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Rating Action:

Moody's assigns first-time B2 ratings to Silk Bidco AS; positive outlook

Global Credit Research - 27 Jan 2015

Approximately EUR455 million of debt rated

London, 27 January 2015 -- Moody's Investors Service has today assigned a first-time B2 corporate family rating (CFR) and a B2-PD probability of default rating (PDR) to Silk Bidco AS (Silk Bidco), a holding company owning all of the shares of Hurtigruten ASA (Hurtigruten). Concurrently, Moody's has assigned a provisional (P)B2 rating, with a loss given default (LGD) assessment of LGD4, 56% to the proposed EUR455 million (approximately NOK4 billion) worth of senior secured notes due 2022 to be issued by Silk Bidco. The outlook on the ratings is positive. This is the first time that Moody's has assigned ratings to Silk Bidco.

Silk Bidco will use the proceeds from the proposed issuance to (1) repay the bridge facility put in place by TDR Capital (which was used in conjunction with the equity contribution to purchase Hurtigruten, repay its existing debt and pay for certain transaction and hedging expenses); and (2) pay fees, costs and expenses incurred in connection with the refinancing transaction.

"We assigned a B2 CFR to Silk Bidco to reflect Hurtigruten's narrow business profile as a cruise operator mainly active in the Norwegian coast segment as well as its highly leveraged capital structure," says Marie Fischer-Sabatie, a Moody's Senior Vice President and lead analyst for Hurtigruten. "Nevertheless, the rating also factors in Hurtigruten's well-established competitive positioning, good revenue visibility and positive free cash flow generation."

Moody's issues provisional ratings in advance of the final sale of securities and these only reflect Moody's opinions regarding the transaction. Upon the closing of the refinancing but also after a conclusive review of the final documentation, Moody's will endeavour to assign definitive ratings to Silk Bidco. A definitive rating may differ from a provisional rating.

All the ratings assume that the refinancing will be completed.

RATINGS RATIONALE

--B2 CFR--

The B2 CFR assigned to Silk Bidco is constrained by (1) Hurtigruten's small scale and narrow business profile being essentially focused on the Norwegian west coast cruise market, (2) its high operational leverage and low profitability, and (3) its highly leveraged capital structure. However, the rating is balanced by (1) Hurtigruten's well-established competitive positioning and differentiated offer in the niche Norwegian cruise market; (2) its good forward-looking revenue visibility and growing customer base; and (3) positive free cash flow generation, reflecting improving profitability and limited capital requirements.

As a cruise ship operator, Hurtigruten mainly targets the Norwegian coast market as well as some expeditions into Arctic and Antarctic waters. As such, the company is a niche player in the global cruise industry, but benefits from its well-established competitive position thanks to its long experience, brand reputation and focus on unique itineraries and authentic expeditions rather than mass tourism. The company also has an exclusive contract with the Norwegian government until 2019, which may be extended for an additional year at the option of the Ministry of Transport, to provide year-round scheduled services to carry passengers, mail and cargo. This activity accounts for around 20% of Hurtigruten's revenues.

Despite the inherent seasonality of its business, with coastal cruises mainly occurring during the summer period, Hurtigruten benefits from a good degree of forward-looking visibility as it receives a fixed-fee schedule through its government contract, but also secures deposits from customer cruise pre-bookings. Moody's also notes the positive demand trends for cruises in Norway, reflecting increased penetration in Europe and the aging population in Northern European countries, which are key source markets for Hurtigruten.

Nevertheless, the company's rating is constrained by high operating leverage, with most of its costs being fixed, and low profitability. Albeit improving, the company's profitability remains low and lags behind other rated peers in the industry, as illustrated by a Moody's-adjusted EBIT margin of 8.8% in the 12-month period to September 2014 (7.4% in fiscal 2013).

