Moody's affirms Norwegian's Ba3 rating but outlook goes to negative

Ba3 is judged as speculative and a substantial credit risk.

Moody's said the affirmation of the ratings reflects the combined company's larger scale and greater operating leverage, diversification into the premium and luxury cruise segments, and improving overall industry operating conditions reflected in rising pricing.

Norwegian's net revenues and EBITDA are expected to spike 39% and 33%, respectively, when the acquisition is completed. The combined companies' pro-forma net revenue was $3bn and EBITDA was $976m for the past 12 months ended June 30.

The ratings agency estimates pro-forma (trailing 12 months) debt/EBITDA is around 5.8 times and EBIT/interest expense is approximately 2.9 times, excluding synergies and potential interest expense savings. Moody's expects the combined entities to generate free cash flow that can be used to lower debt. The agency said the affirmation also reflects Norwegian's track record of cutting debt and lifting EBITDA.

The negative outlook reflects pro-forma leverage that is above the level Moody's previously set for a possible downgrade and is above the range for a Ba3 rating. The outlook revision also considers execution risk related to absorbing Prestige and continued debt-financed capacity expansion that could delay the pace of de-leveraging, especially if new ships enter service during a period of weak demand.

Moody's placed Norwegian's individual debt instruments on review-direction uncertain pending information on the final capital structure of the combined entity and the relative amount of senior versus junior obligations.

The agency said the ratings could be downgraded if it appears debt/EBITDA will not decline from pro-forma levels over the next 12 months.

The outlook could revert to stable if the company reduces debt/EBITDA to around 4.75 times and liquidity remains solid, Moody's said.