UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

 

 

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File Number: 001-35784

 

 

 

NORWEGIAN CRUISE LINE HOLDINGS LTD.

(Exact name of registrant as specified in its charter)

 

 

 

Bermuda 98-0691007

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

7665 Corporate Center Drive, Miami, Florida 33126

(Address of principal executive offices) (zip code)

 

(305) 436-4000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report) 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer x Accelerated filer ¨
       
Non-accelerated filer ¨  (Do not check if a smaller reporting company) Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

There were 227,179,962 ordinary shares outstanding as of November 3, 2016.

 

 

 

 

  

  

TABLE OF CONTENTS

 

    Page
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
     
Item 4. Controls and Procedures 28
   
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 30
     
Item 1A. Risk Factors 30
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
     
Item 6. Exhibits 31
   
SIGNATURES 33

 

 

 Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Revenue                    
Passenger ticket  $1,071,815   $948,059   $2,630,405   $2,406,533 
Onboard and other   412,921    336,851    1,118,798    901,992 
Total revenue   1,484,736    1,284,910    3,749,203    3,308,525 
Cruise operating expense                    
Commissions, transportation and other   249,519    225,586    618,492    589,851 
Onboard and other   90,661    84,171    230,416    210,701 
Payroll and related   193,122    170,694    554,741    490,253 
Fuel   86,250    88,829    248,529    267,784 
Food   50,902    46,419    151,674    131,969 
Other   114,280    102,023    351,263    307,143 
Total cruise operating expense   784,734    717,722    2,155,115    1,997,701 
Other operating expense                    
Marketing, general and administrative   174,813    150,558    504,694    411,879 
Depreciation and amortization   111,575    109,798    317,480    314,381 
Total other operating expense   286,388    260,356    822,174    726,260 
Operating income   413,614    306,832    771,914    584,564 
Non-operating income (expense)                    
Interest expense, net   (60,662)   (49,784)   (188,836)   (153,219)
Other expense   (5,333)   (1,733)   (13,281)   (35,589)
Total non-operating income (expense)   (65,995)   (51,517)   (202,117)   (188,808)
Net income before income taxes   347,619    255,315    569,797    395,756 
Income tax expense   (5,241)   (3,528)   (8,944)   (6,931)
Net income  $342,378   $251,787   $560,853   $388,825 
Weighted-average shares outstanding                    
Basic   227,096,142    227,384,616    227,102,560    225,805,901 
Diluted   227,598,607    230,274,756    227,859,617    229,860,900 
Earnings per share                    
Basic  $1.51   $1.11   $2.47   $1.72 
Diluted  $1.50   $1.09   $2.46   $1.69 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Comprehensive Income

(Unaudited)

(in thousands)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Net income  $342,378   $251,787   $560,853   $388,825 
Other comprehensive income (loss):                    
Shipboard Retirement Plan   107    119    323    358 
Cash flow hedges:                    
Net unrealized income (loss)   37,051    (105,227)   112,508    (138,501)
Amount realized and reclassified into earnings   18,327    13,132    76,658    61,582 
Total other comprehensive income (loss)   55,485    (91,976)   189,489    (76,561)
Total comprehensive income  $397,863   $159,811   $750,342   $312,264 

  

The accompanying notes are an integral part of these consolidated financial statements.

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share data)

 

   September 30,
2016
   December 31,
2015
 
Assets          
Current assets:          
Cash and cash equivalents  $155,431   $115,937 
Accounts receivable, net   55,838    44,996 
Inventories   65,983    58,173 
Prepaid expenses and other assets   159,447    121,305 
Total current assets   436,699    340,411 
Property and equipment, net   10,054,220    9,458,805 
Goodwill   1,388,931    1,388,931 
Tradenames   817,525    817,525 
Other long-term assets   245,965    259,085 
Total assets  $12,943,340   $12,264,757 
Liabilities and Shareholders’ Equity          
Current liabilities:          
Current portion of long-term debt  $566,911   $629,840 
Accounts payable   51,494    51,369 
Accrued expenses and other liabilities   520,079    640,568 
Due to Affiliate       20,769 
Advance ticket sales   1,210,505    1,023,973 
Total current liabilities   2,348,989    2,366,519 
Long-term debt   5,815,248    5,767,697 
Other long-term liabilities   242,376    349,661 
Total liabilities   8,406,613    8,483,877 
Commitments and contingencies (Note 9)          
Shareholders’ equity:          
Ordinary shares, $.001 par value; 490,000,000 shares authorized; 232,467,409 shares issued and 227,155,448 shares outstanding at September 30, 2016 and 232,179,786 shares issued and 227,815,301 shares outstanding at December 31, 2015   232    232 
Additional paid-in capital   3,870,040    3,814,536 
Accumulated other comprehensive income (loss)   (223,161)   (412,650)
Retained earnings   1,128,871    568,018 
Treasury shares (5,311,961 and 4,364,485 ordinary shares at September 30, 2016 and December 31, 2015, respectively, at cost)   (239,255)   (189,256)
Total shareholders’ equity   4,536,727    3,780,880 
Total liabilities and shareholders’ equity  $12,943,340   $12,264,757 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   Nine Months Ended
September 30,
 
