Cruise ship operator Genting Hong Kong has defaulted on around US$2.8bn of debt, after German authorities changed their minds about providing support for its shipyard there.
Genting HK completed a debt restructuring in June last year, led by PJT Partners, after the Covid-19 pandemic wreaked havoc on the cruise industry.
It amended and extended US$2.6bn of debt, which included extending the maturity of around US$1bn of credit facilities at the holding company to June 2026 and giving it a principal repayment holiday until July 2023 on US$1bn of secured credit facilities at its operating subsidiaries. It also reduced the average interest cost to Libor plus 50bp from 210bp and suspended financial covenant testing under all of its financing arrangements, except for a minimum liquidity covenant.
This came alongside a €2bn (US$2.3bn) recapitalisation, which included a €493m bridge loan from the German Economic Stabilisation Fund (WSF, under its German initials) in two tranches.
There was also a US$148m liquidity backstop facility provided by Genting HK shareholders and German stakeholders designed to cure any breach of the minimum liquidity covenant.
Genting HK bought the MV Werften Holdings shipyard in the Mecklenburg-Vorpommern federal state of Germany in 2016, when backlogs at shipyards worldwide led some cruise operators to decide it was more efficient to build their own vessels.
It is building two ships there, including a polar class luxury expedition ship, Crystal Endeavour. Germany’s lockdown forced shipbuilding operations to close for months in 2020 and led to huge cost overruns, but as a key employer in the state, authorities were keen to support the business.
Genting HK was due to draw down a US$88m backstop facility from the state of Mecklenburg-Vorpommern, but on December 23 the state imposed additional pre-conditions to the drawdown. The company fought this in court, and on December 28 the district court of Schwerin ordered the state to disburse the full amount.
The following day, though, the court amended its order so that only US$6.3m was payable immediately and the balance at a later date. The day after that, it changed its order again so that no amount was immediately payable.
Following these decisions, Genting HK tried to draw down a €108m construction milestone payment and €30m of its WSF funding, but said that Euler Hermes, the German export credit insurance agency involved in the financing of its shipbuilding, refused to confirm insurance coverage. As a result, the financing banks refused to release the milestone payment. The WSF on January 5 refused to release the €30m of funding.
Genting HK said that Euler Hermes had refused the disbursal after conducting a stress test of the company, looking at its five-year outlook if the pandemic continues to affect business.
The company said it disagreed with the findings, which were not a pre-condition of its insurance coverage anyway, and had already paid the insurance premium.
German authorities then tried to replace that financing structure with a new proposal with additional conditions. These include subordinating banks to the WSF and requiring Genting HK’s controlling shareholder, Lim Kok Thay and his family, to put in more funding and guarantee at least €600m of the WSF facility.
“The relevant counterparties’ failure to perform their binding contractual obligations have created an immediate and significant gap in the expected liquidity resources of the group,” said Genting HK in a Hong Kong stock exchange filing on Tuesday.
Banks also refused to release US$81m of the company’s own funds held in a liquidity reserve account.
As a result, MVWH and certain of its subsidiaries filed for insolvency with the German court on Monday. Genting said this caused an event of default under the facility for its shipyard and had triggered cross defaults on US$2.777bn of debt in total. It said no financial creditors had demanded repayment or commenced action against the company so far.
The default could be short-lived: the matter was heard in court on January 11 and a ruling will be handed down on January 17.
Lim and his family also control Malaysia's Genting group of gaming, property and oil palm plantation companies, but the cruise ship operator is not part of that corporate group and its default will not affect the other companies.
Genting HK said it was continuing to engage with the German federal government and its controlling shareholder had offered to increase its funding to the group from US$30m, which has already been drawn, to US$42m.
There have recently been signs of recovery for the cruise industry in Asia. Singapore resumed cruises in November 2020, while they began in Malaysia and Taiwan last month.
“Cruise lines are generally expected to reach Ebitda breakeven by Q2 2022 and be profitable for the year 2022,” wrote Bank of America on November 30, shortly after the Omicron strain emerged. The bank wrote that it expects cruise lines to recover quicker than airlines and theme parks.