Cruise line businesses were no exception when it came to facing the wrath of Covid-19. Due to the situation becoming extremely brutal, the Centers for Disease Control and Prevention (CDC) intervened and extended the no sail order through September 2020. This order subjugates to suspend passenger operations on cruise ships with the capacity to carry a minimum of 250 passengers and crew in waters under U.S. jurisdiction.
Lofty hopes: All set for a new record
The Norwegian Cruise Line Holdings Ltd (NCLH) is a business that operates under three brands, namely the Norwegian Cruise Line, Oceania Cruises, and Regent Seven Seas Cruises. The company holds a combined fleet of 28 ships and these brands offer itineraries to more than 490 destinations worldwide. For the first two months of 2020, Norwegian recorded a 7% rise in capacity and the ships sailed at full prices that were higher than the previous year. It appeared all was well and expectations for the year were groundbreaking considering the consistency in topline growth since the financial crisis back in 2008.
Headwinds
Global economies were stunned with the outbreak of the coronavirus that has diminished mobility in people’s everyday life due to Covid-19 being a communicable disease with high mortality rates. As with the broader spectrum of the leisure industry, NCLH experienced a rapid and significant impact on its core business with short to near term demand plummeting with an elevated rate of cancellations for existing bookings. Due to ships having a high fixed cost which will eventually have a bearing on Norwegian’s bottom line and resulting in major cash burn the company was deep-diving into options on how to stay afloat to ensure the business stays relevant for the post-Covid-19 era.
Plan of Action: Covid-19
A: Cutbacks in operational cost
Norwegian is in the process of transitioning the company’s fleet to cold layup as the uncertainty of when operations can commence is vague which indicates that short term recovery is out of the window. In line with that, NCLH significantly reduced their marketing expense for the first half of the year and introduced a temporarily shortened work week and reduced work hours with commensurate 20% salary reduction for shoreside team members. In addition, the cruise operator implemented a company-wide hiring freeze.
B: Debt rollovers and reduced capital expenditure provide adequate breathing space
Rollovers
- NCLH has deferred payments to Hermes, the official export credit agency. The payment deferred is approximately $385Mn and is to be repaid in eight equal semi-annual installments following the Debt Holiday (which is expected to end in Apr 2021) and is currently finalizing documentation for the deferral of the remaining approximately $155Mn of ECA-backed payments through March 31, 2021, with its other ECA lenders.
- NCLH secured a 12M deferral related to the Term Loan A and Norwegian Jewel term loan. The amount deferred is approximately $150Mn and is expected to be repaid 25% per year in equal installments following the deferral period with any outstanding balance paid in full at maturity.
- Extended $230Mn Pride of America term loan by one year to January 2022.
- Extended $675Mn Norwegian Epic revolving credit facility to March 2022.
In addition to this improvement in the debt maturity profile owing to NCLH being successful in obtaining deferrals from their lenders, the company has reclassified $1.4Bn of debt to long term debt which was originally classified as a current liability.
CAPEX slashed
- Approximately 65% reduction of non-newbuild capital expenditures for the remainder of 2020.
- Approximately $170Mn in expected deferred capital expenditures for newbuild related payments through March 31, 2021. Norwegian is currently finalizing the documentation process. Once processed, the company does not expect any newbuild related payments to have an impact on liquidity until April 2021.
C. Norwegian raises over $2Bn to weather the storm
NCLH has raised over $2Bn in a mix of debt and equity and has secured funding to operate for the next 12 months, even considering zilch in revenue. Below is a breakdown of the newly raised capital infusion.
| Source | Amount |
| New equity offering | $400 million |
| New debt offerings | $1.43 billion |
| Funding from private equity firm L Catterton | $400 million |
| Total | $2.23 billion |
Source: Company filings
The company estimates its monthly cash burn to be on average in the range of approximately $120Mn to $160Mn per month during the suspension of operations. The newly raised capital provides a new lease of life for Norwegian. Nonetheless, the “million-dollar question” remains when will cruise lines be set for sail once again. The loyalty of cruise line customers and the rise in booking for 2021 even amid the pandemic displays a silver lining for a battered industry.
Acclimatizing the “new normal”
Despite operations being ceased, NCLH is preparing itself for a post-Covid-19 era of sailing. The company is working closely with leading public health experts to oversee the development of enhanced cruise line health and safety standards. Covid-19 has triggered the deepest global recession in decades and the global cruise industry is expected to see its revenue in 2020 fall by at least 50%.
In line with these projections, we expect the next few quarters will be challenging for NCLH. However, investors need to look beyond the recessionary period to gauge the upside of NCLH stock. IMF projects the world economy to grow by 5.4% in 2021 supported by trillion-dollar stimulus packages and expansionary monetary policy decisions. Advanced economies such as the U.S. are projected to grow by 4.8% in 2021, which is a boost up for the cruise line industry as its growth depends on the rise in the disposable income of consumers.
Takeaway: NCLH stock is undervalued
Fiscal 2020 will be an appalling year for Norwegian and other cruise liners. However, beyond 2020 seems promising. Once the economy finds traction and is geared up for the new normal, consumers will start traveling again in 2021, supported by the low travel prices, pent up demand, robust government stimulus and hopefully an available vaccine (which will uplift consumer confidence). The stock has dropped 74% YTD. It has more than doubled off its 52-week low above $7 set in mid-March. However, the stock is still undervalued considering a potential revenue of $6 billion in 2021, which is just shy of what was achieved in 2019.
The growth in the cruise line industry will not occur instantaneously. Nevertheless, beyond a certain time period considering the pipeline of business objectives of NCLH, the company certainly has promise. The market is presenting an opportunity to buy the stock at a bargained price due to the short-term view of market participants on the cataclysmic pandemic.
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**Disclosure: Dilantha De Silva, the founder of Beat Billions, is long NCLH.