   2016   2015 
Cash flows from operating activities          
Net income  $560,853   $388,825 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization expense   327,366    327,861 
Loss on derivatives   1,007    21,893 
Deferred income taxes, net   707    858 
Gain on contingent consideration       (43,400)
Write-off of deferred financing fees   11,537    195 
Provision for bad debts and inventory   1,767     
Share-based compensation expense   48,289    27,857 
Changes in operating assets and liabilities:          
Accounts receivable, net   (11,286)   (9,563)
Inventories   (9,133)   1,609 
Prepaid expenses and other assets   (16,197)   (599)
Accounts payable   2,551    (57,837)
Accrued expenses and other liabilities   (9,149)   6,996 
Advance ticket sales   180,447    308,691 
Net cash provided by operating activities   1,088,759    973,386 
Cash flows from investing activities          
Additions to property and equipment, net   (915,936)   (330,808)
Settlement of derivatives   (34,300)   1,090 
Investment in trademark       (750)
Net cash used in investing activities   (950,236)   (330,468)
Cash flows from financing activities          
Repayments of long-term debt   (2,687,621)   (908,677)
Repayments to Affiliate   (18,522)   (18,521)
Proceeds from long-term debt   2,687,355    375,751 
Proceeds from the exercise of share options   4,784    66,527 
Proceeds from employee share purchase plan   2,431    858 
Purchases of treasury shares   (49,999)   (7,425)
Deferred financing fees and other   (37,457)   (6,075)
Net cash used in financing activities   (99,029)   (497,562)
Net increase in cash and cash equivalents   39,494    145,356 
Cash and cash equivalents at beginning of period   115,937    84,824 
Cash and cash equivalents at end of period  $155,431   $230,180 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Norwegian Cruise Line Holdings Ltd.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(in thousands)

 

   Ordinary
Shares
   Additional
Paid-in
Capital
   Accumulated
Other
Comprehensive
Income (Loss)
   Retained
Earnings
   Treasury
Shares
   Total
Shareholders’
Equity
 
Balance, December 31, 2014  $230   $3,702,344   $(242,642)  $140,881   $(82,000)  $3,518,813 
Share-based compensation       27,857                27,857 
Proceeds from the exercise of share options   2    66,525                66,527 
Proceeds from employee share purchase plan       858                858 
Purchases of treasury shares                   (7,425)   (7,425)
Other comprehensive loss, net           (76,561)           (76,561)
Net income               388,825        388,825 
Balance, September 30, 2015  $232   $3,797,584   $(319,203)  $529,706   $(89,425)  $3,918,894 
                               
Balance, December 31, 2015  $232   $3,814,536   $(412,650)  $568,018   $(189,256)  $3,780,880 
Share-based compensation       48,289                48,289 
Proceeds from the exercise of share options       4,784                4,784 
Proceeds from employee share purchase plan       2,431                2,431 
Purchases of treasury shares                   (49,999)   (49,999)
Other comprehensive income, net           189,489            189,489 
Net income               560,853        560,853 
Balance, September 30, 2016  $232   $3,870,040   $(223,161)  $1,128,871   $(239,255)  $4,536,727 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Norwegian Cruise Line Holdings Ltd.  

Notes to Consolidated Financial Statements

(Unaudited)

 

Unless otherwise indicated or the context otherwise requires, references in this report to (i) the “Company,” “we,” “our” and “us” refer to NCLH (as defined below) and its subsidiaries (including Prestige (as defined below), except for periods prior to the consummation of the Acquisition of Prestige (as defined below)), (ii) “NCLC” refers to NCL Corporation Ltd., (iii) “NCLH” refers to Norwegian Cruise Line Holdings Ltd., (iv) “Norwegian” refers to the Norwegian Cruise Line brand and its predecessors, (v) “Prestige” refers to Prestige Cruises International, Inc., together with its consolidated subsidiaries, (vi) “PCH” refers to Prestige Cruise Holdings, Inc., Prestige’s direct wholly owned subsidiary, which in turn is the parent of Oceania Cruises, Inc. (“Oceania Cruises”) and Seven Seas Cruises S. DE R.L. (“Regent”) (Oceania Cruises also refers to the brand by the same name and Regent also refers to the brand Regent Seven Seas Cruises) and (vii) “Affiliate” refers to Genting Hong Kong Limited and/or its affiliates (formerly Star Cruises Limited and/or its affiliates). References to the “U.S.” are to the United States of America, “dollars” or “$” are to U.S. dollars, the “U.K.” are to the United Kingdom and “euros” or “€” are to the official currency of the Eurozone.

 

1.Description of Business and Organization

 

NCLH is a leading global cruise company which operates the Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. We have 24 ships with approximately 46,500 Berths including Sirena, previously under a Bareboat Charter, which joined our Oceania Cruises’ fleet in April 2016 and Seven Seas Explorer which was delivered in June 2016. We will introduce four additional ships to our fleet through 2020. Norwegian Joy, Norwegian Bliss and one additional Breakaway Plus Class Ship is on order for delivery in the spring of 2017, the spring of 2018 and the fall of 2019, respectively. An Explorer Class Ship is on order for delivery in the winter of 2020. These additions to our fleet will increase our total Berths to approximately 59,000.

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and, in our opinion, contain all normal recurring adjustments necessary for a fair statement of the results for the periods presented.

 

Our operations are seasonal and results for interim periods are not necessarily indicative of the results for the entire fiscal year. Historically, demand for cruises has been strongest during the Northern Hemisphere’s summer months. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2015, which are included in our most recently filed Annual Report on Form 10-K.

