Moody's Investors Service, (Moody's) issued a press release affirming the B2 corporate family rating (CFR), B2-PD probability of default rating, and the B2 senior secured rating of Silk Bidco AS (Hurtigruten), the full owner of Norwegian cruise operator Hurtigruten ASA. While the ratings have been affirmed, the outlook has been changed to stable from positive.
"The change in outlook to stable reflects the higher credit risk and weaker liquidity that Hurtigruten's recent capex spending announcement entails" says Guillaume Leglise, Moody's lead analyst for Hurtigruten.
"While Hurtigruten's leverage will be slightly higher than we initially expected, we still recognise the company's good deleveraging prospects, which reflects its increased capacities and higher occupancy rates, the solid demand for leisure cruises, and the low oil price environment," said Leglise.
The change of outlook to stable from positive primarily reflects Hurtigruten's higher than previously anticipated capital expenditures, according to the Moody's release. On April 21, 2016, the company announced a new build program, which will initially involve ordering two new ships, and potentially two additional ones over time, with the first two ships (1) being delivered in 2018 and 2019 respectively; (2) costing between $148 and $170 million; and (3) potentially being at least 80% debt funded. While the company has not finalized the financing at this stage, Moody's expects that leverage will remain slightly higher than previously anticipated in the coming years.
That being said, proforma for the ship deliveries, Hurtigruten still presents a good deleveraging profile, aiming towards 5.0x (gross debt to EBITDA as adjusted by Moody's) by 2018, but this may take a longer time period than initially expected. Hurtigruten's initial B2 CFR with a positive outlook assigned in January 2015 reflected the company's deleveraging prospects of achieving leverage comfortably below 5.5x by 2016, as well as expectations of positive free cash flows.
The company's liquidity profile is also weaker than Moody's initially expected due to the recent expansion capex and the expected new investments. Although still adequate, Hurtigruten's liquidity profile presents less room for maneuver, with only $32 million of cash and cash equivalents for the restricted group, and 40% drawn under the covenanted $74 million super senior revolving credit facility as at December 31, 2015, reflecting the seasonal dry-docking expenditures and partial payments of planned refurbishments.
Nevertheless, Moody's recognizes that through these investments, Hurtigruten will increase its capacity in the expedition segment. Demand for expedition cruises in polar waters and the Antarctic is trending upward, supported by the growing global cruise market and the stronger appetite for "adventure travels." Moody's notes positively that expedition activities are expected to generate higher margins than the core Norwegian cruises, mitigating the impact of the new ship financing on the company's leverage. In addition, expedition cruises are generally booked well in advance (around 12 months in advance) and this will allow the company to open bookings as soon as Q4-2016, supporting earnings and deleveraging for 2017-18.
As such, Moody's believes that the company's strategic decision to expand in the expedition segment is credit positive as it will create earnings diversification, away from the core Norwegian coast cruises and away from government contractual revenues, which respectively represented around 65% and 18.5% of the group revenues in FY2015. Also, Hurtigruten will gain operating flexibility as the new ships are expected to be equipped with the adequate environmental technologies required for both extreme polar water expeditions and Norwegian coastal routes. This flexibility will help alleviate the high degree of seasonality of Hurtigruten's activities, thanks to cruise expeditions in the southern hemisphere during the low season of core Norwegian coastal activities (Q1 & Q4).