Alternative Solutions for Financing Cruise Ships
Shipping and the Law, Napoli, October 3rd, 2013
The total orderbook of Cruise Ships is approx USD 17 Billion. So how and by whom is this financed ?
We shall look at :
1)
2)
3)
4)
5)
Capital Markets, Finance Spectrum
The Bank Market
ECA Financing
Alternative Sources
Closing remarks
1
Financing Cruise Ships in a different world
Theoretically cruise companies have a number of financing options…but in reality only a couple of
solutions seem cost efficient in today’s environment
Private Equity
Public
Equity
Preferred
Shares
Mezzanine
Debt
High Yield
Debt
Secured
Debt
Market
Appetite
Limited
but increasing
Moderate – Market
Dependent
Moderate
Moderate
Moderate/High
Limited – in Current
Market
Cost
12 - 20%
decreasing
8 - 15%
6 – 12%
8 - 15%
6 - 12%
4 - 6%
Perpetual
Typically Perpetual
5 – 10 years
5 – 10 years
5 – 10 years
(plus balloon)
Yes – Typically
Maintenance
Covenants
Through Covenants
Term /
Maturity
3 – 7 years
(5 years typical)
Covenants
None
None
None
Varies
Yes – Typically
Incurrence
Covenants
Control
Varies, but normally
significant via SA
None
None
Through Covenants
Through Covenants
=> options depend on “tier” a company belongs to.
2
Today’s Capital Markets Conditions
 The global capital markets have been disrupted for some 4 years, with the banking system in crisis, consumer
spending collapsing, and general economic growth slowing to a standstill
– The shipping industry, and particularly the cruise sector, rely on all of these drivers
– Many investors have shied away from the shipping sector in general, causing equity market valuations
to fall and bond yields to rise
 Since 2011, however, no less than 24 shipping companies have completed at-the-market (ATM) equity issues,
rights offerings and block trades, signalling a return of demand for shipping investments for a total amount of
USD 6,4 bn (till end 2012).
– The only cruise equity issue since was NCL, which in Jan 2013 listed 12% of its shares at USD
477,6m.
 While asset security remains important to investors, there are some funds willing to evaluate junior positions and
the sale and leaseback market is relatively robust
– We are aware of two sale and lease back transactions in the cruise market in 2012, one involving a
Chinese institutions, the other one by Italian Banks.
3
Oxygen for the Cruise Industry
In 2012 & 2013 Cruise companies successfully tapped the (U.S) bond markets, which showed a healthy appetite :
•
Viking Cruises in October 2012 raised USD 250m at 8,5% (8,75% yield), coupon, unsecured, maturing October
2022 (10 years), Book runners Wells Fargo & Credit Suisse – Rating : B+/B3 – Spread : L+679. In August 2013 it
raised another USD 175m PIK Toggle notes with 5 years maturity and 8,875% yield
•
NCL in February 2013 raised USD 300m at 5% (5,125% yield) – Maturity Feb 2018 (5 years) – Bookrunners :
Deutsche Bank, Barclays, JP Morgan - Rating : BB-/B3 – Spread L+410
•
RCCL raised USD 650m, unsecured bonds in Nov 2012, Coupon 5,25%, Maturity Nov 2022 (10 years) – Spread
L+353 – Rating : BBM, BA1 – Bookrunners : Citigroup, JP Morgan
•
Carnival raised USD 500m unsecured notes in Nov 2012 – Maturity Nov 2017 (5 years) – Rating : A3 (Moudy) –
Downgraded June 2013 to Baa1
•
Oceania raised USD 300m secured term loan – Maturity 7 years – Rating : B2 – and Usd 75m, senior secured Usd
75m revolved, 5 years maturity – LGD 3,37% - Secured 3 vessels : Relatta, Nautica and Insignia – Corporate rating
B3 – Bookrunners : Deutsche Bank
4
Shipping Bank Debt Market
 According to Dealogic approx USD28.530bn was lent to Shipping companies in 1H2013 vs USD 50.248bn in 1H2008.
