Moody's cites firm's weak earnings and financial profile after it buys two new vessels for HK$14.7b with option for a third
Star Cruises, the world's third-largest luxury-cruise operator, had its debt rating further downgraded by Moody's Investors Service after the company announced a HK$14.66 billion order for two new cruise ships with a HK$6.98 billion option for a third. Standard & Poor's put the firm on negative watch.
Star Cruises is increasingly taking on debt to renew its fleet with larger, more luxurious vessels in an era of soaring fuel costs and intense pricing competition from industry giants Carnival Cruise Lines and Royal Caribbean International.
Ordering the new vessels, twice the size of Star Cruises' largest ships in Asia, 'is a quantum leap for us', a spokesman said. 'We feel very strongly that these new builds will generate healthy returns.'
The two new 150,000-tonne ships, ordered by subsidiary Norwegian Cruise Lines and due for delivery in the fourth quarter of 2009 and the second quarter of 2010, each features 4,200 lower berths. The company's fleet had 22 vessels either in service or on order before the latest purchases.
Star Cruises did not announce financing details but a spokesman said new builds were typically funded by 80 per cent debt, mainly in the form of bank loans, and 20 per cent equity. Analysts expected the firm to sell older ships.
Moody's issued a B1 junk credit rating on Star Cruises, four notches below investment grade, down from Ba3. The agency indicated the lower rating was still one notch higher than it would be without the potential support of the company's controlling shareholders, Malaysia's Genting group and the family of Lim Kok Thay.
'They may dispose of some of their older ships with fewer berths because the younger vessels with larger berths will be more competitive,' said Moody's Asia-Pacific analyst Kaven Tsang. 'We expect this is something they need to do, but their performance has been somewhat weaker than expected because of the challenging operating environment - that coupled with a weaker financial profile.'
Star Cruises' shares, which have fallen about 30 per cent this year, fell 2.67 per cent to close at HK$1.46 yesterday. Shares in Norwegian shipbuilder Aker Yards, which won the orders, closed up 7.6 per cent in Oslo on Thursday.
The borrowing required to complete the purchase may push Star Cruises' debt-equity ratio to about two, up from 1.54 now.
'It's quite a stretch but not unimaginable,' said one analyst of the increased leverage. 'New ships typically have better yields and better returns.'
Star Cruises, which added three new vessels to its fleet last year and one in April, said the increased risk came with its expansion strategy.
Last month, the company reported a first-half loss of US$69 million with earnings under pressure from higher fuel costs, which rose 42 per cent during the period and accounted for 19.4 per cent of ship operating expenses.
The company's largest ships at present are the 77,000-tonne Superstar Leo in Asia and several 90,000-tonne vessels in the US.