January 9, 2013 / 6:20 PM / 5 years ago

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.

Our Standards:The Thomson Reuters Trust Principles.
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