Ship finance and cruiseliners: eight months into the pandemic

At the start of the new decade, a boom had been forecast for the global cruiseliner industry − which, over the years, has consistently increased in the size and value of cruiseliners, reaching up to 228,000 tonnes and $1.4bn to date. No fewer than 19 new-build cruiseliners with a collective value of over $9bn were scheduled to be delivered in 2020.

COVID-19 lockdown measures imposed across the globe have, however, resulted in widespread disruption of cruise ship operations and a corresponding disruption to the financing arrangements in place between financiers and cruiseliner companies as borrowers under traditional facility agreements.

The outbreak of COVID-19 has had a major impact on global shipping, impacting all sectors from passenger to container ships and oil tankers. Unlike general commercial shipping activities which continued to function at reduced levels, cruiseline opera­tors have faced an unprecedented total shutdown of operations almost overnight.

In addition to loss of income-generating capacity, operators have also been confronted with the additional burden of liability claims for the return of deposits on cancelled holidays.

The industry’s reaction to this extraordinary situation was to seek ways to ‘weather the storm’ until operations could return to normal, failure of which would have resulted in defaults under loan facilities as well as deferred or even cancelled orders in the case of new build vessels.

In either case, this would have been detrimental to the parties concerned, as well as the economies of cruise shipbuilding nations, notably Germany, Italy, France, Norway and Finland. Anxious to avoid such a situation and to maintain cruiseliner firms’ good standing during the suspension of operations, financiers were quick to offer borrowers debt restructuring solutions.

To fill the short-term liquidity void, lenders have acceded to requests across the cruiseliner industry for debt holidays until spring 2021. By virtue of debt holi­days or debt repayment extensions, cruiseliner companies have been granted the opportunity to defer payment obligations to a later date, thereby giving them the means to better manage their cash flow during periods of no or limited revenue, without giving rise to debt forgiveness.

But with the cut-off period for such moratoriums approaching there is growing concern within the cruiseliner industry about the ramifications of a continued depressed environment as we enter the fourth quarter of 2020.

To date, major cruise liners ope­rating in the US have agreed to keep the suspension of their cruise operations until at least October 31, while across the Atlantic cruiseliner companies resumed operations in an attempt to restart economic motors.

Safety measures that have been imposed and consumer safety trust issues have, however, led to the operation of cruise ships at lower capacity than necessary with a view to stem the continued haemorrhaging. Indeed, the international climate has led stakeholders to suggest that cruiseliner 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 cruiseliner companies and their proven reliabi­lity in times of crises – which may be ascertained from the borrower’s proactive approach during the current and previous downturns over the years.

As with most industries, the continued impact of COVID-19 on the cruiseliner industry is a fluid one as we enter the fourth quarter of 2020. As a natural reaction to the debilitating effects of the pandemic, the new build cruiseliner market for deliveries post-2022 has all but ceased. Yet it is clear that the shipping industry as a whole is better positioned to withstand the current market slowdown than it was during previous market meltdowns.

Financiers are motivated towards helping 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 ahead and will go a long way in instilling renewed optimism to an industry facing its most severe downturn in history.

Peter Grima, Associate at Fenech & Fenech Advocates