 

Reclassification

 

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

 

Earnings Per Share

 

A reconciliation between basic and diluted earnings per share was as follows (in thousands, except share and per share data):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Net income  $342,378   $251,787   $560,853   $388,825 
Basic weighted-average shares outstanding   227,096,142    227,384,616    227,102,560    225,805,901 
Dilutive effect of share awards   502,465    2,890,140    757,057    4,054,999 
Diluted weighted-average shares outstanding   227,598,607    230,274,756    227,859,617    229,860,900 
Basic earnings per share  $1.51   $1.11   $2.47   $1.72 
Diluted earnings per share  $1.50   $1.09   $2.46   $1.69 

 

Revenue and Expense Recognition

 

Deposits received from guests for future voyages are recorded as advance ticket sales and are subsequently recognized as passenger ticket revenue along with onboard and other revenue, and all associated direct costs of a voyage are recognized as cruise operating expenses on a pro-rata basis over the period of the voyage. Guest cancellation fees are recognized in passenger ticket revenue in the month of the cancellation. Certain of our product offerings are accounted for under the guidance included within multi-element arrangements and result in an allocation of the fair value between passenger ticket revenue and onboard and other revenue. 


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Revenue and expenses include port fees and taxes. The amounts included on a gross basis are $80.3 million and $70.1 million for the three months ended September 30, 2016 and 2015, respectively, and $214.3 million and $184.4 million for the nine months ended September 30, 2016 and 2015, respectively.

 

Foreign Currency

 

The majority of our transactions are settled in U.S. dollars. We translate assets and liabilities of our foreign subsidiaries at exchange rates in effect at the balance sheet date. Gains or losses resulting from transactions denominated in other currencies are recognized in our consolidated statements of operations within other expense. We recognized losses of $1.5 million and gains of $3.1 million for the three months ended September 30, 2016 and 2015, respectively, and losses of $1.9 million and gains of $8.8 million for the nine months ended September 30, 2016 and 2015, respectively.

 

Depreciation and Amortization Expense

 

The amortization of deferred financing fees is included in depreciation and amortization expense in the consolidated statements of cash flows; however, for purposes of the consolidated statements of operations it is included in interest expense, net.

 

Goodwill

 

We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicates the carrying value of a reporting unit may not be recoverable. Based on the recent performance of the Oceania Cruises’ reporting unit, we performed an interim Step 1 Test which consists of a combined approach using the expected future cash flows and market multiples to determine the fair value of the reporting unit. We determined that there was no impairment of goodwill as the Step 1 Test supports the carrying value of the reporting unit. 

 

Recently Issued Accounting Pronouncements

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15 which amends Topic 230 (Statement of Cash Flows) to eliminate discrepancies in reporting certain items in the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods with early adoption permitted. The transition should be made using a retrospective approach. We do not believe that the adoption of this guidance will be material to our consolidated statements of cash flows.

 

In May 2016, the FASB issued ASU No. 2016-12 which addresses improvements to the guidance on revenue from contracts from customers regarding collectibility, noncash consideration, and completed contracts at transition. Additionally, it provides a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective date of this guidance is upon adoption of ASU No. 2014-09 which is presented below. We are currently evaluating the impact of the adoption of this guidance to our consolidated financial statements.

 

In May 2016, the FASB issued ASU No. 2016-11 which is a rescission of Securities and Exchange Commission guidance related to the issuance of ASU No. 2014-09 which is presented below. The effective date of this guidance is upon adoption of ASU No. 2014-09. We are currently evaluating the impact of the adoption of this guidance to our consolidated financial statements.

 

In April 2016, the FASB issued ASU No. 2016-10 which does not change the core principle of the guidance in ASU No. 2014-09 but clarifies two aspects: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The effective date of this guidance is upon adoption of ASU No. 2014-09. We are currently evaluating the impact of the adoption of this guidance to our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09 to improve multiple aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods with early adoption permitted. We do not believe that the adoption of this guidance will be material to our consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02 which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The ASU requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The ASU further modifies lessors’ classification criteria for leases and the accounting for sales-type and direct financing leases. The ASU will also require qualitative and quantitative disclosures designed to give financial statement users additional information on the amount, timing, and uncertainty of cash flows arising from leases. The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018 with early adoption permitted. The ASU is to be applied using a modified retrospective approach.  We are currently evaluating the impact of the adoption of this guidance to our consolidated financial statements.

 

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In July 2015, the FASB issued ASU No. 2015-11 to simplify the measurement of inventory for all entities. This applies to all inventory that is measured using either the first-in, first-out or average cost method. The guidance requires an entity to measure inventory at the lower of cost and net realizable value. The guidance must be applied prospectively and will be effective for our interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of the adoption of this guidance to our consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-05 to clarify a customer’s accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license or if the arrangement should be accounted for as a service contract. This guidance will impact the accounting of software licenses but will not change a customer’s accounting for service contracts. The guidance will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. We have adopted this guidance and there has not been an impact to our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09 which requires entities to recognize revenue through the application of a five-step model, including identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligation and recognition of revenue as the entity satisfies the performance obligations. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. In August 2015, the FASB issued ASU No. 2015-14 deferring the effective date for one year. We can elect to adopt the provisions of ASU No. 2014-09 for annual periods beginning after December 15, 2017 including interim periods within that reporting period or we can elect to early adopt the guidance as of the original effective date. We have initiated an assessment of our systems, data and processes related to the implementation of this guidance. This assessment is expected to be completed during 2017. Additionally, we are currently evaluating the potential impact on our consolidated financial statements.

