Calmer waters for the cruise industry Calmer waters for the cruise

					       cover feature




Calmer waters for
the cruise industry
The cruise sector has recovered well from the downturn, but
financing is still a contentious issue. Alison Tucker reports




    W
                     hile to a large degree    people who cruised in 2009 represent-                      accordance with Organisation for Eco-
                     the same banks fi-        ed a 4.8 per cent increase, a strong sign                  nomic Development and Co-operation
                     nance commercial          of continuing consumer interest and                        (OECD) rules concerning Hermes ex-
                     shipping vessels          demand. The North American cruise                          port credit cover and the commercial
                     and cruiseships, the      industry continues to expand its pres-                     interest reference rates (CIRR) scheme
cruise sector is not fragmented in the         ence throughout Europe – a continu-                        for ship financing. The financing may
same way as commercial shipping.               ing source of new passengers. Cruise                       also be used to fund payments made
   Commercial shipping is divided into         capacity in Europe grew by 8 per cent                      during the construction period.
segments, such as containerised trans-         from 2008 and has grown by 75 per                             Beyond their function as lead arrang-
port, drybulk, tankers, vehicle carriers       cent from 2005. The number of US                           ers, Nordea is acting as documentation
and offshore service providers. While          resident cruise passengers – who repre-                    agent and together with DnB Nor as
the container market may be strong             sent 70 per cent of all cruisers – grew in                 bookrunners. Commerzbank holds the
based on demand for high-value fin-            2009 by 1.5 per cent, largely reflecting                   function of Hermes agent while KfW
ished goods, the drybulk market may            the popularity of Europe.”                                 Ipex-Bank is facility agent.
be depressed due to lack of demand for            Based on strong growth in the cruise                       Contract price for the two post-pan-
drybulk goods.                                 sector, banks are keen to finance cruise                   amax vessels is approximately USD1.2
   Cruise lines basically offer a homo-        operators, as evidenced by several major                   billion. The vessels are currently the
geneous product – a leisure product            deals this year.                                           largest passenger/cruiseships to be built
– although some cruise lines offer gam-           In March, four mandated lead ar-                        in Germany. When completed in April
bling, others feature gourmet dining           rangers and bookrunners – Citi, Fortis,                    2013 and 2014, they will each have
and some provide opportunities for             Nordea and SEB – completed a USD1.13                       about 4,000 passenger berths.
passengers to immerse themselves in the        billion structured financing for Miami-                       NCL is optimistic of investor ap-
culture of port calls by hiring experts to     based Royal Caribbean Cruises (RCC)                        petite for cruise line shares. On 27
lead groups of passengers on archaeo-          to fund the acquisition of the Genesis-                    October, NCL Corporation, parent of
logical side-trips.                            class cruiseship Allure of the Seas, which                 Norwegian Cruise Line, filed a registra-
   Although there has been consolida-          was delivered in late October by the STX                   tion form with the US Securities and
tion in commercial shipping, there are         Europe shipyard in Finland.                                Exchange Commission (SEC) for an
still several hundred players worldwide           The post-delivery financing – the                       initial public offering (IPO) of up to
in that sector. However, widespread            largest-ever single cruiseship financing                   USD250 million. The cruise line op-
consolidation in the cruise market, has        – covers 80 per cent of the cost of the                    erator has not specified underwriters,
resulted in fewer major cruise lines. But      most expensive cruiseship to be built.                     terms or timing of the deal.
even with fewer players, cruising is still a      The 12.5-year door-to-door financing                       On 4 November, NCL announced the
big and growing business.                      featured 95 per cent cover from Finn-                      private offering of USD250 million of
   A report released by Florida-based          vera – Finland’s export credit agency                      senior unsecured notes, priced at 9.5 per
industry group Cruise Lines Interna-           (ECA) – and is the largest transaction to                  cent and maturing in 2018.
tional Association (CLIA) in mid-Au-           be covered by the agency.                                     Private equity firm Apollo Manage-
gust said that cruise lines were reporting        In October, a European banking                          ment bought a 50 per cent stake in NCL
“strong activity thus far in 2010”. In the     consortium secured commitments for                         for USD1 billion in January 2008, and
report, Terry Dale, president and chief        Miami-based Norwegian Cruise Line                          sold part of that to TPG Capital. Asian
executive officer of CLIA, said: “We are       (NCL) to finance two cruise vessels, to                    cruise and gaming company Genting
encouraged, not only by signs that a           be built by the Meyer Werft shipyard in                    Hong Kong owns half of the company,
turnaround is in progress, but also by         Germany.                                                   Apollo holds 37.5 per cent and TPG
the industry’s history of out-perform-            A group of five lead arrangers –                        owns 12.5 per cent.
ing other tourism sectors and even the         Deutsche Schiffsbank, DNB Nor, HSBC,                          A London-based banker active in
national [US] economy.”                        KfW-Ipex-Bank and Nordea – com-                            lending to finance cruise vessels said that
   Dale added: “The 13.44 million              mitted to finance the new vessels in                       a major reason why banks finance cruise

