Without revenue from normal operations since March, Norwegian Cruise Line Holdings (NCLH -0.70%) has seen its shares plummet as the COVID-19 pandemic turned the travel industry on its head. The stock has rebounded from an all-time low, but it continues to languish as uncertainty dominates the future.
Reaction to unexpected setbacks often separate the winners from the losers in life. Norwegian Cruise Line faces huge challenges, but with smart management at the helm, it is positioned to overcome them. With ample liquidity and demand already returning, this stock looks poised to bounce back faster than most rival cruise lines.
Battening down the hatches
Norwegian Cruise Line released first-quarter 2020 earnings on May 14, and it was an unusual conference call. There was virtually no focus on yield growth or net cruise costs, irrelevant in the current no-sail environment. The focus was very much on liquidity measures taken to get the company through the COVID-19 crisis.
Management reported massive reductions in operating expenses and capital expenditures as the business came to a screeching halt. The maneuver that has really led Norwegian Cruise Line to calmer seas was the improved debt maturity profile and additional capital secured.
The company took advantage of an industry-wide 12-month debt holiday granted by export credit agencies. As a result, the company may defer approximately $540 million of total debt amortization payments through March 31, 2021. All postponed amortization will be repaid evenly over the following four years in eight semiannual installments. Norwegian also extended the maturity of a $675 million revolving credit facility by one year to March 2022, and it exercised a contractual option to extend the $230 million Pride of America term-loan maturity by one year to January 2022.
All told, the company raised over $3 billion by drawing down on its $875 million revolver, securing and drawing down on a new $675 million revolver, and executing a series of successful, oversubscribed capital raises led by Goldman Sachs. Based on these actions, the company says it is can last 18 months in a zero-revenue environment.
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Wait: 18 months with no revenue? Norwegian Cruise Line is planning for the worst-case scenario. The Centers for Disease Control put a no-sail order in effect on March 14, extending it to July 24, and it could be extended again. Given uncertainty like that, planning for the worst is the best thing to do to survive.
Despite COVID-19, people still want to go on cruises. Norwegian said it had $1.2 billion of advance ticket sales for 2020 at the end of the first quarter, with two-thirds of that coming from previously announced cancellations where the ticket buyer had the option of a future cruise credit or cash refund.
CEO Frank Del Rio said, "There continues to be demand for cruise vacations, particularly beginning in the fourth quarter of 2020 and accelerating through 2021, with the company's overall book position at this time and pricing for 2021 within historical ranges."
The company is accepting bookings for 2020, 2021, and 2022. It says that slightly more than half the guests who had their voyages canceled have requested refunds, rather than the other option: a 125% cruise credit that can be used through 2022.
Regarding a possible timeline for resuming operations and returning to profitability, Del Rio said: "2020 is a wasted year. At a minimum, the industry is going to go the entire second quarter without a penny of revenue, impossible to overcome."
He said a return to service might be executed in stages with a few of the company's 28 vessels coming on line over a period of five to six months. He expects the full fleet to resume sailing some time in 2021. The company did not provide second-quarter or full-year guidance because of the unprecedented uncertainty.
Shares will remain in dry dock for a while
"I recognize that this is going to be a recovery effort that's going to take multiple quarters, perhaps multiple years to get back to the good old days of 2019," Del Rio said.
What Norwegian Cruise Line has done to adapt to unforeseen circumstances in only 10 weeks is impressive. Costs have been cut dramatically, an entire fleet of ships idled, customers appeased with refunds or 125% credits toward new trips, and liquidity bolstered to survive 18 months without revenue. Disciplined management has increased the chances for a successful recovery and future success.
Although the pieces are in place for a comeback, I think there are still too many variables and headwinds at this point. COVID-19 and the regulatory response will dictate when the cruise lines can resume operations. Now isn't the time for investors to buy Norwegian stock. If management continues to steer the company skillfully, the right time to invest will come along later.
