Star Cruises

After a recent foray into the international convertible market, Star Cruises is steaming into calmer waters. We talk strategy with Gerard Lim Ewe Keng, SVP in the Chief Executive Office.

How is business after the difficult times at the beginning of the year?

Lim: We have two portions of our business: the Asian part under Star Cruises and the American portion under the NCL brand. People have described the second quarter of this year as the perfect storm with SARS in Asia and the Iraq war. But since then business has recovered. The numbers have definitely come back in Asia. Inter-Asian travellers from Singapore and Hong Kong have come back. But the Caucasian market of Australians and Europeans flying to Asia to take cruises has not come back yet. I think they are looking at how we get through the winter before they come back. However, the Chinese market has come back and bookings out of the PRC have exceeded what we had last year.

So your year-end numbers will be OK?

Lim: Should be. Of course compared to last year it will be lower as the second quarter this year was so bad. But the important thing is that the trend is improving.

You recently went to the markets and undertook an international convertible with a rights issue attached. What was the reason behind that?

Lim: The convertible and rights issue raised $280 million. We recently signed up for two new ships under the NCL brand and the deal was for payment for the new ships. There will be corresponding debt as well associated with this purchase. The ships are being built in Germany and we have a consortium of banks that will lend us money for the ships.

What is the usual debt: equity split for the financing of a new ship?

Lim: Usually 80:20 where 80% of the price comes from debt and 20% from equity.

Some analysts have raised concerns about your overall debt level. Will the money raised from the convertible and rights issue alleviate your overall debt burden?

Lim: At the end of last year the company had $2.4 billion of debt. But debt is something very funny. In bad times it is your enemy, in good times it is your friend. Now we have seen the worst of things what with September 11th, SARS and war and so we expect things to improve from here. Because of the high capex nature of the business, unless you are the size of a company like Carnival Cruises, it is very hard to get a low level of gearing. And so in our initial years we expect a relatively high level of gearing. But it is manageable, unless we have another major shock to the system.

But we mainly finance our ships through asset-backed finance: banks lend against the ships themselves. These banks have been very supportive of us. For instance when September 11th happened we went to the banks, talked to them and they understood the situation. The banks that supported us in 2001, gave us a repayment holiday in 2002 for some of our loans in NCL.

What is it about your company that allows the banks to be so supportive?

Lim: Being ship lenders, they know that unless there is a total disaster to the industry, it will go through its lows and will come back too. They have seen that over the years.

Is that why you have concentrated on bank finance rather than international bond finance?

Lim: The bond market is actually more flexible than the bank market, where in the bank market there are lots of covenants and restrictions. If we can go to the bond market, we will. But at the moment, it is the banks that have supported us.

Why did you decide to go to the convertible market and pay a coupon of 2%?

Lim: We could have pushed the coupon down to 1% but then our yield to maturity would have gone up. So we thought 2% was a good balance: it will cost us about $3.6 million a year, which is manageable. It was a new investor base we were going after and they were appreciative of our story. JPMorgan was marketing the bonds for us. They launched the deal at 6.30pm and by 9.30pm they were calling us and saying that they would be closing it in half an hour. So it was very well taken up and five times over subscribed. The bulk of the interest came from Europe.

We also wanted to increase the free float of our shares, which is currently only about 15%. With the convertible, that will move it up to about 21%. Now the Lim family and Resorts World own about 85% of the company. As the convertible will be converted into new shares it will increase the float.

Star Cruises is not rated. Why is that and do you have any plans to get rated in the future?

Lim: There was no reason to get rated for this deal, although if JPMorgan had told us that we had to get rated we would have done so. But no rating was required. Going forward, if we are to access the bond market by ourselves, then we will look at getting a rating. We would like to be at least a BB+ or better.

Were you worried about the dilutive effects of doing a simultaneous convertible and rights issue?

Lim: The rights issue was only $100 million, so $85 million was taken up by the Lim family and only $15 million came from the market, so that was not very dilutive. The conversion of the convertible is at $0.41 so that is less dilutive than if we issued everything at $0.30 or $0.35.

More generally how do you see the Star Cruises' balance sheet going over the next few years? Where do you see your ratios going?

Lim: One major challenge is getting our equity up. But that is a function of how the market takes up your story. If the market improves, we would look to get our equity higher. Now we have $2.4 billion of debt and $1.8 billion of shareholders' equity. Maybe a level of 0.7 is something we would be targeting.

We also want to get more liquidity into our stock. There are some fund managers who shy away from us because of the lack of liquidity in our stock.

Do you think this might have something to do with your listing status, as a Malaysian company, operating around the world but listed in Hong Kong?

Lim: Although we have Malaysian shareholders we are not even incorporated in Malaysia and have few operations here. The market that we tap mainly comes from Hong Kong and to greater extent now China, Singapore and North America. Our listing in Hong Kong has the effect that we want to be closer to our big market -China.

How do you manage the cash you generate through your operations on the high seas?

Lim: Most of our ships are cashless. When people go onboard they get a boarding pass, which is the key to their room and their restaurant pass. At the end, customers just settle it all up with a credit card. So we don’t deal with that much cash onboard. All our ships are linked through the MEASAT satellite system so credit cards can be approved very quickly. The satellite link also helps us reduce the number of finance staff we need on the ships as everything can be processed here in Kuala Lumpur.

What is the main challenge that the board of Star Cruises faces on an ongoing basis?

Lim: Safety on board ships is very important as we are carrying people, not cargo So far we have been very safe. The other thing is to see how we can get the best yield for the product we offer.

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