 31st March, 2020, NCLH had $1.8 bill of advanced ticket sales, which includes the about $850 mill for the voyage cancellations through end of June, where guests have the option of either a future cruise credit or a cash refund and around $350 mill for voyages scheduled for the remainder of 2020.

Norwegian said it also continues to take future bookings for 2020, 2021 and 2022, and receives new customer deposits and final payments on these bookings.

The company has claimed to have swiftly undertaken several proactive measures to mitigate the financial and operational impacts of COVID-19. This includes cost mitigation and cash conservation levers the company has deployed to preserve and enhance liquidity and is part of an overall plan that also contemplates additional sources of capital and liquidity.

These measures include:

Reduced Operating Expenses

  • Meaningfully reducing cruise operating expense, which includes reducing expenses associated with crew payroll, food, fuel, insurance and port charges. The majority of ships in the company’s fleet are currently transitioning to cold layup.
  • Significantly reducing or deferring marketing expense in the first half of the year.
  • Introduced a temporary shortened working week and reduced work hours with commensurate 20% salary reduction for shoreside team members.
  • Paused employer 401(k) match contribution.
  • Implemented a company-wide hiring freeze.
  • Suspended travel for shoreside employees across the organisation.

NCLH anticipated ongoing ship operating expenses and administrative operating costs combined to range from about $70 mill to $110 mill per month during the suspension of operations.

Reduced Capital Expenditures

The Company has identified around $515 mill of capital expenditure reductions, comprised of:

  • $345 mill, or a nearly 70% reduction of non-newbuild capital expenditures for the remainder of 2020.
  • About $170 mill in expected reduced and deferred capital expenditures for newbuild related payments through 31st March, 2021 which the company is currently finalising. Upon completion, the next newbuild related payments would not be until April, 2021.

Improved Debt Profile

  • Export Credit Agencies (ECA) and Norwegian’s ECA lenders are working to finalise an industry wide initiative to grant a 12-month debt holiday to provide interim debt service relief for amortisation payments and financial covenants. The Company has about $540 mill of ECA-backed amortisation payments due over the next 12-months, of which around $385 mill of payments related to guaranteed financing by Euler Hermes AG, Germany’s official ECA, have already been deferred through April, 2021 and associated credit agreements have been amended to incorporate this debt holiday. The Company is in the process of finalising the deferral of the remaining about $155 mill of payments through 31st March, 2021 with its other ECA lenders.
  • Contractual optionality to extend $230 mill ‘Pride of America’ term loan by one year to January, 2022.
  • Working with lenders and evaluating additional options available to defer or refinance certain of the existing debt profile.

Balance Sheet and Liquidity Position

In response to COVID-19, NCLH secured a new $675 mill revolving credit facility on 5th March, 2020 and fully drew down on this new facility, as well as its existing $875 mill revolving credit facility beginning on 12th March, 2020 for a total of $1.55 bill.

As at 31st March, 2020, NCLH’’s total debt position was $8.6 bill. As outlined above, the company is negotiating to defer a substantial portion of the maturities due within the next 12 months. As of the same date, the company’s cash and cash equivalents were $1.4 bill and said that it believed it was in compliance with all debt covenants.

As a result, NCLH now estimates its cash burn to be on average in the range of, about $110 million to $150 mill per month during the suspension of operations.

The company said it is also currently evaluating several additional strategies to enhance its liquidity position, which may include pursuing additional financing from both the public and private markets through the issuance of equity and/or debt securities, including secured debt.

“Our quick action to pro-actively and aggressively implement initiatives to preserve cash and enhance liquidity in this uncertain and fluid environment puts us in a stronger position to withstand the adverse financial effects of COVID-19,” said Mark Kempa, NCLH’s Executive Vice President and CFO. “We will not only benefit from the actions taken to strengthen our liquidity profile but will also benefit from a period of reduced capital expenditures with no newbuild deliveries until at least mid-2022. We will continue to evaluate all additional options to enhance liquidity.”

As a consequence of known and unknown impacts, while the company cannot estimate the impact on its business, financial condition or near- or longer-term financial or operational results with certainty, it expects to report a net loss on both a US GAAP and adjusted basis for the first quarter of this year and for the full year, the company warned.

If the temporary suspension of sailings is further extended, the company’s liquidity and financial position would likely continue to be significantly impacted.