 

3.Intangible Assets

 

The gross carrying amounts of intangible assets included within other long-term assets, the related accumulated amortization, the net carrying amounts and the weighted-average amortization periods of the Company’s intangible assets are listed in the following table (in thousands, except amortization period): 

 

   September 30, 2016 
   Gross Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount
   Weighted-
Average
Amortization
Period (Years)
 
Customer relationships  $120,000   $(31,326)  $88,674    6.0 
Licenses   3,368    (631)   2,737    5.6 
Non-compete agreements   660    (330)   330    1.0 
Total intangible assets subject to amortization  $124,028   $(32,287)  $91,741      
License (Indefinite-lived)  $4,427   $   $      

 

   December 31, 2015 
   Gross Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount
   Weighted-
Average
Amortization
Period (Years)
 
Customer relationships  $120,000   $(15,527)  $104,473    6.0 
Backlog   70,000    (70,000)       1.0 
Licenses   3,368    (208)   3,160    5.6 
Total intangible assets subject to amortization  $193,368   $(85,735)  $107,633      
License (Indefinite-lived)  $4,427   $   $      

 

The aggregate amortization expense is as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Amortization expense  $5,601   $20,951   $16,552   $60,172 
                     

 

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The following table sets forth the Company’s estimated aggregate amortization expense for each of the five years below (in thousands): 

 

Year ended December 31,  Amortization
Expense
 
2017  $31,067 
2018   26,163 
2019   18,489 
2020   9,906 
2021   75 

 

4.Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) for the nine months ended September 30, 2016 was as follows (in thousands): 

 

   Accumulated
Other
Comprehensive
Income (Loss)
   Change
Related to
Cash Flow
Hedges
   Change
Related to
Shipboard
Retirement
Plan
 
Accumulated other comprehensive income (loss) at beginning of period  $(412,650)  $(405,298)  $(7,352)
Current period other comprehensive income before reclassifications   112,508    112,508     
Amounts realized and  reclassified into earnings   76,981    76,658(1)   323(2)
Accumulated other comprehensive income (loss) at end of period  $(223,161)  $(216,132)(3)  $(7,029)

 

(1) We refer you to Note 7— “Fair Value Measurements and Derivatives” for the affected line items in the consolidated statements of operations.
(2) Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense.
(3) Includes $67.2 million of loss expected to be reclassified into earnings in the next 12 months.

 

Accumulated other comprehensive income (loss) for the nine months ended September 30, 2015 was as follows (in thousands):

 

   Accumulated
Other
Comprehensive
Income (Loss)
   Change
Related to
Cash Flow
Hedges
   Change
Related to
Shipboard
Retirement
Plan
 
Accumulated other comprehensive income (loss) at beginning of period  $(242,642)  $(234,188)  $(8,454)
Current period other comprehensive loss before reclassifications   (138,501)   (138,501)    
Amounts realized and  reclassified into earnings   61,940    61,582(1)   358(2)
Accumulated other comprehensive income (loss) at end of period  $(319,203)  $(311,107)  $(8,096)

 

(1) We refer you to Note 7— “Fair Value Measurements and Derivatives” for the affected line items in the consolidated statements of operations.
(2) Amortization of prior-service cost and actuarial loss reclassified to payroll and related expense.

 

5.Property and Equipment, net

 

Property and equipment, net increased $595.4 million for the nine months ended September 30, 2016 primarily due to the delivery of Seven Seas Explorer and the refurbishment of several ships.

 

6.Long-Term Debt

 

In June 2016, NCLC and Voyager Vessel Company, LLC, indirect subsidiaries of NCLH, entered into a Second Amended and Restated Credit Agreement (the “Amended Senior Secured Credit Facility”) with a syndicate of banks which restates the Amended and Restated Credit Agreement, dated as of October 31, 2014 (the “Existing Senior Secured Credit Facility”). The Amended Senior Secured Credit Facility amends the Existing Senior Secured Credit Facility to, among other things, (i) (a) increase the aggregate amount of commitments under the Revolving Loan Facility from $625.0 million to $750.0 million (the “New Revolving Loan Facility”) and (b) increase the aggregate principal amount outstanding under the $1.38 billion term loan facility from $1.16 billion to $1.51 billion (the “New Term Loan A Facility”) and (ii) extend the maturity of the New Term Loan A Facility and the New Revolving Loan Facility to June 2021 (the “Extended Maturity Date”). The agreement incorporates a springing maturity date for the New Term Loan A Facility and the New Revolving Loan Facility such that both mature on (A) the earlier date that is 91 days prior to the final maturity date of NCLC’s $680.0 million aggregate principal amount of 5.25% senior unsecured notes due 2019 (the “5.25% Notes”) if on such date (x) the 5.25% Notes have not been repaid (or refinanced with indebtedness maturing after the Extended Maturity Date) by such date and (y) free liquidity does not exceed the aggregate principal amount of outstanding 5.25% Notes by at least $50.0 million and (B) the earlier date that is 91 days prior to the final maturity date of NCLC’s $600.0 million aggregate principal amount of 4.625% senior unsecured notes due 2020 (the “4.625% Notes”) if on such date (x) the 4.625% Notes have not been repaid (or refinanced with indebtedness maturing after the Extended Maturity Date) by such date and (y) free liquidity does not exceed the aggregate principal amount of outstanding 4.625% Notes by at least $50.0 million. NCLC used proceeds of approximately $1.59 billion from the New Term Loan A Facility and the New Revolving Loan Facility to prepay the entire outstanding principal amount of the Revolving Loan Facility, the $1.38 billion term loan facility and a $350.0 million term loan facility.

