In the last few weeks, Kloster Cruise was a pawn in a financial game between Yard, board members, major shareholders, creditors, and outside interests. The reason for the crisis was that Yard defaulted on a $59 million loan that was due a syndicate of banks on January 10. The loan was "left-over" from Yard's ferry companies which were sold last year.

Since Yard has no other assets than Kloster Cruise, a default could have put the banks or new investors in control of the cruise line. Among these were Carnival Corporation which had acquired some of Yard's outstanding debt. Another potential investor was Hal Investment, the former owners of Holland America Line.

Among the new lenders, however, is Norex America which previously owned Bermuda Star Lines.


The refinancing package includes loans of $22 million from Norex and Mega Pacific, while the Norwegian bank lenders have extended their loans. totaling $40 million, to December 31, 1995, with partial payment before June 15, 1995. All the non-Norwegian bank lenders have been repaid.

In addition, Yard has proposed to raise NOK 150 (approximately $20 million) in a new share issue in Norway before June 15, 1995.

Yard's plans also call for investing at least $80 million in Kloster Cruise through a new share issue in the cruise company by June 30, 1995, and by selling some of its own shares in the company by Dec. 30, 1995.

Furthermore, Vard's plans call for additional equity issues in Kloster Cruise to enable the cruise company to place orders for two newbuildings, "alternatively other industrial cooperation such as mergers or strategic agreements," according to Vard.

Kloster Cruise has also announced preliminary results for the year ended Dec. 30, 1994.

The company expects to report a net loss of $3 million on revenues of $874.4 million compared to a net loss of $16.3 million on revenues of $918.2 million in 1993.

Excluding the gain on sale of assets and other extraordinary items, the net loss is expected to be $25.2 million for 1994 compared to $20.5 million in 1993.

Kloster posted a $39.4 million gain on sale of assets which included the Royal Viking Sun, Southward and Golden Odyssey.

Long-term debt liabilities were reduced from $921.5 million to $764 million.

Operating income was $68.5 million for an operating margin of 7.8 percent in 1994 compared to $69.5 million and a 7.6 percent margin in 1993.

The interest expense was reported to be $93.3 million in 1994 compared to $86.2 million in 1993. Kloster reported operating income of $140 million before interest, depreciation and amortization for 1994 compared to $141.5 million for 1993.

Kloster also reported 3,679,938 cruise days for a 94.8 percent load factor for 1994 compared to 3,933,587 cruise days and a 97.7 percent load factor in 1993.

Adam Aron, Kloster Cruise President and CEO, said that "we were disappointed by operating earnings especially in the fourth quarter - which were the result of rampant price cutting by our competitors and other factors."

Fourth Quarter

Kloster Cruise expects to report a net loss of $13.9 million on revenues of $198.6 million for the quarter ended Dec. 31, 1994 compared to a net loss of $5 million on revenues of $225.6 million for the same quarter in 1993. Operating income was $4 million this year compared to $14.3 million last year.

Kloster reported 863,184 passenger cruise days for a load factor of 93.2 percent in the fourth quarter of 1994 compared to 971,677 passenger cruise days for a load factor 94.3 percent in the same quarter a year ago.


Kloster Cruise's long promised turn-around is clearly not around the first comer. But as this newsletter has shown before, Kloster's per passenger operating costs and gross per diems compare very favorably in the industry. Kloster's problem, meanwhile, is its debt burden and until that can be solved, debt service will continue to siphon off earnings.

In resolving its crisis, however, Yard went from a debt of $59 million to $62 million. Plans to sell shares may also be questionable based recent market evaluation of Yard in Norway as well as a downgrading of Kloster's bonds in the U.S.

So far, Vard has bought more time, but seemingly little more.

In 1995, Kloster Cruise expects to benefit from repositioning the Seaward, which represents 20 percent of the company's capacity in the more profitable seven­ day Southern Caribbean market.

Kloster attributed some of the 1994 results to the intensely price competitive, low yielding three- and four-day market which had resulted in a decline in operating income for the Seaward.

Next summer, Kloster will instead put the Leeward in the three- and four-day market out of Miami.

Thus, Kloster should be able to boost revenues and earnings in 1995. However, with its large debt service, the company is vulnerable to adverse developments beyond its control and makes the point somewhat soberly in a prepared statement. Kloster stated that it may consider proposals to enhance its liquidity and capital resources, including the sale of equity interests in the company and its vessels.

Battle Scenarios

While the battle scenarios were raging in Oslo, Micky Arison, Chairman of Carnival Corporation, was quoted as saying that he had acquired some of Yard's debt because he would like to help Kloster Cruise. He has previously been critical of Kloster management.

Carnival had acquired approximately $13 million, or 25 percent, of Yard's outstanding debt. If Yard had defaulted, Carnival could theoretically have acquired a significant interest in Kloster Cruise for $13 million. Or, at the very least had some say in Kloster Cruise's future. The outstanding debt was mortgaged against a 49.5 percent interest in Kloster Cruise.

While Arison was reported to say that he would not comment on his strategy, it is speculated that he had hoped to buy more of Yard's debt and assume control of Yard, that is, of Kloster Cruise.

That scenario obviously did not come to pass this time, but the opportunity may come again unless Yard can carry out its plans. Meanwhile, a spokesperson for Royal Caribbean Cruise Line said that RCCL was not interested in Kloster Cruise.

HAL Investments, on the other hand, reportedly offered to lend Yard $22 million to pay off the foreign banks and offered to buy Royal Cruise Line for $265 million.

In the last few months, Yard has also spent a lot of time on Apollo Investors, which once was reported to be close to purchasing Royal Cruise Line and Royal Viking Line. For a long time, Apollo seemed to be Yard's only solution to meet its January 10th loan deadline.

Sources said that the board nearly "lost" Yard by relying too much on Apollo to bail it out. However, once again Apollo did not come through for Kloster.

In a prepared statement, Yard said that a number of institutional and financial investors, including Apollo, had shown a considerable interest in buying assets or shares in Kloster Cruise, but that the board has not accepted any of the offers.

Long Term

Kloster Cruise last posted net earnings before asset sales in 1990 and has lost money before ship sales every year since.

In order to continue under its present ownership structure, Kloster needs to generate enough cash to service its debt. Since this seems to be very difficult, it means that Kloster must reduce its debt. That either means that the company must attract new capital and/or sell ships or, more likely, both.

The most effective next course of action may be to sell RCL and focus solely on NCL. The sale of RCL, plus the sale of the two white ships that NCL has left, should bring in capital to further reduce debt and enable NCL to order new, larger and more efficient ships.

But the arithmetic may not be that simple. New ships will again add to the company's debt.

It will be up to Kloster's management to demonstrate how new ships will generate enough cash to put the company on a profitable course.