At the start of 2020, the new decade was forecast to herald a boom for the global cruise liner industry. However, COVID-19 lockdown measures imposed across the globe have significantly disrupted cruise ship operations and the financing arrangements between financiers and cruise liner companies, as borrowers, under traditional facility agreements.
COVID-19’s impact on shipping industry
The ongoing COVID-19 pandemic has had a major effect on global shipping, affecting all sectors – from passenger ships to container ships and oil tankers. Unlike general commercial shipping activities which have continued to function at reduced levels, cruise line operators were faced with an unprecedented total shutdown of operations almost overnight. In addition to the loss of income-generating capacity, operators have been confronted with the additional burden of liability claims for the return of deposits for cancelled holidays.
The industry reacted to this extraordinary situation by seeking ways to weather the storm until operations could return to normal in order to avoid defaults under loan facilities and deferred or even cancelled orders in the case of new-build vessels. In either case, this would have been detrimental to the parties concerned and the economies of many cruise shipbuilding nations (eg, Germany, Italy, France, Norway and Finland).
Actions taken to mitigate losses
Anxious to avoid such a situation and maintain the good standing of cruise liner companies during the suspension of operations, financiers have been quick to offer debt restructuring solutions to borrowers to fill the liquidity void. At the local level, the most common refinancing exercise involving Malta-flagged vessels is the renegotiation of debt holidays. By virtue of such debt holidays or debt repayment extensions, cruise liner companies have been granted the opportunity to defer payment obligations, thereby giving them the means to better manage their cash flow during periods of no or limited revenue without giving rise to debt forgiveness.
As they operate in the most heavily affected sector of the shipping industry, cruise line operators were among the first to look towards negotiating such payment holidays. As such, these have been consistently negotiated since March 2020 as the deliveries of 2020 new-build vessels have been rolled out. However, these payment holidays are not available across the board as certain facility agreements include as an event of default instances where the borrower commences negotiations with one or more of its creditors with a view to rescheduling its indebtedness. This is frequently the case where cross-guarantees are in place or a company has multiple facilities.
With respect to borrowers which do not have such restrictions in their facility agreements, Malta-flagged vessels have witnessed increased activity in this area as debt holidays have given rise to refinancing scenarios that require the execution of fresh security over the secured vessels. While debt holidays may vary in the way in which they are provided, a common example has been the provision of additional finance from the same lender to repay the borrower’s commitments up to a period of one year, with the corresponding obligation of the borrower to repay a premium over and above the outstanding loan. This scenario would necessitate the registration of an amendment mortgage or second priority mortgages to secure the new amounts advanced or obligations that are being created.
With the cut-off period for moratoriums approaching, there is growing concern within the cruise liner industry about the ramifications of a continued depressed environment in the fourth quarter of 2020. Major cruise liners operating in the United States have agreed to continue the suspension of their cruise operations until at least 31 October 2020. Meanwhile, Malta cruise liner companies have resumed limited operations in a concerted attempt to restart economic motors. However, the safety measures imposed and lack of consumer trust with respect to safety have led cruise ships to operate at a lower capacity than needed to stem the continued haemorrhaging. The international climate has led stakeholders to suggest that cruise liner companies will almost certainly require extended debt holidays come Spring 2021 and that such extended debt holidays may even be voluntarily offered by financiers.
The extension of payment holidays will likely depend on several factors, including longstanding relationships between financiers and cruise liner companies and their proven reliability in times of crisis – which may be ascertained from the borrower’s proactive approach during the current and previous downturns. As with most industries, COVID-19’s continued impact on the cruise liner industry in the fourth quarter of 2020 will be fluid.
As a natural reaction to the debilitating effects of the pandemic, the new-build cruise liner market for deliveries post-2022 has all but ceased. Yet, the shipping industry is clearly better positioned to withstand the current market slowdown than it was during previous market meltdowns. Financiers are motivated to help the industry through the financial consequences of travel restrictions and health issues and there is reason to believe that the availability of deferred payment obligations until Spring 2021 will be extended further. These extensions will almost certainly be essential to carry the industry through what is forecast to be another difficult year and will go a long way in instilling renewed optimism in an industry facing its most severe downturn in history.
by Peter Grima, Fenech & Fenech Advocates