 

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The New Term Loan A Facility and New Revolving Loan Facility bear interest at a rate per annum of (a) an adjusted LIBOR rate or (b) a base rate determined by reference to the greatest of (i) the federal funds rate plus 0.50%, (ii) the prime rate in effect on such day and (iii) the adjusted LIBOR rate plus 1%, in each case plus an applicable margin that is determined by reference to a total leverage ratio, with an applicable margin of between 2.25% and 1.50% with respect to Eurocurrency loans and between 1.25% and 0.50% with respect to base rate loans. The initial applicable margin for borrowings is 2.25% with respect to Eurocurrency borrowings and 1.25% with respect to base rate borrowings.

 

The New Term Loan A Facility is required to be repaid in quarterly installments that commenced in September 2016, in a principal amount equal to (a) in the case of installments payable on or prior to June 6, 2018, 1.25% of the loans outstanding immediately after the closing date under the New Term Loan A Facility and (b) in the case of installments payable after June 6, 2018, 2.50% of the loans outstanding immediately after the closing date under the New Term Loan A Facility, with the remaining unpaid principal amount of loans under the New Term Loan A Facility due and payable in full at maturity on June 6, 2021. Principal amounts outstanding under the New Revolving Loan Facility are due and payable in full at maturity on June 6, 2021, subject to earlier repayment pursuant to the springing maturity date described above.

 

In addition to paying interest on outstanding principal under the borrowings, we are obligated to pay a quarterly commitment fee at a rate determined by reference to a total leverage ratio, with a maximum commitment fee of 40% of the applicable margin for Eurocurrency loans.

 

In June 2016, we took delivery of Seven Seas Explorer. To finance the payment due upon delivery, we had export financing in place for 80% of the contract price. The associated $373.6 million term loan bears interest at 3.43% with a maturity date of June 30, 2028. Principal and interest payments are payable semiannually.

 

NCLC, a subsidiary of NCLH, entered into a Supplemental Agreement, dated July 26, 2016, by and among NCLC, as guarantor, Breakaway Four, Ltd. (the “Borrower”), as borrower, NCL International Ltd., as shareholder, and KfW IPEX-Bank GmbH (“KfW”), as facility agent and lender (the “Credit Agreement Amendment”), which amends the Credit Agreement, dated as of October 12, 2012, by and among NCLC, as parent, the Borrower and KfW, as facility agent and lender (the “Existing Credit Agreement”). The Credit Agreement Amendment amends the Existing Credit Agreement to, among other things, increase the aggregate principal amount of commitments under the multi-draw term loan credit facility from €590.5 million to €729.9 million. Except as provided in the Credit Agreement Amendment, all other provisions of the Existing Credit Agreement remain in full force. 

 

7.Fair Value Measurements and Derivatives

 

Fair value is defined as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).

 

Fair Value Hierarchy

 

The following hierarchy for inputs used in measuring fair value should maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available:

 

Level 1 Quoted prices in active markets for identical assets or liabilities that are accessible at the measurement dates.
   
Level 2 Significant other observable inputs that are used by market participants in pricing the asset or liability based on market data obtained from independent sources.
   
Level 3 Significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available.

  

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Derivatives 

 

We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal operating and financing activities and through the use of derivatives. We assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the cash flow of our hedged forecasted transactions. We use regression analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of the derivative and the hedged forecasted transaction. Cash flows from the derivatives are classified in the same category as the cash flows from the underlying hedged transaction. The determination of ineffectiveness is based on the amount of dollar offset between the cumulative change in fair value of the derivative and the cumulative change in fair value of the hedged transaction at the end of the reporting period. If it is determined that a derivative is not highly effective as a hedge, or if the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings. In addition, the ineffective portion of our highly effective hedges is recognized in earnings immediately and reported in other income (expense) in our consolidated statements of operations. There are no amounts excluded from the assessment of hedge effectiveness and there are no credit-risk-related contingent features in our derivative agreements.

 

We monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. Credit risk, including but not limited to counterparty non-performance under derivatives and our New Revolving Loan Facility, is not considered significant, as we primarily conduct business with large, well-established financial institutions that we have established relationships with and that have credit risks acceptable to us or the credit risk is spread out among a large number of creditors. We do not anticipate non-performance by any of our significant counterparties.  The following table sets forth our derivatives measured at fair value and discloses the balance sheet location (in thousands):

 

        Asset     Liability  
    Balance Sheet location   September 30,
2016
    December 31,
2015
    September 30,
2016
    December 31,
2015
 
Fuel swaps designated as hedging instruments                                    
    Prepaid expenses and other assets   $ 13,740     $     $     $  
    Other long-term assets     3,462             145        
    Accrued expenses and other liabilities                 73,923       128,740  
    Other long-term liabilities     7,167             65,529       132,494  
Foreign currency forward contracts designated as hedging instruments                                    
    Prepaid expenses and other assets     10,153             1,381        
    Other long-term assets     14,980       3,446       2,363       1,370  
    Accrued expenses and other liabilities     1,065             8,930       8,737  
    Other long-term liabilities     1,567       551       4,943       24,181  
Foreign currency collar not designated as a hedging instrument                                    
    Accrued expenses and other liabilities                       42,993  
Interest rate swaps designated as hedging instruments                                    
    Accrued expenses and other liabilities                 3,858       4,079  
    Other long-term liabilities                 2,594       3,395  

