The rating reflects our assessment of Viking's business risk profile as "weak" and our
assessment of the company's financial risk profile as "aggressive," according to our criteria.
Our assessment of Viking's business risk profile as weak reflects the company's relatively short
track record of stable EBITDA margins, and our belief that there is a high level of execution
risk related to the company's aggressive river fleet expansion plans (as well as its planned
entrance into the ocean cruise market) over the next few years. Nevertheless, we recognize that
the pace of Viking's fleet expansion plan is somewhat discretionary, given the relatively short
time frame between river vessel order and delivery (compared with ocean cruise ships). This, in
conjunction with long booking windows, should provide management some flexibility to manage
capacity increases over the next few years based on demand patterns. Our business risk
assessment also reflects Viking's leading position in the river cruise industry, which has been
growing in the mid-teens percent area in terms of passengers over the past several years, as
well as Viking's good revenue visibility given its long booking windows.
Our assessment of Viking's financial risk profile as aggressive reflects our expectation for
total leverage (adjusted for operating leases and charter fees) pro forma for the proposed notes
issuance and expected incremental ship financings, to remain above 5x over the next few years.
It also incorporates our expectation for EBITDA coverage of interest to remain in the mid- to
high-2x area. Although we expect significant EBITDA growth over the next few years, in
conjunction with required debt amortizations under ship financing agreements, we do not believe
this growth will be sufficient to offset the incremental debt to the extent that leverage will
improve meaningfully, particularly as investment in Viking's coastal cruise business begins to
ramp up. Our assessment of Viking's financial risk profile also considers the company's
substantial cash balances, a large portion of which we consider to be excess and that provide a
cushion in the event that demand patterns are meaningfully weaker than we anticipate.
Viking currently plans to add eight new river vessels each year between 2013 and 2016. Even
though we base our ratings on the assumption that this pace of expansion occurs, we believe the
company has some flexibility to scale back the pace of expansion based on the relatively short
time frame between order and delivery, as well as longer booking windows, when compared with
ocean cruising.The company will fund this expansion and its investment in the ocean cruise
business through the proceeds from the proposed notes, cash currently on hand, and secured ship
financings (equal to about75% to 80% of the cost). Assuming each new river vessel and ocean ship
is funded in this manner, based on current expansion plans, we expect this to add approximately
$1.4 billion in incremental debt by 2016. Nevertheless, we expect significant EBITDA growth as
new ships enter the fleet. Under this expansion plan, capacity will increase at an average of
over 20% per year through 2016, and we have assumed that EBITDA grows at a trajectory somewhat
higher than that.
Our performance expectations take into consideration the success that the company has had
during the initial fleet expansion, as six new longships have been launched so far this year,
and booking trends for 2013, including these ships, are solid. Still, we view the expansion plan
as aggressive. We believe net cruise revenue per passenger cruise day (a ratio of gross revenue,
excluding on board and other revenue, less direct costs, to the number of passengers carried,
multiplied by the number of days the ships were in service) will be pressured somewhat over the
next few years, given the substantial additional capacity. We have incorporated an expectation
that this measure grows only in the low-single-digit percent area, compared with the
low-double-digit percent growth we expect for 2012 and despite the much stronger pricing that
has been realized on the initial longships. We believe that Viking will maintain its load factor
on its river vessels in the mid-90% area and will flex its pricing to achieve this, if
Our forecast also incorporates our expectation that the company will continue to make
incremental investments in marketing and overhead, as well as investments in its ocean cruise
operation (planned to launch in 2015), which will likely weigh on EBITDA margins. However, we
expect operating expense growth to abate somewhat over the next few years, since longship class
vessels operate at a much higher EBITDA margin than older class vessels, and given our
expectation Viking will realize some economies of scale from operating a larger fleet. Based on
these factors, we anticipate EBITDA margins will gradually improve to the high-teens over the
next few years from the low- to mid-teens currently. Under these performance assumptions, we
expect debt to EBITDA to remain in the low- to mid-5x range and anticipate cash balances will
remain sizable. Additionally, while we have assumed that the pace of fleet expansion is aligned
with current plans (eight per year). We believe the company has some flexibility to slow this
expansion in the event that demand patterns are weaker than anticipated.
Viking is a leading river cruise operator, marketing and operating 30 river vessels as of
June 30, 2012. Although the company's cruises are primarily in Europe, Viking also offers
cruises in China, Egypt, Vietnam, Cambodia, Russia, and Ukraine. The majority of Viking's
customers are from North America, and the company has been focusing on increasing its customer
base from the U.K. and Australia as well. Compared with ocean cruising, river cruising generally
has smaller ships and fewer passengers, allowing for more personalized experiences and the
ability to dock in certain cities inaccessible by ocean ships.
Based on its likely sources and uses of cash over the next 12 to 18 months, and
incorporating our performance expectations, Viking has a "strong" liquidity profile, accordinto
our criteria. Our assessment of Viking's liquidity profile incorporates the following
assumptions and expectations:
-- We expect the company's sources of cash to exceed its uses over the next 12 to 18 months
by over 1.5x.
-- We also expect that sources of cash would exceed uses of cash even if forecasted EBITDA
were to decline by 30%.
Notwithstanding our expectation for EBITDA growth, given Viking's aggressive growth plan, we
expect the company to rely on internal cash and incremental ship financings to fund ship
development, other capital expenditures, and significant levels of debt amortizations related to
individual ship financing agreements. However, we believe Viking will maintain its good advance
collection rate and successfully obtain additional ship financings. Pro forma for the proposed
notes issuance, the company will have no meaningful debt maturities beyond scheduled
amortization payments until 2018, when one of Viking's individual ship financing agreements
For the complete recovery analysis, please see the recovery report on Viking to be published
as soon as possible following this release, on RatingsDirect.
The stable outlook reflects our expectation for significant EBITDA growth to offset
substantial incremental debt over the next few years, which should result in credit measures
remaining in line with the rating.
We could consider revising the outlook to positive or raising the ratings once the company
demonstrates more of a track record of managing meaningful increases in capacity, resulting in
sustained EBITDA margin improvement and continued excess cash flow generation.
We could revise the outlook to negative or lower the ratings if EBITDA growth is
meaningfully less than we anticipate, resulting in leverage rising to above 6x, or if the
company is unable to successfully manage weaker-than-expected demand growth.
Related Criteria And Research
-- Methodology: 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
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008
-- 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
Viking Cruises, Ltd.
Corporate Credit Rating B+/Stable/--
US$250 mil sr unsecd nts due 2022 B+
Recovery Rating 4