Premier Cruises has bought time - and hopefully, confidence within the travel community - thanks to a new $35 million Joan at 11 percent interest from Donaldson Lufkin & Jenrette (DLJ). In addition, Premier is attempting to sell a minority stake in the company for $20 million.
DLJ had handled Premier's $160 million bond offering in March and is now rumored to hold a significant position in those bonds. The new loan by DLJ essentially supplants a $30 million Joan facility co-underwritten by SE Banken (SEB) and Chase Manhattan which was created in conjunction with the bond offering.
The SEB/Chase facility had provided an initial loan of $15 million (since spent by Premier) at just over seven percent, plus an additional $15 million if specific performance covenants were met. After fust quarter losses of $21.3 million, there were questions about whether the banks would hold Premier to those covenants and not loan out the additional $15 million.
The DLJ action ends such concerns: Of DLJ's $35 million loan, $20 million will go to Premier in cash, while $7.5 million is paid to SEB, $7.5 million to Chase. Thus, the banks get repaid on their first $15 million and DLJ gives Premier the second $15 million - plus $5 million that Premier plans to spend on additional FMC bonding.
The new DLJ loan, like the old lower interest bank loan, is secured by liens on the Oceanic and Rembrandt, Premier's two most sellable ships. With those terms, DLJ should expect to get its $35 million back even in the worst-case scenario, at the same time it defends its rumored position in Premier's bonds by giving the cruise line a financial cushion.
Jan Erik Nygaard, COO of Premier, discounts any suggestion that the banks were not willing to loan the second $15 million. "We were in discussions with the banks, but the DLJ loan offered us much more flexibility and allowed us to focus on operating the company, not on a lot of paperwork," he claimed.
With the new loan in place, Premier's total debt stands at approximately $195 million, all at 11 percent, with the first semi-annual $8.8 million bond payment due this September. CFO Dan Huwel said he expects this interest payment to be paid through company earnings "but the additional cash (from DLJ) lays to rest any questions about whether we can pay that."
The timing of the DLJ loan is particularly important to Premier's ability to retain travel agents' confidence. Travel agent fears arose from a string of negative publicity, capped by the engine problems of the SeaBreeze in early July (which cost Premier $380,000). Acording to Nygaard, "The main reason for doing this financial plan is to be able to stop all the rumors and all the talk in the travel agency community."
And if Premier can successfully sell a minority stake in the company, it with gain additional working capital as well as a long-term opportunity to refinance some of its high-interest debt. While several analysts questioned how Premier could do so without ceding control from Norwegian Vidar Lyhus to a new investor, Huwel maintained, "We are hoping to raise at least $20 million with the least amount of dilution; ultimately this will be determined by the marketplace."
New Business Plan
For 1998, Premier now projects an EBITDA of $15 million, down over 60 percent from the initial forecast of $40.7 million. While the second quarter is expected to be disappointing, Nygaard reports "definite indications" of stronger third and fourth quarters, and optimistically predicts EBITDA of $40 million for 1999.
The key points of the new business plan announced July 8 are (1) more itineraries from U.S. ports beginning next year and (2) cost cutting which does not impact service.
While heightened U.S. embarkations will necessitate the additional $5 million in FMC bonding, Nygaard said the shift will reduce air costs and increase net revenues for Premier. In particular, Premier is considering shifting one of its vessels into service as a second Big Red Boat (the Oceanic, Premier's most successful ship, contributed 47 percent of the overall first-quarter operating profit in 1998).
Will this strategy create two brands, a "classic" brand and a Big-Red-family brand, as opposed to one focused image? "To some extent we already have sort of two brands, with the Oceanic," noted Nygaard, underlining the potential of the family-oriented market.
Also, will the shift to U.S. embarkations bring Premier into closer competition with the more amenity-laden and cost-efficient newbuildings of the Big Three? "That's a good question," responded Nygaard, "but even if we had all six ships at U.S. ports, we would still be our own niche, not mass market."
With regards to the cost cutting, Premier plans to cut $5 million annually shoreside and $2 million from ship operating costs. Yet Nygaard asserted, "We would never take the chance of allowing cost cutting to affect service. That's a risk we can't take."
In addition, air/sea operations are being brought in-house, he added, with yield management being improved, and an early booking program going on line in August.
Premier's long-term success depends on the extent it can carve out a true niche for itself, and build brand loyalty - and not just ride on the coattails of the industry's success. The latter strategy may not survive the flood of new tonnage being introduced by mainstream lines, and would be vulnerable to economic downturns. The former strategy has been given a window of opportunity to work by the $35 million DLJ loan, a window which would be further widened by successful equity financing.