TEXT - S&P raises NCL Corp

Fri Jan 18, 2013 3:06pm EST

Related Topics

Overview
     -- U.S.-based cruise operator NCL Corp. Ltd. has announced the completion 
of the IPO of its parent company's common stock.
     -- The IPO, not including the underwriters' overallotment, will generate 
$447 million in gross proceeds, which will be used for debt repayment and IPO 
expenses.
     -- We are raising our corporate credit rating on NCL to 'BB-' from 'B+'.
     -- The stable outlook reflects our belief that NCL will sustain credit 
measures that are in line with the current rating over the intermediate term.
 
Rating Action
On Jan. 18, 2013, Standard & Poor's Ratings Services raised its corporate 
credit rating on Miami, Fla.-based cruise operator NCL Corp. Ltd. to 'BB-' 
from 'B+'. We removed the ratings from CreditWatch, where they were placed 
with positive implications on Jan. 9, 2013. The outlook is stable.

At the same time, we raised the issue-level rating on the first-lien senior 
secured notes due 2016 one notch to 'BB+' from 'BB'. The recovery rating on 
this debt remains '1', indicating our expectation for very high (90% to 100%) 
recovery for noteholders in the event of default.

We also raised the issue-level rating on the senior notes due 2018 one notch 
to 'BB-' from 'B+' and revised the recovery rating on this debt to '3' (50% to 
70% recovery expectation) from '4' (30% to 50% recovery expectation). Recovery 
prospects for the 2018 notes have improved enough to warrant an upward 
revision in the recovery rating following anticipated debt repayment from the 
IPO proceeds.

Rationale
The action follows the completion of the company's IPO of common stock, which 
generated $447 million in gross proceeds not including the underwriters' 
overallotment, which will be used for debt repayment. This will 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 high-4x area from the high-5x area previously, and our 
expectation for funds from operation (FFO) to total adjusted debt will improve 
to around 16% in 2013 from the low-teens percentage area previously. In 
addition, we believe that EBITDA coverage of interest expense will improve to 
about 4x 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 debt repayment from IPO proceeds 
would represent a good cushion compared 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 the 'BB-' rating on NCL.

The 'BB-' corporate credit rating on Miami, Fla.-based NCL Corp. Ltd. reflects 
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 a "strong" 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 1.5x. 
     -- We expect net sources to be positive, even if EBITDA performance is 
30% 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 a 
good 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 
$447 million in gross 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.

Recovery analysis
We plan to publish a full recovery report on NCL as soon as practical 
following this release.

Outlook
The stable outlook reflects our expectation that lease and port 
commitment-adjusted debt to EBITDA in 2013 will improve to the high-4x area 
and funds from operation (FFO) to total adjusted debt will improve to around 
16% in 2013, which are good compared with thresholds for debt to EBITDA of 
5.5x and FFO to total debt of 15% that we believe are in line with the current 
'BB-' rating.

A one notch upgrade in the corporate credit rating on NCL could occur if we 
become confident that the company can successfully absorb additional capacity 
in the fleet over the next few years and sustain debt to EBITDA in the low-4x 
area and FFO to total debt around 20%. We could lower ratings if we believe 
NCL will maintain debt to EBITDA above 5.5x and FFO to debt below 15%.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 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

Upgraded; Recovery Rating Revision
                                        To                 From
NCL Corporation Ltd.
 Corporate Credit Rating                BB-/Stable/--      B+/Watch Pos/--
 Senior Secured                         BB+                BB/Watch Pos
   Recovery Rating                      1                  1
 Senior Unsecured                       BB-                B+/Watch Pos
   Recovery Rating                      3                  4
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