6                                                                                           25 November 2010 jtf.janes.com Jane’s Transport Finance
                                                                                                               cover feature




                                                          ships is that “bankers are familiar with         Another attraction of the sector, says
                                                          the model. Lending is done based on up-       DnB Nor, is the level of ECA support of-
                                                          side projections of passenger demand”.        fered by Finland, France, Germany and
                                                             The banker also said that he expects       Italy, which hold a virtual monopoly on
                                                          Chinese interests to enter the cruise sec-    cruiseship construction. “This support
                                                          tor as the level of discretionary income      limits the commercial risk to banks,”
                                                          rises in China and that Chinese banks         says DnB Nor.
                                                          – currently absent from lending to the           According to DnB Nor: “Many banks
                                                          market – will lend to Chinese cruise op-      handle cruise companies within their
                                                          erators at that time.                         leisure industry department, which
                                                             DnB Nor notes the growth potential         may explain why some banks that have
                                                          of the cruise sector as a significant fac-    pulled out of ship finance are still ac-
                                                          tor in its ability of the sector to attract   tive in the cruise sector. There are clear
                                                          bank financing.                               economies-of-scale in the cruise indus-
                                                             “DnB Nor has a positive view on the        try and we mainly finance the top-tier
                                                          demand growth potential in the cruise         operators. Smaller operators will typi-
                                                          industry and we take comfort from             cally get financing through local banks
                                                          how the major cruise lines weathered          rather than through international ship-
                                                          the storm during the recent recession,”       ping banks,” says DnB Nor.
                                                          states the bank.                                 After a bumpy ride in 2009, cruise de-
                                                                                                        mand is showing robust growth. RCC,
                                                                                                        Carnival Corporation and NCL report-
                                                                                                        ed significant increases in third-quarter
                                                                                                        earnings against the same period last
                                                                                                        year. All three companies report solid
                                                                                                        bookings across their lines for the rest of
                                                                                                        the year and into 2011.
                                                                                                           Carnival Corporation – which oper-
                                                                                                        ates 11 cruiseship brands such Carnival
                                                                                                        Cruise Lines, Holland America Line,
                                                                                                        Princess Cruises, AIDA in Germany
                                                                                                        and Costa Cruises in southern Europe
                                                                                                        – has a total of 10 ships on order, all
                                                                                                        of which are being built at the Meyer
                                                                                                        Werft shipyard.




