NCL Corporation Ltd. — Moody's downgrades NCL Corporation's CFR to B2; outlook negative
Rating Action: Moody’s downgrades NCL Corporation’s CFR to B2; outlook negative
Global Credit Research – 24 Aug 2020
New York, August 24, 2020 — Moody’s Investors Service, (“Moody’s”) downgraded the ratings of NCL Corporation Ltd. (“NCL”) including its Corporate Family Rating to B2 from Ba2, Probability of Default Rating to B2-PD from Ba2-PD, senior secured rating to B1 from Ba2, and senior unsecured rating to Caa1 from B1. The company’s Speculative Grade Liquidity rating of was upgraded to SGL-2 from SGL-3. The outlook is negative. This concludes the review for downgrade that was initiated on July 14, 2020.
“The downgrade reflects Moody’s expectation that NCL’s metrics will remain weak over at least the next two years with debt/EBITDA of above 7.0x and EBITA/interest expense below 2.5x,” stated Pete Trombetta, Moody’s lodging and cruise analyst. “The downgrade also reflects our assumption that NCL’s available capacity will be modest in the first half of 2021 as the industry puts in place acceptable guidelines that satisfy the requirements for the Centers for Disease Control and Prevention (CDC) to lift its no sail order put in place in March,” added Trombetta. The upgrade in NCL’s speculative grade liquidity rating to SGL-2 reflects the steps the company has taken to enhance its cash balances which now stand at about $3.1 billion (pro forma for transactions subsequent to June 30), which provide it sufficient runway to get through this period of unprecedented earnings pressure.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today’s action reflects the impact on NCL from the deterioration in credit quality it has triggered, given its exposure to travel restrictions in the US, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
Downgrades:
..Issuer: NCL Corporation Ltd.
…. Probability of Default Rating, Downgraded to B2-PD from Ba2-PD
…. Corporate Family Rating, Downgraded to B2 from Ba2
….Senior Secured Bank Credit Facility, Downgraded to B1 (LGD3) from Ba2 (LGD3)
….Senior Secured Regular Bond/Debenture, Downgraded to B1 (LGD3) from Ba2 (LGD3)
….Senior Unsecured Regular Bond/Debenture, Downgraded to Caa1 (LGD6) from B1 (LGD6)
Upgrades:
..Issuer: NCL Corporation Ltd.
…. Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3
Outlook Actions:
..Issuer: NCL Corporation Ltd.
….Outlook, Changed To Negative From Rating Under Review
RATINGS RATIONALE
NCL’s credit profile is supported by its market position as the third largest ocean cruise operator worldwide, as well as its well-known brand names — Norwegian Cruise Line, Oceania Cruises, and Regent Seven Seas Cruises, as well as the strong performance of its new ships in terms of pricing and bookings relative to its other ships which enables the company to compete against larger rivals across all its price points. Moody’s view that over the long run, the value proposition of a cruise vacation relative to land-based destinations as well as a group of loyal cruise customers supports a base level of demand once health safety concerns have been effectively addressed. In the short run, NCL’s credit profile will be dominated by the length of time that cruise operations continue to be highly disrupted and the resulting impact on the company’s cash consumption and its liquidity profile. The normal ongoing credit risks include its high leverage, the highly seasonal and capital intensive nature of cruise companies and the cruise industry’s exposure to economic and industry cycles, weather incidents and geopolitical events.
The negative outlook reflects NCL’s high leverage and the uncertainty around the pace and level of recovery in demand that will enable the company to reducle leverage to below 6.0x.
NCL has good liquidity represented by its pro forma cash balance of about $3.1 billion (pro forma for transactions subsequent to June 30). This liquidity provides the company with sufficient coverage of its current cash burn through 2021. The company has fully drawn its committed $875 million revolver due 2024. The company’s credit facilities contain one covenant that is not tested unless total liquidity drops to below $100 million. We do not expect the covenant will be tested. Most of NCL’s assets are encumbered either to ship level debt, the revolving credit facilities and term loans, or secured notes. Also considered is that while we view cruise ships as valuable long-term assets, we do not believe the company could sell ships quickly to raise cash, if necessary.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded further in the near term if the company’s liquidity weakened in any way or if the recovery is delayed beyond our base assumptions which include a resumption of US cruising in the first half of 2021 with capacity days reaching at least 65% of their 2019 levels and occupancy reaching at least 70% by the second quarter with continued improvement from there. The ratings could also be downgraded if there are indications that the company is not on a path to restoring leverage to a sustainable level. The outlook could be revised to stable if the impacts from the spread of the coronavirus stabilizes and cruise operations resume at a level that enables the company to maintain debt/EBITDA below 6.0x. Ratings could be upgraded if the company is able to maintain leverage below 5.5x with EBITA/interest expense sustained above 2.0x.
NCL Corporation Ltd., headquartered in Miami, FL, is a wholly owned subsidiary of Norwegian Cruise Line Holdings, Ltd. Norwegian operates 28 cruise ships with approximately 59,150 berths under three brand names; Norwegian Cruise Line, Oceania Cruises, and Regent Seven Seas Cruises. Net revenues were about $5.0 billion for the fiscal year ended December 31, 2019.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
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Peter Trombetta Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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