Wednesday, February 25, 2009
Rajesh Joshi - Wednesday 25 February 2009
ROYAL Caribbean has issued a veiled warning that securing committed financing for the ambitious pair of Oasis-class cruise ships expected to debut this year is “not assured”.
The company revealed in its annual report filed with US regulators that it is trying to convince the Finnish export credit agency to increase the guarantee level on the Oasis project from the existing 80%, and in fact get the agency itself to lend some money.
Noting the “turmoil in credit and capital markets”, Royal Caribbean said its situation has been compounded by a further downgrade of its credit rating by Standard & Poor’s in January this year.
This caution is thrown in relief by the situation at Royal Caribbean’s cross-town rival Carnival.
Carnival has frozen its dividend for 2009, and hopes to use the resultant savings of $1.3bn, together with ample liquidity and expected healthy cash-flow, to avoid having to borrow money from banks or capital markets in today’s tough environment to finance its own portfolio of 17 newbuildings on order.
Royal Caribbean, too, has eschewed dividends, curtailed “non-shipbuild capital expenditures”, and put further newbuildings on hold. However, the company admits it needs bank support.
Royal Caribbean said it is “working with various financial institutions to secure financing for the Oasis-class ships”.
The company said it may elect to fund contractual obligations through “other means” if current conditions in the capital markets improve. The company’s share price was $6.84 on Monday, compared with a 52-week high of $38.70.
The company has $2.6bn in contractual obligations due in 2009.
Royal Caribbean’s newbuilding roster comprises six ships. Two of them are for the 5,400-passenger Oasis-class for Royal Caribbean, described as the “biggest ships ever built”.
The first of these, the Oasis of the Seas, is scheduled for delivery from STX Finland this autumn, with the sistership Allure of the Seas due late next year.
The other four newbuildings are Solstice-class ships for Celebrity Cruises, at Meyer Werft.
The total price of the six ships is $6.5bn, of which Royal Caribbean had paid $540m as of December 31, 2008. Anticipated capital expenditures will be $2.1bn for 2009, $2.2bn for 2010, $1bn for 2011, and $1bn for 2012.
Carnival’s 17-ship newbuilding portfolio is priced at $9.1bn, of which $719m was paid through to November 30, 2008. The remaining costs are scheduled at $2.6bn, $2.8bn, $1.9bn and $1bn in 2009, 2010, 2011 and 2012, respectively.
Royal Caribbean has commitments for financing guarantees from Finnvera, the export credit agency of Finland, for 80% of the financed amount.
The annual report states “We are working with the relevant export credit agencies and various financial institutions to obtain committed financing for Oasis of the Seas. This includes exploring opportunities to increase the guarantee level and obtain partial funding support from the relevant export credit agencies.
“Although we believe that we will secure committed financing for these ships before their delivery dates, there can be no assurance that we will be able to do so or that we will do so on acceptable terms.”
Celebrity’s Solstice-class quartet has committed bank financing, but the financing guarantees from Euler Hermes Kreditrersicherungs, the German export credit agency, account for 95% of the financed amount.
Overall, Royal Caribbean notes: “In response to the current environment and in light of our funding needs, we have increased our focus on preserving cash and improving our liquidity.”
A cost-cutting programme unveiled in the summer of 2008, before the global financial crash but caused immediately by the sky-high fuel prices prevailing at the time, is said to be on track, with the annualised cost-savings of $125m expected to come through.
Royal Caribbean remains confident that its usual funds-flow mechanisms would see it through, but even this is tempered with caution.
“While we anticipate that cash flows from operations, current available credit facilities, current financing arrangements and those that we expect to obtain will be adequate to meet our capital expenditures and debt repayments over the next 12-month period, there can be no assurance that this will be the case,” the annual report notes.