 

The fair values of swap and forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The Company determines the value of options and collars utilizing an option pricing model based on inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets. The option pricing model used by the Company is an industry standard model for valuing options and is used by the broker/dealer community. The inputs to this option pricing model are the option strike price, underlying price, risk-free rate of interest, time to expiration, and volatility. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. Our derivatives and financial instruments were categorized as Level 2 in the fair value hierarchy, and we had no derivatives or financial instruments categorized as Level 1 or Level 3.

 

Our derivative contracts include rights of offset with our counterparties. We have elected to net certain assets and liabilities within counterparties when the rights of offset exist. We are not required to post cash collateral related to our derivative instruments.

 

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The following table discloses the gross and net amounts recognized within assets and liabilities (in thousands):

 

September 30, 2016  Gross Amounts   Gross
Amounts
Offset
   Total Net
Amounts
   Gross
Amounts Not
Offset
   Net Amounts 
Assets  $42,335   $(3,889)  $38,446   $(11,179)  $27,267 
Liabilities   159,777    (9,799)   149,978    (10,802)   139,176 

 

December 31, 2015  Gross Amounts   Gross
Amounts
Offset
   Total Net
Amounts
   Gross
Amounts Not
Offset
   Net Amounts 
Assets  $3,446   $(1,370)  $2,076   $(2,043)  $33 
Liabilities   344,619    (551)   344,068    (336,645)   7,423 

   

Fuel Swaps

 

As of September 30, 2016, we had fuel swaps maturing through December 31, 2020 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 1.7 million metric tons of our projected fuel purchases.

 

The effects on the consolidated financial statements of the fuel swaps which were designated as cash flow hedges were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Gain (loss) recognized in other comprehensive income (loss)  – effective portion  $(157)  $(101,056)  $76,145   $(69,724)
Loss recognized in other expense – ineffective portion   (2,602)   (1,580)   (11,353)   (10,825)
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense   16,427    11,670    68,004    47,503 

 

We had fuel swaps that matured which were not designated as cash flow hedges. These fuel swaps were previously designated as cash flow hedges and were dedesignated due to a change in our expected future fuel purchases mix.

 

The effects on the consolidated financial statements of the fuel swaps which were dedesignated and recognized into earnings were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Loss recognized in other expense  $(179)  $(4,716)  $(271)  $(4,716)
Amount reclassified from accumulated other comprehensive income (loss) into other expense           2,994    10,000 

 

Fuel Collars

 

We had fuel collars that matured and were used to mitigate the financial impact of volatility in fuel prices of our fuel purchases.

 

The effects on the consolidated financial statements of the fuel collars which were designated as cash flow hedges were as follows (in thousands): 

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense  $   $   $   $248 
                     

Foreign Currency Options

 

We had foreign currency options that matured which consisted of call options with deferred premiums. These options were used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. If the spot rate at the date the ships were delivered was less than the strike price under these option contracts, we would have paid the deferred premium and would not exercise the foreign currency options.

 

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The effects on the consolidated financial statements of the foreign currency options which were designated as cash flow hedges were as follows (in thousands): 

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense  $330   $330   $990   $990 

 

Foreign Currency Forward Contracts

 

As of September 30, 2016, we had foreign currency forward contracts which are used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. The notional amount of our foreign currency forward contracts was €2.3 billion, or $2.6 billion based on the euro/U.S. dollar exchange rate as of September 30, 2016.

 

The effects on the consolidated financial statements of the foreign currency forward contracts which were designated as cash flow hedges were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Gain (loss) recognized in other comprehensive income (loss) – effective portion  $36,390   $(1,519)  $39,001   $(61,966)
Loss recognized in other expense – ineffective portion   (190)   (3)   (181)   (10)
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense   665    (64)   1,966    (191)

 

We had foreign currency forward contracts that matured and were used to mitigate the volatility of foreign currency exchange rates related to financial instruments denominated in foreign currencies.

 

The effects on the consolidated financial statements of foreign currency forward contracts which were not designated as cash flow hedges were as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Gain (loss) recognized in other expense  $   $585   $(6,133)  $684 
                     

Foreign Currency Collars

 

We had foreign currency collars that matured and were used to mitigate the volatility of foreign currency exchange rates related to our ship construction contracts denominated in euros.

 

The effects on the consolidated financial statements of the foreign currency collar which was designated as a cash flow hedge was as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense  $(91)  $(91)  $(273)  $(273)
                     

The effect on the consolidated financial statements of the foreign currency collar which was not designated as a cash flow hedge was as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Gain (loss) recognized in other expense  $   $955   $10,312   $(18,648)
                     

Interest Rate Swaps

 

As of September 30, 2016, we had interest rate swap agreements to hedge our exposure to interest rate movements and to manage our interest expense. The notional amount of outstanding debt associated with the interest rate swap agreements was $339.8 million as of September 30, 2016.

