With the pandemic blowing and investors breaking their promises, Asia's first local luxury cruise ship brand is facing the darkest hour

Source: Beijing News

On 19 January, Genting Hong Kong Limited ("Genting HK") announced that the Company's available cash balance would be depleted by the end of January or the end of January 2022 and would soon be unable to repay its debts as they fell due, so it filed a winding-up petition with the Bermuda Supreme Court on January 18, local time.

Encountered the "black swan" of the epidemic, the performance of huge losses

According to the data, Genting Hong Kong was established in November 1993, and its subsidiary Genting Cruises owns three cruise brands of Star Cruises, Dream Cruises and Crystal Cruises, operating a number of cruise ships such as Genting Dream and World Dream, of which Dream Cruises is the first local luxury cruise ship brand in Asia. In addition, Genting Hong Kong is also home to the German MV Shipbuilding Group (MVWH) and lloyd Werft Shipyard, among others.

Affected by additional depreciation and amortization of cruise ships and shipyards, marketing costs and market competition, Genting Hong Kong has been losing money for consecutive years before the outbreak of the new crown pneumonia epidemic, and the suspension caused by the epidemic has ushered in the "darkest hour" of Genting Hong Kong.

At the beginning of 2020, the outbreak of the epidemic broke out, and the World Dream of Dream Cruises once attracted widespread attention due to confirmed cases among passengers. On January 26, 2020, Dream Cruises announced the suspension of all of its cruise ships in Chinese mainland. In the end, the quarantine work of the World Dream was completed on 9 February 2020, and the 1814 crew members on board tested negative, and all passengers who had previously boarded the ship from Hong Kong, China, had left the ship after obtaining permission from the Department of Health. In addition, Crystal Cruises and Star Cruises have also cancelled their sailing plans. In February of the same year, Genting Hong Kong's cruise tourism business was suspended, and shipyard business was suspended since March.

The pandemic has hit the global cruise industry hard. According to the International Cruise Line Association, from mid-March 2020 to September, the cruise industry lost $77 billion to the global economy and lost 518,000 jobs. The survival of cruise companies is also worrying, and the three major cruise companies in the United States have collectively suffered large losses.

In this context, Genting Cruises took the lead in resuming sailing, kicking off the prelude to the resumption of global cruise ships. In July 2020, Dream Cruises launched island hopping tours in Taiwan, and in November 2020, World Dream was put back into operation, becoming the first cruise ship in Singapore to be allowed to resume sailing.

However, the two cruise ships are clearly struggling to reverse Genting Hong Kong's annual results. In 2020, Genting Hong Kong's total revenue plummeted from US$1,561 million in 2019 to US$367 million, with a net comprehensive loss of US$1,716 million, compared to a loss of US$159 million in 2019. In addition, The main source of revenue for cruise tourism in Genting Hong Kong is passenger ticketing, which shrank by 85.37% year-on-year to US$152 million in 2020.

Debt was at its peak, and Genting Hong Kong "sold off" assets

In its 2020 annual report, Genting Hong Kong expects cruise tourism business to return to normal in 2022 and reach pre-pandemic levels. However, with the epidemic and the changing market environment, Genting Hong Kong may "fall" in the first month of 2022.

On the one hand, although Dream Cruises and Crystal Cruises have resumed sailing one after another, due to the impact of the epidemic, not only the cruise capacity is limited, but also the operation is facing uncertainty brought about by the changes in the epidemic. For example, Nearly 10 months after the resumption of voyages in Taiwan in July 2020, The Star Cruises Discovery Dream was called off again in May 2021 until it was restarted on December 31, 2021. In addition, World Dream returned to Singapore early in July 2021 and underwent a preventive suspension due to the detection of suspected cases, before resuming operations in November of the same year. Genting Hong Kong management had previously anticipated that the approval of the remaining cruise ships would ultimately depend on the outbreak and the control of the Delta variant in other countries. However, with the spread of Omiqueron, the future epidemic situation has increased sharply.

On the other hand, there is the heavy pressure of debt. As at 31 December 2020, Genting Hong Kong had defaulted on a total of US$3.395 billion in borrowings. As at 30 June 2021, Genting Hong Kong's net debt was US$3,409 million, further expanding from US$3,141 million as at 31 December 2020, with total equity of US$2,515 million and a debt-to-capital ratio of 135.6%, while cash and cash equivalent items were only US$453 million.

To reserve cash and seek additional sources of funding, Genting Hong Kong has frequently sold non-core assets since September 2020, selling 50% of the total issued equity and loans of tourism facility development company Genting Macau in 2021 alone, a 26.84% stake in luxury yacht manufacturer Grand Banks Yachts and two aircraft.

