Kloster Cruise Limited has formed a joint venture company with Overseas Shipholding Group which will own and operate four ships under the name of Norwegian Cruise Line.

The new NCL will own and operate the 2,022-passenger Norway and 1,534-passenger Seaward and the new 1,246-passenger Dreamward and Windward. In addition, the new company will also operate the Starward, Westward Sunward and Southward owned by Kloster Cruise.

New NCL

The new company will be financed through investments of $175 million by OSG and $175 million by Kloster Cruise and will acquire the four vessels from Kloster Cruise valued "in excess of" $1 billion, according to Trygve Hegnar, Chief Executive of Kloster Cruise.

OSG's investment is in the form of a $175 million interest bearing loan which will be converted to 50 percent ownership after five years, upon payment of an additional $50 million, if the new company is profitable. If the new company does not meet expectations, OSG has the option to withdraw, in which case NCL is obligated to repay the loan.

Kloster Cruise will receive more than $300 million from the transaction, according to Hegnar. In the process, Kloster Cruise's debt would be reduced from about $630 million to $500 million with the new company assuming mortgage debt of approximately $120 million on the Norway and the Seaward.

It is estimated that the new NCL will have total assets including cash and ships valued at more than $1.4 billion and long-term debt of about $850 million. The owned fleet will include four ships with 6,048 berths, and another four ships with 3,108 berths, for a total fleet of eight ships and 9,156 berths.

New Kloster Cruise

Kloster Cruise will henceforth hold a 50 percent interest in the new NCL.

Kloster Cruise will also have more than $300 million in cash plus 100 percent ownership of the other four ships of the "old" NCL fleet, recently valued at $246 million. Kloster Cruise will also own RVL, valued at $340 million, and RCL, valued at $345 million. Total assets, including ships and cash, are estimated at $1.406 billion. Total debt is estimated at $500 million.

While it is too early to say, it is unlikely that travel agents or consumers will notice any differences between the new and old NCL, since the changes are taking place on the ownership side.

A new board will be installed for NCL with four board members from each of the two partners, representing OSG and Kloster Cruise respectively.

RCL operates largely independently out of its offices in San Francisco and RVL has in recent months been operating with its own organization in Miami so neither of these cruise lines are likely to be affected. However, the ships of the three lines are largely looked after by the same marine operations department. Hegnar said he expected this relationship to continue.

Hegnar said it would be natural for Kloster Cruise to purchase marine operations services from the new NCL. Hegnar also said it was natural that the present NCL administration, marketing and sales organization will continue. "We already have a successful organization in place," he said.

Contrary to previous reports (also in this newsletter), Hegnar said he had no plans to vacate his position as CEO of Kloster Cruise.

Bum Rap

Kloster Cruise may have received a bum rap by the Norwegian press which has been largely critical of the deal.

Before the deal with OSG, Kloster had a debt­ to-asset ratio of about 46 percent; the new Kloster will have an estimated debt-to-asset ratio of 35 percent.

Kloster Cruise has managed to release a large amount of cash which it can use to pay down debt. The expected net result should be a more profitable Kloster Cruise.

The new NCL will have a debt-to-asset ratio of about 60 percent. While the new NCL thus will have a larger debt burden than Kloster used to have, it will also have cash on hand and it will own the most profitable NCL ships, the Norway and the Seaward, and the two new ships, the Dreamward and the Windward. In addition, the new NCL will also have a new partner/owner.

The combination should make the new NCL more competitive in the marketplace. It may also give the company new growth opportunities.

Hegnar said that he thought the new four-ship fleet of some 6,000 berths was a good size in the Caribbean market and that there are plans for expansion.

It is hard to judge the reaction to the announcement of the new partnership with OSG in the Norwegian stock market since the whole market is presently in a slump. "We cannot fight the market," Hegnar said while underlining that Vard's shares have taken less of a beating than many other large companies.

$300 million for Norway

Since it has been announced that total payment exceeds $1 billion, it means that the 30-year-old Norway realized more than $300 million.

It is assumed that the two new ships have been sold at basically construction cost, $240 million each, and that the Seaward has been sold for her estimated market value of $22.5 million, according to a recent balance sheet statement from Vard parent company to Kloster Cruise.

The values realized largely supports Hegnar who has long argued a case for looking at the company's asset values not only earnings potential.

Citibank, N.A. acted as financial advisor for the transaction.

Future

It is expected that the new partnership will have a beneficial impact on Kloster Cruise's earnings, but the cruise market is still a long way from recovered.

NCL is expected to be operating in the competitive Caribbean market where historically both the Norway and the Seaward have reportedly been profitable. As to new ships, they are traditionally profitable for established operators.

The uncertain factor is the impact of the rest of the older Kloster fleet which will also be sailing under the NCL flag. Sources have indicated, however, that all or some of the older ships will be sold or deployed in new markets.

It is clear, however, that the new NCL will lose market share to the growing fleets of its competitors. How this will affect its operations remains to be seen.

RCL has an established reputation and has never had any problems filling its two-ship fleet. Now, however, RCL has three ships and its markets may soon be overlapping with those of the growing Holland America Line fleet. Executives at RCL, however, expressed confidence.

At RVL meanwhile, the Sun may benefit from a reduced supply in the luxury market segment, mostly due to its own streamlining. But the smaller ship may face competition from the Seabourn Cruise Line and Cunard Sea Goddess fleets.

Thus, while the new Kloster is expected to be successful, and Hegnar has promised that 1992 will be the best year in the company's history, today's cruise market is characterized by a great deal of uncertainty created by the ongoing economic recession in the United States and the oversupply of berths as new ships come into service.

OSG

OSG has gained entry into the cruise market through an established and well-reputated operator by a relatively modest entry fee.

While Kloster has negotiated a "sweet deal," OSG has done likewise. If NCL is not successful, OSG can simply pull out and collect its loan plus interest.

OSG is one of the largest bulk shipping companies in the world. It is engaged in ocean transportation of liquid and dry bulk cargoes. OSG's fleet consists of 65 vessels with a total carrying capacity of 6.1 million deadweight tons.

OSG is listed on the New York Stock Exchange.