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 necessary.
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 matures.
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