Through cost control and partial resumption of cruise ships, Genting Hong Kong's "survival" has been effective, and the net loss in the first half of 2021 narrowed to US$238 million. During the resumption of flights from July 2020 to May 2021, Discovery Dream received more than 90,000 visitors. However, Genting Hong Kong remains tight in terms of cash flow.

Investors "default", where will the future go?

Among a series of open source and cost-cutting plans, the group's restructuring agreement disclosed by Genting Hong Kong in May last year is particularly important. Under the agreement, Genting Hong Kong-based German shipbuilding group MVWH will receive a €300 million financing from WSF (German Economic Stability Fund) for the construction of the Global Dream vessel and the Polar Icebreaker yacht Crystal Endeavor. In addition, the agreement amends and extends existing financial obligations, as well as capital financing worth not less than $30 million.

According to the data, MVWH was formed by the merger of three shipyards in Germany by Genting Hong Kong in 2016. At that time, the global cruise industry was developing rapidly, and global cruise orders had reached an unprecedented high. Genting Hong Kong judged that in the future, there may be a situation in which the cruise ship construction schedule cannot be obtained at the right price, which will affect the development of the cruise brand. As a result, Genting Group hopes to build and design its fleet of cruise ships through the acquisition of shipyards.

However, MVWH has dragged down Genting Hong Kong's performance to some extent. One of the reasons for genting Hong Kong's net profit in 2016 was the additional depreciation and amortization arising from the acquisition of the German shipyard, as well as the start-up, restructuring and acquisition costs associated with the shipyard's operations and new ship construction business. In the following years, MVWH's related depreciation and amortization items were among the "regular customers" who led to the loss of Genting Hong Kong.

The outbreak of the epidemic in 2020 has made Genting Hong Kong's "shipbuilding dream" worse. According to the financing agreement, the main purpose of the funds is to finance MVWH's shipbuilding. However, Genting Hong Kong's capital restructuring plan did not go well.

According to the announcement, a German insurance institution refused to recognize the insurance coverage required by the financing agreement, resulting in the relevant bank involved in the financing refusing to issue a loan of 108 million euros to Genting Hong Kong. It is reported that the reason for the insurance agency's refusal is the impact of the epidemic in Genting Hong Kong in the next five years and the continuous reduction of commercial activities. Genting Hong Kong argued that the above judgment was not a prerequisite for the insurance institution to confirm the insurance coverage, and the relevant assumptions were "unfair and unreasonable".

After adjusting the financing scheme, Genting Hong Kong was still denied access to the liquidity pool it was entitled to under the contract, and the payment request was also rejected. Genting Hong Kong applied to the participating banks to release the US$81 million of its own funds locked in the working capital reserve account, but as of January 18 this year, the relevant banks had not approved the payment.

In the end, due to the inability to obtain additional funds, MVWH filed for bankruptcy in the German court on January 10, local time, and the construction of two new ships of Genting Cruises may be at an impasse.

It is worth noting that on December 17 last year, Genting Hong Kong encountered obstacles in requesting the withdrawal of $88 million in standby financing provided by the German state of Mae Qian. Genting Hong Kong said that after filing a lawsuit with a German court to demand that Meiqian State fulfill the agreement, the court initially ordered Meiqian State to immediately allocate $88 million, but then revised the judgment twice, and finally changed to no amount to be paid immediately. On January 11 this year, the amendment was heard, and on January 17, Genting Hong Kong's application for MeiqianZhou was rejected by the court.

Due to the failure of investors to meet the contract, Genting Hong Kong currently faces a significant shortage of liquidity sources. On 18 January, Genting Hong Kong said that unless it receives a restructuring plan that enables the company to repay its debts as they fall due, the parties unanimously approve and the conditions of all parties are met at the same time, the board of directors will likely file a provisional winding-up petition with the competent court of Bermuda on 18 January 2022 (Bermuda time). Meanwhile, three independent non-executive directors of Genting Hong Kong, Aaron Shi, Wai-han Lam and Chan Ho-yu, announced their resignations.

On 19 January, Genting Hong Kong announced that the company's available cash balance would be depleted by the end of January or the end of January 2022 and would soon be unable to repay its debts as they fell due, so it had filed a winding-up petition with the Bermuda Supreme Court. At the same time, Genting HONG Kong also applied to the Court to authorize the joint provisional liquidators to facilitate and assist the Company in formulating and proposing a financial debt restructuring, to assist the Company in its continuing operations, and to make compromises or arrangements with creditors on the repayment of debts, or to authorize the sale of all/part of genting Hong Kong's assets.

Genting Hong Kong also said that the company's business activities such as cruise route operations will continue to protect core assets and maintain value, but it is expected that most of the existing operating business will be stopped. With domestic and foreign difficulties, where will Genting Hong Kong go? (Reporter: Zheng Yijia Source: Beijing News)