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Rating Action:

Moody's assigns B3 CFR to TUI Cruises GmbH; outlook stable

04 May 2021

Frankfurt am Main, May 04, 2021 -- Moody's Investors Service ("Moody's") has today assigned a B3 corporate family rating (CFR) and a B3-PD probability of default rating (PDR) to TUI Cruises GmbH (TUI Cruises). Concurrently, Moody's has assigned a Caa2 instrument rating to €300 million of senior unsecured notes to be issued by TUI Cruises. Moody's has assigned a stable outlook to TUI Cruises.

This is the first time Moody's has assigned ratings to TUI Cruises.

"The inaugural B3 CFR assigned to TUI Cruises balances the group's very profitable business model prior to the coronavirus outbreak, its strong deleveraging prospects once the virus will start subsiding on the one hand and the company's very weak point in time credit metrics as a result of the demand shock from the coronavirus outbreak on the other hand", says Stanislas Duquesnoy, a Senior Vice President at Moody's.

RATINGS RATIONALE

TUI Cruises' B3 CFR is supported by (i) the group's strong market position and brand recognition in the German speaking cruise market, (ii) good long term growth prospects of the German cruise market once the negative impact of the coronavirus pandemic will have faded supported by positive demographic factors, a still low penetration of cruise holidays in comparison to other more mature markets and the exposure to an affluent customer base, (iii) TUI Cruises' very profitable business model and best in class profitability pre-pandemic coupled with a good operating cash flow conversion, (iv) a young and attractive fleet with lower maintenance costs and a higher energy efficiency than other rated peers, (v) an adequate liquidity profile, which should ensure a sufficient buffer to bridge to a period of stronger cruise activity even assuming a very weak 2021 summer season, (vi) an experienced management team that has navigated the company successfully through the pandemic so far, and (vii) the support offered by the two joint venture partners Royal Caribbean Cruises Ltd. (B1 negative) and TUI AG (Caa1 stable) as well as our expectation that the two partners will remain supportive going forward.

Conversely, TUI Cruises CFR is constrained by (i) the issuer's very weak point-in time credit metrics as a result of high cash burn rates and very depressed EBITDA generation since the onset of the pandemic in 2020, (ii) the resurgence of the virus in all TUI Cruises' source markets and a very slow start to the vaccination campaign, which increases the risk that the summer season 2021 might prove to be challenging, (iii) the remaining uncertainties regarding the timing and pace of a recovery in cruise activities over the next few years, and (iv) the smaller size and diversification (both in terms of offered routes and sources of customers) of TUI Cruises compared to larger US rated peers.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects our expectation that TUI Cruises will be able to gradually ramp up cruise activities starting in late Q2 2021 leading to a gradual improvement in earnings and operating cash flows. The stable outlook is also underpinned by the issuer's adequate liquidity profile and the expectation that the group's liquidity profile will not deteriorate materially for current levels. This implies the need to reduce the group's cash burn starting at least in Q3 2021 and the timely refinancing of the €181 million debt maturity in Q2 2022. TUI Cruises is seen as strongly positioned in the B3 rating category and a recovery of operating performance, e.g. driven by rising vaccination rates and returning appetite for travel activity could result in material leverage improvements and positive rating pressure in the short- to medium-term.

LIQUIDITY

TUI Cruises' liquidity position is adequate. Pro forma of the bond issuance, the company would have approximately 300 days of liquidity at hand assuming virtually no cruising activity going forward (monthly cash burn of approximately €30 million). Assuming the refinancing of a €181 million debt maturity of €181 million in Q2 2022 the liquidity buffer would increase to around 500 days. This should be sufficient to bridge to a period of more sustained cruising activity and break-even free cash flow. The group's strong profitability pre pandemic and low break-even levels should lead to a swift improvement in the group's free cash flow generation when cruise activity resumes.

TUI Cruises has largely refunded passengers for the cruises that have been canceled during 2020. Customer deposits have been broadly stable since Q4 2020 and we do not expect a material cash outflow from refunds over the next 6 to 12 months. We also note that around 40% of passengers have elected to receive their refund from a canceled cruise in vouchers or have rebooked to another date rather than requesting a cash refund.

STRUCTURAL CONSIDERATIONS

The Caa2 instrument rating to be assigned to the proposed €300 million senior unsecured notes reflects the deeply subordinated nature of the instrument with €3.3 billion of debt ranking contractually ahead of the proposed €300 million senior unsecured notes. The unsecured notes rank junior to (i) €2.3 billion of ECA financing that have 1st lien security over a large portion of the fleet, (ii) €800 million of bank debt that have 2nd lien security over certain vessels, and (iii) €300 million of KfW loan that have security over the Mein Schiff trademark.

Moody's has used a family recovery rate of 50% due to the mix of bank and bond debt in the capital structure and the presence of a comprehensive financial covenant package.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Positive pressure would build on the rating if leverage as measured by Moody's adjusted Debt/EBITDA would drop sustainably below 6.0x, RCF/net debt would increase to the high single digits and TUI Cruises would maintain an adequate liquidity profile.

Conversely negative pressure would arise on the rating if the company's liquidity profile would deteriorate and weak recovery prospects for both the upcoming summer season and for 2022 would derail TUI Cruises from a visible path to a Moody's adjusted Debt/EBITDA below 7.0x by year-end 2023.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

CORPORATE PROFILE

TUI Cruises GmbH is a cruising company that operates a fleet of 11 cruise vessels across two brands: Mein Schiff, a contemporary brand and Hapag Lloyd Cruises, a luxury and expedition brand. TUI Cruises sources its passengers from Germany (around 80% to 90% across its two brands), Austria and Switzerland and offers German-speaking crew on board.

TUI Cruises generated revenue of €1.8 billion and an EBITDA of €0.7 billion (36% EBITDA margin) in 2019. TUI Cruises is a joint venture between TUI AG (Caa1 stable) and Royal Caribbean Cruises Ltd. (B1 negative).

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stanislas Duquesnoy
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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