Business COUNTER-CYCLICAL INVESTMENT Counter-cyclical investment in cruise assets can pay off handsomely BY KARI REINIKAINEN Price opportunity balancing act between the cost of the The change of outlook has already assets (and their maintenance costs while he cruise sector has suffered started to strengthen valuations of cruise idle or laid up) and future revenue from the Covid-19 pandemic ships, according to Guy Cooper, a cruise expectations given that the market perhaps more than any other analyst at the UK-based VesselsValue. effectively remains closed for business,” industry. The crisis has also “Although the global fleet value is still said Niklas Carlen, research director at created opportunities for slightly down at $126 billion compared to Maritime Strategies International (MSI) in the cTounter-cyclical investment, from moves on this time last year at $170 billion, a small but UK. the stock market to at least one corporate important gain of $500 million in the past acquisition so far and extending to week is encouraging,” he told CruiseTimes. Competitive disadvantage demolition sales of ships. But low ship The size and age of a vessel was a MSI believed that once the business values alone do not pave the way for major determinant of its value and recovery. was restarted, the landscape would shift; newcomers to enter the cruise market. “Smaller and older tonnage was the hardest emphasis would soon be moved to other, The suspension of operations that hit by the pandemic, with values falling 90% more relevant concerns, and major cruise followed the outbreak of the pandemic in 2020; however, from the data, it is clear lines would again enjoy a distinct market about a year ago greatly reduced the cash these values are now heading in the right advantage. flow of cruise lines, forcing them to book direction,” said Cooper. “These are small “When cruising eventually does deep impairment charges against the value movements but significant if it marks a resume,” said Carlen, “MSI expects price of their ships. Share prices of listed trend, and for the first time in over a year, competition to be focused on ticket prices, companies plummeted. cruise values show the green shoots of with lines expecting to generate more profit Share prices of leading cruise recovery.” from onboard/excursion spends. Those with companies hit a 52-week low in the spring Owners such as Fred. Olsen Cruise older ships may struggle to compete with of 2020. But investors who bought shares in Lines in the UK, Celestyal Cruises in Cyprus, the onboard experiences on offer on them at that time have seen their investment and a few others who acquired second- modern vessels operated by the major lines. multiply in value, and the prices in early hand tonnage at the price slump have Looking at the age profile of vessels sold by March 2021 are in fact close to the levels obviously timed their purchase very well. But the major cruise lines, the majority of these seen before the start of the crisis. despite the abundance of ships on the sale have been at least 20 years old.” The recovery was based on the and purchase market since the outbreak of Those who sought to acquire older assumptions that the worst had been left the crisis, understandably there have been vessels also faced a significant financial behind and that progress with vaccination fewer start-ups than otherwise expected. hurdle. Although ships could be bought at campaigns, combined with a recovery of the “I agree that current asset values and low prices now, at the moment banks are global economy, would soon allow business the distressed financial position of the not prepared to lend money to a newcomer, to move forward and generate decent existing cruise lines potentially opens the to the industry, as collateral against ageing returns. door to new entrants, but it represents a ships, according to Lars Hallengren, Share price development of leading cruise shipping companies Cruise vessel valuation changes – week to 24 Feb. 2021 COMPANY 52-WEEK HIGH 52-WEEK LOW CLOSE ON 3 MAR. 2021 Carnival Corp. $33.34 $7.80 $28.67 AGE MEGA LARGE SMALL Carnival plc £23.97 £5.81 £17.40 0 +0.01% +0.01% +0.01% Royal Caribbean Cruises, Ltd $99.24 $19.25 $94.48 200k 100k 25k Norwegian Cruise Line Holdings, Ltd $35.90 $7.03 $33.13 5 +0.48% +0.38% +0.30% Source: Google Finance 200k 100k 25k 10 +0.47% +0.43% +0.46% 200k 100k 25k “Smaller and older tonnage was the hardest hit by the pandemic, 15 +0.92% +0.94% +0.90% with values falling 90% in 2020; however, from the data, 200k 100k 25k 20 +6.0% +6.1% +6.2% it is clear these values are now heading in the right direction.” 