Business Context and Reporting Period
This Form 8-K, filed on May 5, 2020, by Norwegian Cruise Line Holdings Ltd. (NCLH), addresses the severe impact of the COVID-19 pandemic on the company's operations and liquidity. The report details a voluntary suspension of all cruise voyages across its three brands, extended through June 30, 2020, and a CDC "No Sail Order" potentially lasting until July 24, 2020. The filing updates the company's 2019 Form 10-K to include a "Liquidity and Management's Plan" and discloses that the independent auditor has reissued its report to include a paragraph noting substantial doubt about the Company's ability to continue as a going concern.
Key Financial Metrics and Liquidity
- Debt Obligations: Approximately $6 billion in total long-term debt as of December 31, 2019.
- Revolving Credit Facilities: Borrowed the full $1.55 billion available under two revolving credit facilities in March 2020.
- Advanced Ticket Sales: $1.8 billion as of March 31, 2020, including $850 million for cancelled voyages through June 30, 2020, and $350 million for the remainder of 2020.
- Capital Expenditure Reductions: Identified approximately $515 million in reductions ($345 million from non-newbuild and $170 million from newbuild payments).
- Goodwill and Tradenames: Provisional impairment write-off estimated between $1.5 billion and $1.7 billion (assessment pending completion).
- Profitability Outlook: Management expects to report a net loss on both U.S. GAAP and adjusted bases for the quarter ended March 31, 2020, and the full year 2020.
Material Changes and Operational Impact
The company has completely suspended operations for the first time in its history. All 28 ships are in safe haven, and all passengers were disembarked by March 28, 2020. Credit ratings have been downgraded by major agencies: Moody's lowered NCLC's ratings to Ba2 and B1 in March 2020, and S&P Global downgraded the issuer rating to BB- in April 2020. Advanced bookings for the remainder of 2020 are meaningfully lower than the prior year with pricing down mid-single digits. Approximately half of guests who have contacted the company regarding cancelled voyages have requested cash refunds rather than future cruise credits.
Guidance, Outlook, and Risks
Management's Plan: NCLH is pursuing a strategy to raise at least $1 billion in financing by June 30, 2020, through public or private equity and debt markets. The company has secured amendments to certain export-credit backed facilities providing approximately $385 million in incremental liquidity and is seeking further deferrals totaling approximately $1 billion. Cost-cutting measures include a 20% salary reduction for shoreside staff, a hiring freeze, and furloughing approximately 20% of shoreside employees through July 31, 2020.
Risks and Contingencies:
- Going Concern: Substantial doubt exists regarding the company's ability to continue as a going concern without additional financing.
- Litigation: Three class-action lawsuits and investigations by the Florida Attorney General and other agencies regarding COVID-19 disclosures and marketing.
- Refund Obligations: Significant cash outflows may be required for refunds if guests reject future cruise credits.
- Credit Card Reserves: Processors may require the company to post collateral or maintain reserves due to increased chargebacks, potentially impacting liquidity.
- Impairment: Final impairment charges for goodwill and tradenames could exceed the provisional $1.5–$1.7 billion estimate.
Investor Verification Checklist
- Verify the status and terms of the anticipated $1 billion financing transaction required by June 30, 2020.
- Monitor the percentage of guests requesting cash refunds versus accepting future cruise credits to assess cash outflow risks.
- Track the final outcome of the goodwill and tradename impairment analysis for the first quarter of 2020.
- Review updates on the CDC No Sail Order expiration and the resumption of port access globally.
- Assess the progress of debt covenant amendments and the potential for cross-default triggers if covenants are breached.