 

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The effects on the consolidated financial statements of the interest rate swaps which were designated as cash flow hedges were as follows (in thousands): 

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Gain (loss) recognized in other comprehensive income (loss)– effective portion  $818   $(2,652)  $(2,638)  $(6,811)
Gain (loss) recognized in other expense – ineffective portion       (9)   3    (21)
Amount reclassified from accumulated other comprehensive income (loss) into interest expense, net   996    1,287    2,977    3,305 

 

We had an interest rate swap that matured which was used to mitigate our exposure to interest rate movements and to manage our interest expense.

 

The effect on the consolidated financial statements of the interest rate swap contract which was not designated as a hedging instrument was as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Loss recognized in other expense  $   $   $   $(2)
                     

Long-Term Debt

 

As of September 30, 2016 and December 31, 2015, the fair value of our long-term debt, including the current portion, was $6.5 billion which was $16.4 million higher and $6.6 million lower, respectively, than the carrying values. The difference between the fair value and carrying value of our long-term debt is due to our fixed and variable rate debt obligations carrying interest rates that are above or below market rates at the measurement dates. The fair value of our long-term debt was calculated based on estimated rates for the same or similar instruments with similar terms and remaining maturities resulting in Level 2 inputs in the fair value hierarchy. Market risk associated with our long-term variable rate debt is the potential increase in interest expense from an increase in interest rates. The calculation of the fair value of our long-term debt is considered a Level 2 input.

 

Other

 

The carrying amounts reported in the consolidated balance sheets of all other financial assets and liabilities approximate fair value.

 

8.Employee Benefits and Compensation Plans

 

Share Option Awards

 

On March 1, 2016, we granted 1.0 million share option awards to our employees at an exercise price of $50.31 with a contractual term of ten years. The share options vest equally over three years.

 

The following is a summary of option activity under our share option plan for the nine months ended September 30, 2016 (excludes the impact of 364,584 previously awarded performance-based options as no grant date has been established):

 

    Number of Share Option
Awards
    Weighted-Average Exercise
Price Per Share
    Weighted-
Average
Contractual Term
   

Aggregate

Intrinsic Value

 
    Time-
Based
Awards
    Performance-
Based
Awards
    Market-
Based
Awards
    Time-
Based
Awards
    Performance-
Based
Awards
    Market-
Based
Awards
    (years)     (in thousands)  
Outstanding as of December 31, 2015     7,702,071       432,752       208,333     $ 47.35     $ 19.00     $ 59.43       8.59     $ 104,864  
Granted     1,095,000       52,083             49.88       59.43                        
Exercised     (169,527 )     (51,857 )           27.64       19.00                        
Forfeited and cancelled     (583,492 )                 49.46                              
Outstanding as of September 30, 2016     8,044,052       432,978       208,333     $ 47.96     $ 23.86     $ 59.43       8.07     $ 24,633  

 

Restricted Ordinary Share Awards

 

The following is a summary of restricted ordinary share activity for the nine months ended September 30, 2016:

 

   Number of
Time-Based
Awards
   Weighted-
Average Grant
Date Fair
Value Per Share
 
Non-vested as of January 1, 2016   43,653   $5.87 
Granted        
Vested   (26,118)   4.81 
Forfeited or expired   (352)   2.50 
Non-vested and expected to vest as of September 30, 2016   17,183   $7.55 

 

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Restricted Share Unit Awards

 

On March 1, 2016, we granted 1.2 million restricted share unit awards to our employees which vest equally over three years. 

 

The following is a summary of restricted share unit activity for the nine months ended September 30, 2016 (excludes the impact of 87,500 previously awarded performance-based restricted share units as no grant date was established):

 

    Number of
Time-Based
Awards
    Weighted-
Average Grant
Date Fair
Value Per Share
    Number of
Performance-
Based
Awards
    Weighted-
Average Grant
Date Fair
Value Per Share
    Number of
Market-
Based
Awards
    Weighted-
Average Grant
Date Fair
Value Per Share
 
Non-vested as of January 1, 2016     150,000     $ 59.43           $       50,000     $ 59.43  
Granted     1,328,490       49.62       12,500       50.00              
Vested     (37,500 )     59.43       (12,500 )     50.00              
Forfeited or expired     (83,655 )     50.51                          
Non-vested and expected to vest as of September 30, 2016     1,357,335     $ 50.38           $       50,000     $ 59.43  

 

The share-based compensation expense for the three months ended September 30, 2016 was $16.8 million of which $15.0 million was recorded in marketing, general and administrative expense and $1.8 million was recorded in payroll and related expense. The nine months ended September 30, 2016 was $48.3 million of which $42.7 million was recorded in marketing, general and administrative expense and $5.6 million was recorded in payroll and related expense.

 

9.Commitments and Contingencies

 

Ship Construction Contracts

 

We have Norwegian Joy, Norwegian Bliss and one additional Breakaway Plus Class Ship on order with Meyer Werft shipyard for delivery in the spring of 2017, spring of 2018 and the fall of 2019, respectively. These ships will be amongst the largest in our fleet, reaching approximately 164,600 Gross Tons. The combined contract price of these three ships is approximately €2.6 billion, or $2.9 billion based on the euro/U.S. dollar exchange rate as of September 30, 2016. We have export credit financing in place that provides financing for 80% of their contract prices. We have an Explorer Class Ship on order with Fincantieri shipyard with an original contract price of approximately €422.0 million, or approximately $474.1 million based on the euro/U.S. dollar exchange rate as of September 30, 2016. We have export credit financing in place that provides financing for 80% of the contract price. The Explorer Class Ship is expected to be delivered in the winter of 2020.