200k 100k 25k Guy Cooper, cruise analyst, VesselsValue 25 +2.4% +10.7% +13.3% 200k 100k 25k Source: VesselsValue www.cruisetimes.net 29 BUSINESS COUNTER-CYCLICAL INVESTMENT managing director of shipbroking company the fourth ship for Azamara. healthy return to service without disruption Brax Shipping in Sweden. According to Carol Cabezas, president to the plans that have been put in place. We In addition to the purchase price, a of Azamara Cruises, Sycamore Partners has will evaluate the best path forward after our prospective newcomer to the cruise industry a track record of investing in and elevating fleet is back in service,” continued Cabezas. will have to budget for upgrading the brands with significant potential. There is a From the perspective of RCG, the interiors, which can cost many times more great opportunity for them to grow and disposal was a rational divestment of a than the low price tag of $20 million, seen flourish the Azamara brand. “They were burdensome asset in its portfolio. “Certainly, during the pandemic, of a 25-year-old cruise attracted to Azamara for several reasons, the sale of Azamara to Sycamore Partners is ship. one of which was our loyal global customer an interesting one, but I think you need to Maintenance of older ships is a base,” she said. view it in the context of RCG’s position in the considerable expense burden. Special Beyond capacity expansion, the new market. Azamara’s fleet is composed of surveys that must be carried out every five owner has no plan to change the essence vessels built 20 years ago, and has seen no years add a substantial amount to the bill. of the brand. “It’s important to remember, as investment in terms of fleet renewal,” said Ageing ships are also far less fuel efficient we move through this transition, that Carlen of MSI. than modern ones, which results in higher Azamara’s product will not change at all, RCG already has a significant stake in daily operating expenses. and neither will the people,” said Cabezas. the upper end of the market through “A newcomer will also have to think how Azamara’s talented employees will remain Celebrity Cruises and Silversea Cruises, its product would differ from those already part of the brand and play a critical role in its both with significantly younger fleet-age on the market, who should be its customers, future. However, as we become an profiles and ongoing investment in new and how does the new line intend to attract independent brand, there will also be vessels. its chosen segment of the market,” said opportunities to fill new roles.” Azamara will by no means be the last Hallengren. Private equity investors often have one counter-cyclical investment in the sector common weakness: they lack cruise made by private equity. “We may see the New interests shipping operational experience. But this large-liner groups divesting smaller niche Private equity has occasionally stepped issue is quickly addressed from the very brands in order to survive, but it is difficult to into the cruise industry. Early in the beginning. In the case of Azamara, for the try to second-guess what could potentially millennium, the New York–headquartered time being, RCG is providing technical be on the table and who the buyers might Apollo Global Management acquired management and crewing services through be,” Carlen noted. Norwegian Cruise Line. Just before the a lengthy transition. “We are focused on a “We may see more modern assets outbreak of the pandemic, Genting Hong Kong sold 32.6% of the shares in Dream Azamara Cruises’ fleet Cruises for about $459 million to a unit of SHIP NAME YEAR BUILT GROSS TON PAX CAPACITY TPG Asia Capital and Growth Funds. Azamara Journey 2000 30,277 694 More recently, in January 2021, Royal Azamara Pursuit 2001 30,277 704 Caribbean Group (RCG) sold Azamara Azamara Quest 2000 30,277 694 Cruises and its three turn-of-the-century- Azamara Onward 1999 30,277 702 built, 30,000-gross-ton ships to Sycamore Source: SHIPPAX Guide 20 Partners for $201 million. The seller booked a $170 million impairment charge in the “They were attracted to Azamara for several reasons, process, while Sycamore went on to expand the fleet by buying Pacific Princess one of which was our loyal global customer base.” (renamed Azamara Onward ), a sister vessel Carol Cabezas, president, Azamara. of its existing trio, from Princess Cruises as n i l p a T a n n e J : o t o h P Guy Cooper, cruise analyst, VesselsValue Carol Cabezas, president, Azamara. Lars Hallengren, managing director, Brax Shipping. 30 www.cruisetimes.net Business COUNTER-CYCLICAL INVESTMENT being sold by the liner groups into joint ventures where they have a significant stake, for example in China, but I would not consider those to be open market transactions.” Bullish scrap Marios Iliopoulos, the Greek shipowner whose portfolio includes the Seajets ferry company, has acquired several cruise ships in the past few months.