 The ‘flight to quality’ trend has continued and more banks (such as Danish Ship Finance, ING, C.I.T., ICBC and NordLB in shipping)
have opened again for senior lending. This has resulted in most banks chasing the same deals/clients (especially in Offshore).
 We have also begun to witness, although sporadically and at low volumes, the emergence of some opportunistic lending at houses
such as BTMU, NIBC, ABN Amro.
 Book-building deals are now emerging as tier 2 & 3 clients require an appointed bank to assist them extend their banking group.
 Major shipping houses, such as DnB NOR and Nordea and DVB, will now lend to new top tier clients. As competition has dried-up such
banks can fill a void on lucrative terms.
 Much speculation has been made regarding Asian, mainly Chinese, banks extending their lending beyond Asia. At this stage only
speculative as such banks have other priorities before extending their regional lending policy, unless of course a deal has inherent local
interest or necessity (i.e. financing required for vessels delivering from local yards). ICBC Lease (H.K.) is setting the pace !
 Import / export agencies are more focused on top tier names & facility structures (lower gearing) than previously.
 Nordea led a Euro 365m syndicated loan unsecured to RCCL, drawn early 2013, maturing July 2017, Libor +3% approx
 Overall, the message is that top tier names and ECA financings appeal to most lenders and most banks continue to de-leverage.
5
All Shipping banks can be categorized as follows:
(a) not lend at all (in view of need to reduce shipping book);
(b) lend only to core clients;
(c) lend only when to protect existing exposure (defensive lending);
(d) lend only domestically (mainly govt bailed out banks);
(e) out completely (banks that have officially exited ship finance); and
(f) opportunistic lending, i.e. cherry picking (open)
•
This will differ from country to country => ship-owners from countries with few ship-owners but good number of shipping banks (“ship
finance export-countries”) , such as Netherlands or France will be fine;
•
However, ship-owners in so called “ship finance import countries” (US, Greece, Norway) may struggle
6
7
Main issues for shipping banks (1)
-
When looking at the top 10 global shipping banks, 9 of these banks are large general banks, where shipping
may represent not more than 1 or 2% of the balance sheet. Within these large banks shipping has to compete
with other industries for capital
-
Minimise losses is crucial; if substantial losses start to occur in their existing book, management boards may
decide to exit shipping in order to create goodwill with shareholders, media and rating agencies for commercial
banks with a strong historical link to shipping (DnB, Nordea) this is unlikely to happen.
-
Note: if shipping is 1 or 2% of a large bank’s balance sheet, that bank can easily have a decent future without
shipping exposure; but if the shipping industry loses a number of these large banks (on previous page) as
lender, it does impact the future of shipping substantially.
-
Cruise not core to any bank, with exception of maybe DnB, Nordea and KfW. None-core means less appetite
and less focus. However, DnB and Nordea will only touch the top 3 players.
=>
“difficulty” obtaining financing across the board still very much the case.
8
Main issues for shipping banks (2)
Liquidity is in most banks not anymore the issue. Capital however is.
•
Basle II forces banks to increase its minimum required capital per transaction when security cover reduces
•
Reduced shipping values lead to requirement to invest more capital in existing book
•
This capital can then no longer be used for new business
•
If existing shipping book requires too much capital, internal support for shipping in larger banks will disappear,
especially with large write-offs in most banks.
•
Basle III already applied in U.S.A.: higher capital requirements; cyclical industries like shipping and cruise
proportionally over-affected. 3% leverage ratio (equity/total).
•
Cruise does not fit any pigeon hole (leisure nor shipping) and is not so liquid so no interest !
9
Export Credit Agency (“ECA”) Financing
 Overall, the message is that initially top tier names but now all cruise lines apply for ECA financings while most banks continue to deleverage.
 ECA Financing is supporting exports of locally produced goods.
 Governed world-wide by Standard OECD rules to avoid unfair competition.
 Linked to ship-yards, so for cruise industry, Finland, France, Germany & Italy are most relevant, Germany approx. Euro 1,5 bn per year for
cruise.