In addition, Silk Bidco's leverage pro forma of the proposed transaction is high. Moody's estimates that the group's leverage (i.e. gross debt/EBITDA, including Moody's adjustments) will be slightly above 6.0x pro forma of the transaction at end-December 2014. Nevertheless, Moody's expects that Silk Bidco's profitability will continue to improve on the back of ongoing cost saving initiatives and increasing customer pre-bookings, which offers good prospects for deleveraging below 5.5x in the next 12 to 18 months. If the recent decline in fuel price and weakening of the Norwegian kroner against the euro were to continue, this would also be beneficial to the group's profitability. However, Moody's cautions that fluctuations in foreign currency rates or fuel price can result in material volatility of group profitability.

Silk Bidco's liquidity profile is adequate. The proposed refinancing will leave the group with a limited amount of cash on balance sheet pro forma for the transaction (estimated at around NOK210 million at the end of December 2014). Hurtigruten has also access to a covenanted EUR65 million revolving credit facility ("RCF", with a maturity of six years). This facility is expected to be drawn by NOK250 million during Q1 2015 (EUR27.5 million) to cover cash payments in connection with the termination of hedging obligations and, to a lesser extent, to cover some seasonal working capital requirements during off-peak season. Moody's expects that this drawing will be repaid during the course of this year and anticipates that, going forward, the RCF will remain largely undrawn thanks to positive free cash flow generation expected in the next 12 to 18 months, reflecting the company's limited capital requirements with no new ship on order and no replacement of assets planned over the medium term. The RCF will have only one maintenance covenant (minimum EBITDA of NOK400 million), which will be tested at quarter-end and only when the RCF is more than 30% drawn. Moody's expects that the company will maintain comfortable leeway under this covenant.

--(P)B2 RATING ON SENIOR SECURED NOTES--

The (P)B2 rating (LGD4, 56%), which is in line with the CFR, assigned to the company's proposed EUR455 million senior secured notes due 2022 reflects the quantum of the notes which represent the bulk of the group's debt instruments. The only other material debt instrument in the capital structure is the committed EUR65 million super senior RCF, which ranks before the notes, but is of limited size compared to the notes.

The proposed notes and the super senior RCF will benefit from a similar guarantor package including upstream guarantees from Hurtigruten and its subsidiaries, representing around 90% of the EBITDA of the group. Both instruments will also be secured, on a first-priority basis, by substantially all assets of the group (including the fleet of 10 ships). However, the notes will be contractually subordinated to the RCF with respect to the collateral enforcement proceeds.

The PDR of B2-PD reflects the use of a 50% family recovery assumption, as is usual for a structure comprising a mix of bond and bank debt.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive rating outlook reflects Moody's expectation that Hurtigruten will improve its profitability supported by growth in cruise night volumes, higher ticket revenues and the materialisation of cost saving initiatives. The positive outlook also reflects Moody's expectations of good deleveraging prospects. Quantitatively, Moody's expect that the company's financial ratios will improve in the next 12 to 18 months, with adjusted gross debt/EBITDA trending below 5.5x.

In addition, the B2 CFR factors in the maintenance of an adequate liquidity profile.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could upgrade the ratings if Silk Bidco (1) continues to improve its profitability; and (2) maintains a positive free cash flow generation. Quantitatively, stronger credit metrics such as adjusted (gross) debt/EBITDA comfortably below 5.5x could trigger an upgrade.

Conversely, Moody's could downgrade the ratings if Silk Bidco's free cash flow generation becomes negative for a prolonged period of time as a result of a weakened operating performance or higher-than-expected capital expenditures. Quantitatively, an adjusted (gross) debt/EBITDA ratio trending towards 6.5x could trigger a downgrade.

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was Global Lodging and Cruise Industry published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Norway (Tromso), Hurtigruten is a cruise ship operator that focuses mainly on coastal cruises in Norway but also offers expeditions, land-based excursions and activities in the Arctic Circle, Greenland and Antarctica. In addition, the company provides local transportation services with daily calls in 34 ports in Norway through an exclusive contract with the Norwegian government until 2019. The company generated revenues of NOK3.3 billion ($538 million) during FY2013 and currently operates a fleet of 12 ships, of which 10 are owned. Silk Bidco AS is a holding company which owns 100% of Hurtigruten.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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

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.

Marie Fischer-Sabatie
Senior Vice President
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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Moody's assigns first-time B2 ratings to Silk Bidco AS; positive outlook
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