Jane’s Transport Finance jtf.janes.com 25 November 2010                                                                                           7
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                                                                                                                                                       that already have access to other sources
                                                 ‘It certainly is not the                                                                              of finance?” asks Horton-Jansen.
                                                 case that banks are                                                                                      “Now is the perfect time to place
                                                 more willing to finance                                                                               orders,” he adds. “It is the lowest point
                                                                                                                                                       in the cycle. Shipbuilders are offer-
                                                 cruiseships than
                                                                                                                                                       ing preferential prices and there is an
                                                 general shipping’                                                                                     increasingly positive outlook for the
                                                 Michel Degermann                                                                                      sector. Yet small- to medium-sized
                                                 Natixis                                                                                               companies cannot benefit from these
                                                                                                                                                       preferential market conditions as they
                                                                                                                                                       cannot get the ECA backing that they
MSC Cruises – www.fotoseeker.com: 1390154




                                                                                                                                                       need to finance new orders. Nor can
                                                                                                                                                       they access ships off the second-hand
                                                                                                                                                       market and expand that way, as banks
                                                                                                                                                       will not finance older second-hand ship
                                                                                                                                                       purchases,” he says.
                                                                                                                                                          In allowing for ECA support to be
                                                                                                                                                       given to top-tier operators only, ship-
                                                                                                                                                       yards have taken a very short-sighted
                                                                                                                                                       approach, Horton-Jansen believes.
                                                                                                                                                       “ECA is a valuable financing tool yet it
                                                                                                                                                       is available to an increasingly smaller
                                                                                                                                                       group of operators. The ECAs should
                                                                                                                                                       stay a little closer to the purpose for
                                               Financing is already in place for seven   gether with CA-CIB and BNP Paribas –                          which they were intended – providing
                                            of the 10 ships. “We do not expect any       provided debt for the MSC deal.                               financing solutions for those compa-
                                            issues with required financing for those        With MSC and STX France both cli-                          nies that do not have sufficient access to
                                            three vessels given our strong cashflow      ents of the bank, Natixis was keen to                         other sources of funding. Having more
                                            and investment-grade credit rating. We       support the deal, says Degermann.                             companies expanding rather than just
                                            believe ECA financing will continue to          Degermann does not believe that                            the top few would be beneficial for the
                                            be available for our newbuilding proj-       growth projections for cruise lines make                      industry as a whole and the shipyards in
                                            ects,” says Carnival.                        the sector especially attractive to banks.                    particular,” he says. “Any mid-size op-
