(The following statement was released by the rating agency)
Oct 09 - Overview
-- U.S. river cruise operator Viking Cruises Ltd. plans to issue $250 million in seniornotes.
-- The company will primarily use the proceeds to invest in new river vessels and expandinto coastal cruising, to fund the buyout of minority shareholders and a dividend to Viking'sparent, and for general corporate purposes.
-- We are assigning Viking our 'B+' corporate credit rating, and the proposed senior notesour 'B+' issue-level rating and '4' recovery rating.
-- The stable outlook reflects our expectation for significant EBITDA growth from the rapidexpansion of the company's fleet to largely offset incremental debt from this transaction andship financings over the next few years, resulting in credit measures remaining in line with therating.
On Oct. 9, 2012, Standard & Poor's Ratings Services assigned Woodland Hills, Calif.-basedriver cruise operator Viking Cruises Ltd. its 'B+' corporate credit rating. The rating outlookis stable.
At the same time, we assigned Viking's proposed $250 million senior notes due 2022 our 'B+'issue-level with a recovery rating of '4', indicating our expectation for average (30% to 50%)recovery for lenders in the event of a payment default.
Viking plans to use the proceeds from the notes to help invest in new river vessels, toexpand into coastal cruising, to buy out minority shareholders, to fund a dividend to Viking'sparent, and for general corporate purposes and transaction fees and expenses.
The rating reflects our assessment of Viking's business risk profile as "weak" and ourassessment 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 shorttrack record of stable EBITDA margins, and our belief that there is a high level of executionrisk related to the company's aggressive river fleet expansion plans (as well as its plannedentrance into the ocean cruise market) over the next few years. Nevertheless, we recognize thatthe pace of Viking's fleet expansion plan is somewhat discretionary, given the relatively shorttime frame between river vessel order and delivery (compared with ocean cruise ships). This, inconjunction with long booking windows, should provide management some flexibility to managecapacity increases over the next few years based on demand patterns. Our business riskassessment also reflects Viking's leading position in the river cruise industry, which has beengrowing in the mid-teens percent area in terms of passengers over the past several years, aswell as Viking's good revenue visibility given its long booking windows.
Our assessment of Viking's financial risk profile as aggressive reflects our expectation fortotal leverage (adjusted for operating leases and charter fees) pro forma for the proposed notesissuance 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- tohigh-2x area. Although we expect significant EBITDA growth over the next few years, inconjunction with required debt amortizations under ship financing agreements, we do not believethis growth will be sufficient to offset the incremental debt to the extent that leverage willimprove meaningfully, particularly as investment in Viking's coastal cruise business begins toramp up. Our assessment of Viking's financial risk profile also considers the company'ssubstantial cash balances, a large portion of which we consider to be excess and that provide acushion 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. Eventhough we base our ratings on the assumption that this pace of expansion occurs, we believe thecompany has some flexibility to scale back the pace of expansion based on the relatively shorttime frame between order and delivery, as well as longer booking windows, when compared withocean cruising.The company will fund this expansion and its investment in the ocean cruisebusiness through the proceeds from the proposed notes, cash currently on hand, and secured shipfinancings (equal to about75% to 80% of the cost). Assuming each new river vessel and ocean shipis 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 asnew ships enter the fleet. Under this expansion plan, capacity will increase at an average ofover 20% per year through 2016, and we have assumed that EBITDA grows at a trajectory somewhathigher than that.
Our performance expectations take into consideration the success that the company has hadduring 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 planas 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 thenext few years, given the substantial additional capacity. We have incorporated an expectationthat this measure grows only in the low-single-digit percent area, compared with thelow-double-digit percent growth we expect for 2012 and despite the much stronger pricing thathas been realized on the initial longships. We believe that Viking will maintain its load factoron its river vessels in the mid-90% area and will flex its pricing to achieve this, ifnecessary.
Our forecast also incorporates our expectation that the company will continue to makeincremental investments in marketing and overhead, as well as investments in its ocean cruiseoperation (planned to launch in 2015), which will likely weigh on EBITDA margins. However, weexpect operating expense growth to abate somewhat over the next few years, since longship classvessels operate at a much higher EBITDA margin than older class vessels, and given ourexpectation Viking will realize some economies of scale from operating a larger fleet. Based onthese factors, we anticipate EBITDA margins will gradually improve to the high-teens over thenext few years from the low- to mid-teens currently. Under these performance assumptions, weexpect debt to EBITDA to remain in the low- to mid-5x range and anticipate cash balances willremain sizable. Additionally, while we have assumed that the pace of fleet expansion is alignedwith current plans (eight per year). We believe the company has some flexibility to slow thisexpansion in the event that demand patterns are weaker than anticipated.
Viking is a leading river cruise operator, marketing and operating 30 river vessels as ofJune 30, 2012. Although the company's cruises are primarily in Europe, Viking also offerscruises in China, Egypt, Vietnam, Cambodia, Russia, and Ukraine. The majority of Viking'scustomers are from North America, and the company has been focusing on increasing its customerbase from the U.K. and Australia as well. Compared with ocean cruising, river cruising generallyhas smaller ships and fewer passengers, allowing for more personalized experiences and theability 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, andincorporating our performance expectations, Viking has a "strong" liquidity profile, accordintoour criteria. Our assessment of Viking's liquidity profile incorporates the followingassumptions and expectations:
-- We expect the company's sources of cash to exceed its uses over the next 12 to 18 monthsby over 1.5x.
-- We also expect that sources of cash would exceed uses of cash even if forecasted EBITDAwere to decline by 30%.
Notwithstanding our expectation for EBITDA growth, given Viking's aggressive growth plan, weexpect the company to rely on internal cash and incremental ship financings to fund shipdevelopment, other capital expenditures, and significant levels of debt amortizations related toindividual ship financing agreements. However, we believe Viking will maintain its good advancecollection rate and successfully obtain additional ship financings. Pro forma for the proposednotes issuance, the company will have no meaningful debt maturities beyond scheduledamortization payments until 2018, when one of Viking's individual ship financing agreementsmatures.
For the complete recovery analysis, please see the recovery report on Viking to be publishedas soon as possible following this release, on RatingsDirect.
The stable outlook reflects our expectation for significant EBITDA growth to offsetsubstantial incremental debt over the next few years, which should result in credit measuresremaining in line with the rating.
We could consider revising the outlook to positive or raising the ratings once the companydemonstrates more of a track record of managing meaningful increases in capacity, resulting insustained EBITDA margin improvement and continued excess cash flow generation.
We could revise the outlook to negative or lower the ratings if EBITDA growth ismeaningfully less than we anticipate, resulting in leverage rising to above 6x, or if thecompany 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 Ratings List New Rating Viking Cruises, Ltd. Corporate Credit Rating B+/Stable/-- Senior Unsecured US$250 mil sr unsecd nts due 2022 B+ Recovery Rating 4