TEXT - S&P may raise NCL Corp Ltd
Overview -- U.S.-based cruise operator NCL Corp. Ltd. has announced the launch of an IPO of its parent company's common stock. -- The company expects the IPO, not including the underwriters' overallotment, to generate approximately $370 million in net proceeds, which would be used for debt repayment. -- We are placing our ratings on the company, including the 'B+' corporate credit rating, on CreditWatch with positive implications. -- We will monitor NCL's progress toward completing the IPO in order to resolve the CreditWatch listing. Rating Action On Jan. 9, 2013, Standard & Poor's Ratings Services placed its ratings on Miami, Fla.-based cruise operator NCL Corp. Ltd., including the 'B+' corporate credit rating, on CreditWatch with positive implications. In the event NCL completes its proposed IPO, we expect to take the following rating actions: -- We will raise the corporate credit rating one notch to 'BB-' from 'B+'. -- We will raise the issue-level rating on the first-lien senior secured notes due 2016 one notch to 'BB+' from 'BB'; the recovery rating will remain '1'. -- We will raise the issue-level rating on the senior notes due 2018 one notch to 'BB-' from 'B+' and revise the recovery rating on this debt to '3' from '4'. We anticipate that recovery prospects for the notes will improve enough to warrant an upward revision in the notes recovery rating following anticipated debt repayment from the IPO proceeds. Rationale The action follows the company's amended S-1 filing yesterday, which commences the active marketing period for a proposed IPO of NCL's common stock. The company anticipates the IPO, not including the underwriters' overallotment, to generate approximately $370 million in net proceeds, which would be used for debt repayment. The CreditWatch positive listing on the company's existing 'B+' corporate credit rating reflects the prospects that NCL may complete the IPO over the near term. This would result in a significant reduction in debt and a moderate decrease in interest expense, and an improved financial risk assessment on the company. Following the IPO, our expectation for lease and port commitment-adjusted debt to EBITDA in 2013 will improve to the low-5x area from the high-5x area previously, and our expectation for funds from operation (FFO) to total adjusted debt in 2013 will improve to around 15% in 2013 from the low-teens percentage area previously. In addition, we believe that EBITDA coverage of interest expense will improve to the high-3x area in 2013. These leverage and coverage measures would be in line with an "aggressive" financial risk assessment, in our view, compared with a "highly leveraged" financial risk assessment previously. Additionally, anticipated leverage measures in 2013 after the IPO would be in line with the 5.5x threshold for debt to EBITDA and the 15% threshold for FFO to total debt that we believe are in line with a one notch higher 'BB-' rating on NCL. Following the completion of the IPO, a one notch higher 'BB-' corporate credit rating on Miami, Fla.-based NCL Corp. Ltd. would reflect Standard & Poor's Ratings Services' assessment of the company's financial risk profile as "aggressive" and our assessment of its business risk profile as "fair," according to our criteria. Our assessment of NCL's business risk profile as fair is based on its position as the third largest cruise operator in the North American market (behind Carnival Corp. and Royal Caribbean Cruises Ltd.), significant capital requirements to fund new ship building, an inability to pull back spending once a ship order is committed, and the cruise industry's sensitivity to the economic cycle. Management's success in executing operating improvements over the past few years partly offsets these risk factors. We believe the cruise sector has, to a large extent, recovered from the impact of the Costa Concordia grounding and should experience low-single-digit net yield growth in 2013. We believe NCL's future bookings pertaining to 2013 itineraries are pricing better compared with the prior-year period. For 2013, we have incorporated into the ratings an expectation of a low-single-digit increase in net revenue yield and a low-teen percentage EBITDA increase factoring in capacity growth due to the scheduled April 2013 delivery of Norwegian Breakaway. Downside risks to our performance expectation for NCL stem primarily from slowing economic growth and sovereign debt issues in Europe. In the first nine months of fiscal 2012, EBITDA increased about 8% as capacity and net yield increased 1.5% and 1.4%, respectively, and net cruise costs per capacity day decreased 1.3%. As of Sept. 30, 2012, our measure of NCL's total lease and port commitment adjusted debt to EBITDA was 6x and EBITDA interest coverage was in the mid-2x area. Based on our current operating expectations, we believe total lease and port commitment adjusted debt to EBITDA was just under 6x at the end of 2012. Liquidity Based on its likely sources and uses of cash over the next 12 to 18 months and incorporating our performance expectations, NCL has an "adequate" liquidity profile, according to our criteria. Our assessment of NCL's liquidity profile incorporates the following expectations and assumptions: -- We expect sources of liquidity (including cash and facility availability) over the next 12 to 18 months to equal or exceed uses by 1.2x. -- We expect net sources to be positive, even if EBITDA performance is 15% below expectations over the next 12 months. -- There are several covenants NCL must maintain. The debt service coverage covenant includes high debt amortization payments and requires a level greater than 1.25x, or the company must maintain free liquidity defined as cash balances plus available revolver capacity of greater than $100 million. NCL also must maintain net funded debt to total capitalization under 70% and net funded debt to total assets under 70%. We expect NCL to sustain an adequate cushion relative to covenant levels over the intermediate term. -- NCL has sound relationships with its banks, in our assessment, and a satisfactory standing in credit markets. NCL's liquidity sources include cash balances of $69 million as of Sept. 30, 2012, and availability of $604 million under its revolving credit facilities. Beginning Oct. 28, 2010, revolver commitments are reduced by $47 million on a semiannual basis. We expect that NCL will generate more than $500 million in operating cash flow in 2013 and 2014. In addition, the company will use the anticipated $370 million in net IPO proceeds to prepay an aggregate of $55.6 million under its various credit facilities, pay $79.7 million to Genting Hong Kong Ltd. as part of the Norwegian Sky purchase agreement, redeem $122.5 million in aggregate principal of the company's $350 million senior notes due 2018, and repay other debt balances and expenses related to the IPO. We currently expect high amortization payments (related to various loans and credit facilities) totaling more than $600 million in the aggregate in 2013 and 2014 to be met with internal cash flow and revolver borrowings. NCL expects capital expenditures to be $830 million in 2013 and $712 million in 2014, mostly for new ship deliveries. NCL has committed export financing arrangements in place to fund the company's ship deliveries in 2013 and 2014. CreditWatch We will monitor NCL's progress toward completing the proposed IPO in order to resolve the CreditWatch listing. In the event NCL completes its proposed IPO, we expect to take the following rating actions: -- We will raise the corporate credit rating one notch to 'BB-' from 'B+'. -- We will raise the issue-level rating on the first-lien senior secured notes due 2016 one notch to 'BB+' from 'BB'; the recovery rating will remain '1'. -- We will raise the issue-level rating on the senior notes due 2018 one notch to 'BB-' from 'B+' and revise the recovery rating on this debt to '3' from '4'. We anticipate that recovery prospects for the notes will improve enough to warrant an upward revision in the notes recovery rating following anticipated debt repayment from the IPO proceeds. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed; CreditWatch Placement To From NCL Corporation Ltd. Corporate Credit Rating B+/Watch Pos/-- B+/Stable/-- Senior Secured BB/Watch Pos BB Recovery Rating* 1 1 Senior Unsecured B+/Watch Pos B+ Recovery Rating* 4 4 *Standard & Poor's does not place its recovery ratings on CreditWatch; however, this does not preclude our recovery assessment from potentially changing in the future.
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