                                                                                         “It certainly is not the case that banks                      erator that got through the aftermath
                                            ECA support                                  are more willing to finance cruiseships                       of 11 September and the financial crisis
                                            According to Nigel Thomas, a Lon-            than general shipping. The return on                          obviously has a durable business model
                                            don-based partner in the asset finance       equity is good in the cruise sector but                       that can withstand shocks. With such a
                                            division of law firm Watson Farley &         the net margin is lower than for con-                         track record, they deserve a chance for
                                            Williams: “ECA financing is the biggest      ventional shipping, primarily due to the                      an equal playing field in terms of access
                                            factor in unlocking financing for most       lower margins banks can charge as a re-                       to export finance in order to grow their
                                            cruiseship newbuilds.”                       sult of ECA guarantees,” he says.                             businesses at the right time – the lowest
                                               Without the support of French ECA            MSC Cruises is the only cruise line                        point in the cycle,” he adds.
                                            Coface, MSC Cruises – a subsidiary of        that Natixis finances. “The fact that                            There are few exceptions of any new
                                            Mediterranean Shipping Co (MSC),             Natixis is in the cruise sector at all is due                 banks entering the cruise sector in the
                                            known for its deep pockets – struggled       to the bank’s relationship with MSC,”                         short- to mid-term – although DVB
                                            to raise the financing for its Fantasia-     explains Degermann.                                           would be keen to see increased compe-
                                            class MSC Divina (formerly Fantas-              DVB Bank would like to do more                             tition in the sector, translating into im-
                                            tica), slated for delivery at the end of     business in the cruise sector but says it is                  proved lending volumes. “Any operator
                                            spring 2012. A letter of intent (LOI) was    held back by the difficulties of small-to-                    that has managed to come through this
                                            signed in March but it took a further        medium-sized operators – on which the                         latest recession deserves to be support-
                                            five months of legal and financial nego-     bank focuses – to get support from other                      ed,” says Horton-Jansen.
                                            tiations – in which the French govern-       banks. “DVB can fund a portion of a                              Paul Nelson, partner in the asset fi-
                                            ment took a prominent role – to secure       vessel’s cost but other banks are needed                      nance division of law firm Allen & Overy,
                                            financing for the ship, construction of      to fund the difference,” says Richard                         also notes that ECA financing – formerly
                                            which had started in April to provide        Horton-Jansen, head of DVB’s cruise                           financing of last resort – is now routine
                                            jobs at STX France, whose order book         and ferry unit.                                               for the best-funded cruise lines.
                                            had almost dried out.                           That debt is not forthcoming for                              With shipyards providing significant
                                               The French Republic is a strategic        smaller cruise operators due to ECA                           employment that extends to local and
                                            owner in STX Europe’s Saint-Nazaire          support being extended largely to top-                        European sub-contractors and govern-
                                            and Lorient shipyards, holding more          tier operators, believes Horton-Jansen.                       ments wanting to support shipyards
                                            than 33 per cent.                               “ECA financing should exist to level                       that have been hit badly in the down-
                                               “Banks were very reluctant to support     the playing field. But if you look at                         turn, “it is difficult for ECAs to deny
                                            MSC. The principal reason why financ-        which companies are able to achieve                           support for big customers of shipyards”,
                                            ing was eventually extended was Coface       ECA financing in the cruise sector, it is                     he says.
                                            support,” says Michel Degermann, head        mostly the largest entities, the best cred-                      Nelson points out that a lack of or-
                                            of shipping, offshore and land trans-        its, that need it least. Why do the ECAs                      ders for new ships from smaller cruise
                                            portation finance at Natixis, which – to-    make their best terms available to those                      lines is not necessarily due to a lack of