 Agencies called: Finnvera, Coface, Euler/Hermes and Sace, respectively.
 Pertains to newbuildings and/or significant conversions, such as lengthenings.
 Some basic rules:
1)
Always a commercial bank taking the same risk, albeit for a minimal amount.
2)
Funded or unfunded – ECA provides a guarantee that leads to capital relief at banks. Banks can fund cheaply under = unfunded.
If ECA provides financing also = funded.
3)
Max 80% advance ratio
4)
Max 80% guarantee ratio
5)
Max 12 year, straight-line amortization
6)
Guarantee premium to be paid upfront but, can be financed up to 80%.
Today ALL cruise newbuildings are financed under ECA cover.
10
Current finance market developments
•
Banks continue deleveraging, trying to reduce risk on balance sheet, and to improve capital ratio’s and/or deal with losses
•
As part of that process, banks have become very selective regarding new transactions:
•
•
–
Core clients; (in case of bailed-out banks) only domestic clients
–
Core sectors; ferry and cruise usually not considered core
–
Top tier credits; combined with,
–
More conservative leverage (60% maximum)
–
Ship-finance tends to lose out at larger institutions
Only a handful of banks (Kfw-Ipex e.g.) can still lend on an opportunistic basis, i.e. cherry pick the best opportunities from a
risk/reward point of view
Financing of second hand vessels has become virtually impossible, so as potential buyers for 2nd hand vessels cannot get finance,
market is blocked and top tier owners have to hang on to their tonnage and go for life extension.
•
Many cruise ship-owners (will) struggle to obtain finance – other capital sources required!
•
Reduced newbuilding
•
Operators of 2nd hand tonnage are disappearing, not only lack of finance but due to low rates of top tier owners to fill their new ships.
11
Alternative Sources of Finance – Some suggestions...
1. EXPORT CREDIT FINANCE
•
China and EU Exims are encouraged by government to become active again on a funded basis; will European Exims follow?
•
Limited-to-no funded exposure by ECA’s; just insured transactions – so still need for bank funding; becoming possible again
luckily in a limited way.
•
We believe that cruise companies will continue to turn to the ECAs when financing fleet growth.
•
Newbuildings are now easier to finance than second-hand tonnage, provided ECA’s step up to the plate
2. BOND MARKETS
•
The corporate market the bond market is currently a good alternative
•
Does requires shipping company to have a certain level of professional finance function/department
=> generally see a need for cruise companies to “elevate” their “financial” game in a “maturing” (slower-growth)
industry
12
Alternative Sources of Finance – Some suggestions...
3. SALE AND LEASEBACKS
•
Sale and leaseback transactions can help to restructure balance sheets by paying down debt or utilise the freed up capital to
bolster liquidity or even for targeted acquisitions
•
Still relatively competitive cost of funding compared to bonds and/or (private) equity issuance
4. PRIVATE EQUITY FUNDS
•
We do see a rising interest of private equity funds into ship finance but so far this has been more equity than finance with yield
requirements decreasing this may change.
13
Cruise Market: Tier 1 & Tier 2 cont’d
 Carnival Cruise line and RCCL have now on average 4 ships to be delivered annualy, which is down by approx. 25%
compared to pre-crisis figures.
 No cruise vessels have been contracted by MSC after this year delivery. Newcomer Viking is the surprise.
 Orderbook outlook:
 The present market and lower results of the big 4 do not make it likely that newbuilding orders will markedly increase.
 Low yields and high fuel cost are not an incentive to order more in general but pax line revolutionary vessels line NCL, Epic
and Breakaway as well as the Oasis class hence more newbuilding in this category. Carnival studying solutions and MSC
announcing tenders for new 4,000 pax design.
 Dual fuel will be the next step (Viking 3 or 4 ?)
14
Thank you for your attention
DOLFINANCE
4, avenue des Citronniers, ‘’Le Mirabel’’, 98000 Monaco
Tel : +377 97 70 67 00 – Fax : +377 97 70 67 01 – Email : info@dolfinance.mc