NCL to continue cash burn as cruise lines look to set sail, but European restrictions could stall recovery 

Norwegian Cruise Lines is expected to burn cash for years to come, as the industry attempts to rebound from the pandemic, according to four sources following the situation.

Shares backing Norwegian traded off yesterday after Morgan Stanley published a report on 7 July, offering a somewhat bearish view on the cruise industry’s recovery prospects, according to two of the sources. The report predicts that the industry will take until at least 1Q22 or 2Q22 to fully resume, as it contends with changing restrictions, moving ships, staffing ships and limited port availability. The report further predicts that 31% of the global fleet will be operating in 3Q21, 58% in 4Q21 and 75-80% in 1Q22.

Compared to peers Carnival Cruise Line and Royal Caribbean Group, however, NCL’s exposure to cruises across the Atlantic could delay its ability to generate cash, as Europe is seeing a rise in COVID cases, which could impact the sentiment around traveling, the sources said. Furthermore, the borrower will need to increase capex in order to ramp up capacity, keep up with its mountain of interest expense and accept ship deliveries, further elevating its cash burn for the next few years, said the sources.

NCL is preparing to launch its inaugural cruises this summer, with ships sailing to Greece, Alaska and the Caribbean. However, the reopening has not been without its challenges, given the ever-changing COVID rules and restrictions in the sector.

As the rules stand, NCL will be requiring all guests and crew members to be vaccinated. However, Florida Governor Ron DeSantis’s executive order and a law he signed that went into effect 1 July fines companies that require proof of vaccination for up to USD 5,000 per violation. Meanwhile, the CDC is asking cruise ship companies to have passengers show proof of vaccination or documentation proving they are not at high risk for COVID-19.

On the European front, sources noted that the continent’s pandemic recovery has slowed due to the highly contagious Delta variant, which could, in turn, hamper Norwegian’s full recovery. Out of the 29 ships on NCL’s roster in 2020, 21 of them list Europe as one of the primary areas of operation, according to SEC filings.

As far as recovery goes, the pandemic left the cruise line space with pent-up demand and limited supply, which should contribute to a faster EBITDA recovery, the sources said. Norwegian’s monthly cash burn for the first quarter of 2021 was roughly USD 190m per month. The company also expects to report monthly cash burn in the same range for 2Q21, as it prepares for a return to service this summer, according to company documents.

The largest contributor to cash burn for the next few years will be capex, the sources said. Not only will the company spend more to bring ships out of pause mode and return crew members to ships, but the company is also expected to spend capex for ship deliveries.

In 2020, Norwegian burned roughly USD 2.47bn of cash through negative USD 1.04bn of adjusted EBITDA, USD 946m of capex and USD 482m of interest expense, according to company documents. In comparison, the sources expect the company to burn USD 2.9n in 2021 through negative USD 1bn of EBITDA, less USD 700m of capex, less USD 1.2bn of interest expense.

The sources project that the company will take a year minimum or around 2H22 before crossing over to positive free cash flow, if they defer capex related to ship deliveries. Annually, for 2022, they predicted the company will burn USD 1.1bn through positive USD 1.5bn of adjusted EBITDA, USD 1.4bn of capex and USD 1.2bn of interest expense.

Without deferring capex, sources expect cash burn will total USD 900m for 2023, factoring positive USD 2.3bn of adjusted EBITDA, USD 2bn of capex and USD 1.2bn of interest expense.

On a quarterly basis, two of the sources expect EBITDA to break even in 4Q21 as its ships remained idle in 1H21 and accounting for one-time reopening costs for the remainder of the year. Meanwhile, EBITDA is expected to amount to roughly USD 70m in 1Q22, the sources said.

As of 31 March, the company held USD 3.5bn of cash and short-term investments.

On the positive side, sources speculated that given the overall support of the equity market, the company could issue further equity down the line as needed, just as Carnival did last week and NCL did in March.

Most recently, in March 2021, NCL raised USD 1.56bn through a common equity offering of USD 30 per share along with USD 575m 5.875% senior unsecured notes due 2026 and USD 525m 6.125% senior unsecured notes due 2028.

NCL’s equity is trading at USD 27.17 per share and a market cap of USD 10.047bn, up 1.61% on the day, and up from pandemic lows of USD 8.46 per share. Pre-pandemic, shares were trading around USD 59.65.

The USD 525m 6.125% senior unsecured notes due 2028 traded today at 104.625 to yield 5.266%, compared to trades in the 105 range over the last few weeks, according to MarketAxess.

Its USD 565m 3.625% senior unsecured notes due 2024 traded on 6 July at 96.375 to yield 4.781%, compared to trades in the 97 range over the last few weeks.

Sources place Norwegian wide to Royal Caribbean and Carnival, as both competitors are much larger and do not have as much European exposure. However, on a general market basis, sources would place NCL’s bonds at least 200bps wider than where they are now if the high yield market wasn’t so tight.

With an active market and yields tightening, spreads are tighter than ever before. The average high yield on bonds was at 3.92% yesterday, according to ICE BofA US High Yield Index. For single-B companies, the average yield on bonds is 4.36%, according to the index.

Carnival’s USD 3.5bn 5.75% senior unsecured notes due 2027 traded today at 104.375 to yield 4.817%, down from trades at 105 earlier this week, according to MarketAxess.

Carnival’s equity is trading at USD 24.13 per share and a market cap of USD 27.936bn, up 1.71% from yesterday’s close, and up compared to a pandemic low of USD 8.49 per share. Pre-pandemic, shares were trading around USD 51.90 per share.

Royal Caribbean Cruises’ USD 650m 4.25% senior unsecured notes due 2026 traded yesterday at 99.25 to yield 4.419%, down from trades at par last week, according to MarketAxess.

RCL’s equity is trading today at USD 81.51 per share and market cap of USD 20.737bn, up 2.59% from yesterday’s close, and up compared to a pandemic low of USD 23.81. Pre-pandemic, shares were trading around USD 135.05 per share.

Messages left with Norwegian were not returned.

2021 Debtwire

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