                                      8                                                                                                  25 November 2010 jtf.janes.com Jane’s Transport Finance
                                                                                                                       cover feature


available financing but could equally         – the ship will be the first Asian-built                          lays in the limited number of cruise
be because smaller operators simply           cruiseship and could act as the catalyst                          line owners, providing GNMTC with
don’t need the additional capacity at the     for Asian banks to join the sector.                               a good chance of establishing a strong
moment. “Financing is a byproduct.               The involvement of Chinese banks in                            position in the sector.
Operators tend to order first and then        the cruise sector is a long-term prospect                            It is not so long ago that Libya was an
look for financing,” he says.                 as China does not have its own indus-                             active supporter of terrorism before the
   For Simon Hartley, banking partner         try yet. “Nonetheless, China has shown                            fall of Baghdad in 2003 and the counry
at law firm Norton Rose, specialising in      great determination in its climb up the                           was categorised as a rogue state. “I would
asset and shipping finance, the level of      world shipbuilding tables and for com-                            expect this ship, and any potential future
ECA support extended to top-tier op-          mercial transport ships has just about                            orders, would be financed in cash by
erators is “a question of timing”.            overtaken South Korea to obtain the top                           Libya,” says Horton-Jansen, who also
   He says: “The recent level of ECA sup-     spot. Building a cruiseship in China in                           questions the validity of a Libyan cruise
port is a reflection of current economic      the near future looks quite unlikely but                          operation when cruising, by and large,
conditions and an indication of where         China will undoubtedly be determined                              is a leisure activity enjoyed by western
we are in the market cycle. Those com-        – and able – in the medium- to long-                              societies that are unlikely to choose to
panies taking recent deliveries of ships      run to compete with European yards on                             travel on ships operated by countries
would have been facing a critical point       cruiseship construction.                                          with former links to terrorism.
in the credit markets. Access to bank            “When that day comes, there will                                  However, according to Thomas, there
debt is more restricted and banks do          undoubtedly be Chinese banks ready                                could well be a number of European in-
not want to lend on an unsecured basis:.      and willing to finance the construction                           stitutions that would line up to finance
The level of activity in capital markets      of cruiseships built in China for inter-                          GNMTC together with Coface. “The
has also been weaker. At the same time,       national and local cruise companies,”                             Libya order is a sensitive issue, but there
ECAs have an important political role to      says Thomas.                                                      is quite a lot of business going on be-
support national shipyards, particularly         If not among banks, the growth po-                             tween the European business commu-
when they are struggling to attract new       tential of the sector is generating in-                           nity and Libya and the order provides
orders from a relatively narrow custom-       terest among potential new operators.                             work for STX’s Saint-Nazaire shipyard,”
er base. The hope is that support for a       Watson, Farley & Williams has been                                he says.
cruise operator now could result in fur-      approached by a number of entities in-                               Nelson agrees. “Banks are not going
ther orders later on.                         terested in launching cruise operations,                          to be queuing up to extend financing
   “From the point of view of ECAs, it        says Thomas.                                                      to Libya but it would be no surprise to
is easier to examine – and accept – the          “The huge investment needed still                              see some involvement from the French
credit risk of larger cruise operators        makes it a sector with a very high bar to                         government in extending support to
and this explains why the larger rather       entry. Many have tried and, for whatever                          finance the export of cruiseships from
than the smaller operators have had           reason – including lack of economies-                             its yards.”
success in the ECA market. ECAs will          of-scale – have failed. Unless one can                               “Libya does not have quite the same
be very wary of contributing in any way       find an untapped niche that can em-                               disapprobation as Iran, for example,
to already strained national deficits and     ploy ships that can give some level of                            and the French government can be quite
will therefore have to apply a prudent        economy-of-scale, it is extremely dif-                            pragmatic when it comes to safeguard-
credit policy in assessing the under-         ficult for newcomers to access finance.                           ing the interests of national industry,”
lying credit risk of their borrowers,”        The cruise sector is becoming a two-tier                          says another London-based lawyer.
 says Hartley.                                sector, characterised by three or four big
   While banks are only lending to top        operators and a cluster of smaller opera-                         Outlook
credits, “you have got to be a large op-      tors and a wide gap between these two                             While the cruise market has rebounded
erator to achieve the economies-of-scale      groups,” he says.                                                 better than expected and the outlook for
in order to make a profit in this indus-         There is one new entrant on the hori-                          the sector is encouraging, it is still un-
try”, says Hartley. He does expect all cur-   zon. Libya’s General National Maritime                            clear as to how this will translate into
rent orders to be financed.                   Transport Co (GNMTC) has placed an                                newbuilding activity. “Shipyards are still
   A total of 19 cruiseships are currently    order with STX France for a Fantasia-                             facing a very uncertain future. The next
on order with European shipyards up           class cruise vessel with a capacity of                            12 to 24 months are going to be critical
to 2014, ordered by Carnival Corpora-         close to 4,000 passengers. The order                              for them,” says Hartley.
tion, RCC, Disney Cruise Line, NCL and        for the vessel, which costs in the region                            Nor is the cruise sector completely
luxury cruise operator Oceania, owned         of USD711 million, was signed on 30                               out of the woods, according to Nelson.
by Apollo Management. “I do not think         June and the ship is scheduled for de-                            “The outlook for the cruise industry
we will see cancellations of cruiseships      livery in December 2012.                                          seems to be reasonably strong, but the
such as we have seen in other shipping           Founded in 1975, GNMTC is a Liby-                              leisure industry is prone to economic
sectors, as cancellation in this sector is    an state-owned company that operates                              downturns,” he says. “If there is a sec-
potentially a very expensive exercise,”       a fleet of mostly tankers for crude oil,                          ond dip, the sector is likely to be pulled
says Hartley.                                 other oil products and liquified pe-                              down again.”                            n
                                              troleum gas (LPG), and owns a large
New market players                            refinery in Switzerland. GNMTC is not
Last year, California-based Utopia Resi-      a complete newcomer to the passenger
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