Cruising ECA debt volumes buoyant
The emergence of untied lending and longer tenors are symptomatic of a growing ECA and lender appetite for the cruise ship sector in the wake of the pandemic.
The global ECA-backed cruise ship finance market has experienced a robust resurgence in deal volume since the Covid crisis. According to TXF Intelligence, the volume of closed deals totalled $3.2 billion in 2022 and $4.5 billion across 12 transactions in 2023 so far.
Over the past three years, the cruise sector has accounted for nearly 40% of all ECA-backed shipping deals captured by TXF. But overall year-on-year volumes are still shy of the pre-pandemic peak of almost $9 billion of closed deals in 2019. And despite mushrooming challenges such as a heightened risk perception from lenders, substantial corporate debt burdens, and geopolitical instability, the industry is showing signs of post-pandemic buoyancy.
The rebound in cruise ship debt volumes was demonstrated in the uptick in passenger numbers for 2022 (and the forecasted figure for 2023). In 2019, the global cruise industry welcomed 29.7 million passengers according to Statista. This number dropped from 5.8 million in 2020 to 4.8 million of passengers in 2021 during the Covid crisis – but in 2022, there was a notable increase to 20.4 million passengers. The forecasted figures for 2023 anticipates a further rise to 31.5 million passengers by year-end, surpassing the 2019 record. Additionally, occupancy rates frequently exceeded 100% in the first three quarters of 2023, up from 57.4% in early 2022.
To accommodate the growing number of passengers and higher occupancy rates, the cruise shipbuilders are set to deliver 19 new cruise ships in 2023, with an additional 10 confirmed for 2024, according to Cruise Industry News. Notable deliveries in 2023 included Royal Caribbean’s 5,610-passenger Icon (financed in 2017 via SACE support), MSC Cruises’ 4,889-passenger Euribia and Norwegian’s 3,215-passenger Viva. Expected cost of these deliveries in 2023 are approximately at $10.7 billion.
In 2023, the overall financing landscape for the cruise ship industry has been on a positive incline: with closed deals like Carnival’s Princess Sphere I and Princess Sphere II (with a combined value of $1.81 billion), Norwegian Cruise’s four prima-class cruise ships – Leonardo 3, Leonardo 4, Leonardo 5 and Leonardo 6, pushing overall cruise debt volumes to supersede 2022 figures.
Pre-pandemic maturities return
Loan maturities are also a good yardstick to measure lender confidence in the sector: with the average tenor being 12 years in 2019, 6 years in 2020, 8 years in 2021, and 12 years in both 2022 and 2023. This oscillation in repayment periods – from long tenors (12 years) to medium-term maturities in 2020 and 2021 – are symptomatic of pre- and post-pandemic lender confidence.
The drop to 6-year average tenors in 2020 and 8 years in 2021 were linked to the heightened risk perception from lenders and ECAs during the Covid crisis. Supporting domestic buyers and exporters was top of ECAs’ agendas when order books emptied, and in turn shorter tenors became par for the course to mitigate bank and ECA uncertainty around extending lines of credit to another ailing sector.
As the cruise industry moves forward – with China now officially out of lockdown, driving global passenger demands back to pre-pandemic volumes – a 12-year average tenor in 2023 indicates a return to lender confidence and stability. Coupled with rebounding closed cruise ship deal flow and volume, increasing passenger numbers, and the sector's commitment to sustainability as it strives to move away from heavy fuel oil towards LNG, the positive trends continue apace.
In short, the maturity of loans is not only a financial metric but also a reflection of the industry's resilience and its ability to navigate through choppy waters, providing valuable insights for industry stakeholders and observers.
Untied lending emerges
There has been a rise in the number of untied deals across the ECA market in recent years, and this trend holds weight not just in the cruise sector, but across the wider vessel finance market.
In the world of cruise ships, in 2022, while there was a year-on-year decrease in tied deals, from 53 to 8 transactions, there was an untied ECA lending debut with 2 such deals being captured. This trend has echoed across the wider seas of the shipping sector – for example, untied lending proved a boon for shipbuilders too.
In October, Fincantieri raised an untied sustainability-linked SACE-backed loan, with KPIs including CO2 emission reduction, increased efficiency in the Italian shipping industry, and gender equality. This is the second SACE supported deal Fincantieri has sealed with a €1.1 billion loan signed in 2020.
Untied deals provide shipbuilders and ship operators with the ability to source goods and services globally while fostering competition and potentially leading to more cost-effective and efficient projects. Coupled with opening the door to future export and maintenance contracts for the respective ECA’s exporters, the untied product will only increase in usage in 2023 and beyond.
With the stronger focus on energy transition from cruise companies, ECAs and lenders, green finance and ESG-tied debt will emerge. But so far, there has yet to be a green loan or ESG-tied deal raised by any cruise ship company globally.
Cruise companies are far from green. The carbon-intensive nature of cruising – burning heavy fuel oil is still commonplace – has come under scrutiny due to its environmental impact, prompting commitments from the Cruise Lines International Association (CLIA) to reduce emissions by 40% across the global cruise fleet by 2030.
But it is not just cruise operators that need to get on board with specific sustainability targets. Another question is: are ECAs willing to absorb the reduction on premiums, and if so, are they still able to cover indemnity payments with such a pricing mechanism?
Even though the cruise ships make only 1% of world’s maritime industry, it participates with 6% in the black carbon emission as it has been reported that each passenger’s carbon footprint at sea is 3 times higher than on land. This environmental impact has prompted exploration of sustainable alternatives like LNG and biofuels. The rise of LNG-powered cruise ships is evident, with 24 such vessels expected for delivery in the next five years.
With 44 new cruise ships anticipated to be delivered in the next five years to accommodate almost 40 million passengers in 2027, the role of ECAs remains crucial. TXF data shows that SACE has maintained a significant market share, with $13 billion in supported deals from 2019 to 2023, signalling its pivotal role in the industry’s recovery. Euler Hermes, Finnvera, and Bpifrance also played essential roles, contributing $12.4 billion in recorded deals over the last five years.
Alongside ECAs, commercial banks play a vital role in financing the cruise industry, with CDP, BNP Paribas and Societe Generale holding the largest market share. Together, they have provided $9.4 billion in financing over the last five years – representing 50% of all recorded deals in the same period.
Major cruise lines, including Norwegian Cruise with $5.6 billion, Royal Caribbean with $4.6 billion, and Carnival Corporation with $1.2 billion were the biggest borrowers between 2019-23period. All these three major cruise lines took on billions of dollars of debt during the pandemic. Refinancing that debt in an environment with higher interest rates will be a challenge.
As the cruise ship industry stands at a crossroads, grappling with financial challenges, environmental imperatives, and the aftermath of the COVID-19 pandemic, recovery hinges on effective decarbonization efforts and adaptation to change consumer expectations. In navigating these challenges, the support of ECAs and financial institutions will be pivotal in shaping a sustainable and resilient future for cruise travel.