 

In connection with the contracts to build these ships, we do not anticipate any contractual breaches or cancellations to occur. However, if any would occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us, subject to certain refund guarantees, and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.

 

Litigation

 

In the normal course of our business, various claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits are covered by insurance and, accordingly, the maximum amount of our liability is typically limited to our deductible amount.

 

Nonetheless, the ultimate outcome of these claims and lawsuits that are not covered by insurance cannot be determined at this time. We have evaluated our overall exposure with respect to all of our threatened and pending litigation and, to the extent required, we have accrued amounts for all estimable probable losses associated with our deemed exposure. We are currently unable to estimate any other potential contingent losses beyond those accrued, as discovery is not complete nor is adequate information available to estimate such range of loss or potential recovery. However, based on our current knowledge, we do not believe that the aggregate amount or range of reasonably possible losses with respect to these matters will be material to our consolidated results of operations, financial condition or cash flows. We intend to vigorously defend our legal position on all claims and, to the extent necessary, seek recovery.

 

10.Restructuring Costs

 

Due to the Acquisition of Prestige, a number of employee positions were consolidated. As of September 30, 2016, we had no accrual balance for restructuring costs for severance and other employee-related costs. The expense of $0.1 million for the nine months ended September 30, 2016 is included in marketing, general and administrative expense.

 

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The following table summarizes changes in the accrual for restructuring costs (in thousands):

 

   Restructuring costs 
Accrued expense balance as of December 31, 2015  $(4,144)
Amounts paid   4,254 
Additional accrued expense   (110)
Accrued expense balance as of September 30, 2016  $

 

11.Supplemental Cash Flow Information

 

For the nine months ended September 30, 2016, we had non-cash investing activities in connection with property and equipment of $22.3 million and for the nine months ended September 30, 2015, we had non-cash investing activities in connection with capital leases of $28.5 million and capital expenditures of $6.5 million.   

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement Concerning Forward-Looking Statements

 

Certain statements in this report constitute forward-looking statements within the meaning of the U.S. federal securities laws intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained, or incorporated by reference, in this report, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects and objectives of management for future operations (including development plans and objectives relating to our activities), are forward-looking statements. Many, but not all, of these statements can be found by looking for words like “expect,” “anticipate,” “goal,” “project,” “plan,” “believe,” “seek,” “will,” “may,” “forecast,” “estimate,” “intend,” “future” and similar words. Forward-looking statements do not guarantee future performance and may involve risks, uncertainties and other factors which could cause our actual results, performance or achievements to differ materially from the future results, performance or achievements expressed or implied in those forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited to the impact of:

 

  adverse general economic and related factors, such as fluctuating or increasing levels of unemployment, underemployment and the volatility of fuel prices, declines in the securities and real estate markets, and perceptions of these conditions that decrease the level of disposable income of consumers or consumer confidence;
  the risks and increased costs associated with operating internationally;
  an impairment of our tradenames or goodwill which could adversely affect our financial condition and operating results;
  our efforts to expand our business into new markets;
  adverse events impacting the security of travel, such as terrorist acts, acts of piracy, armed conflict and threats thereof and other international events;
  breaches in data security or other disturbances to our information technology and other networks;
  the spread of epidemics and viral outbreaks;
  adverse incidents involving cruise ships;
  changes in fuel prices and/or other cruise operating costs;
  our hedging strategies;
  our inability to obtain adequate insurance coverage;
  our substantial indebtedness, including the ability to raise additional capital to fund our operations, and to generate the necessary amount of cash to service our existing debt;
  restrictions in the agreements governing our indebtedness that limit our flexibility in operating our business;
  the significant portion of our assets pledged as collateral under our existing debt agreements and the ability of our creditors to accelerate the repayment of our indebtedness;
  our ability to incur significantly more debt despite our substantial existing indebtedness;
  volatility and disruptions in the global credit and financial markets, which may adversely affect our ability to borrow and could increase our counterparty credit risks, including those under our credit facilities, derivatives, contingent obligations, insurance contracts and new ship progress payment guarantees;
  fluctuations in foreign currency exchange rates;
  our inability to recruit or retain qualified personnel or the loss of key personnel;
  future changes relating to how external distribution channels sell and market our cruises;
  our reliance on third parties to provide hotel management services to certain ships and certain other services;
  delays in our shipbuilding program and ship repairs, maintenance and refurbishments;
  future increases in the price of, or major changes or reduction in, commercial airline services;
  seasonal variations in passenger fare rates and occupancy levels at different times of the year;
  our ability to keep pace with developments in technology;
  amendments to our collective bargaining agreements for crew members and other employee relation issues;
  the continued availability of attractive port destinations;
  pending or threatened litigation, investigations and enforcement actions;
  changes involving the tax and environmental regulatory regimes in which we operate; and
  other factors set forth under “Risk Factors” in our most recently filed Annual Report on Form 10-K and “Item 1A. Risk Factors” in this report.

 

The above examples are not exhaustive and new risks emerge from time to time. Such forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment in which we will operate in the future. These forward-looking statements speak only as of the date made. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based, except as required by law.

 

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Terminology

 

This report includes certain non-GAAP financial measures, such as Net Revenue, Net Yield, Net Cruise Cost, Adjusted Net Revenue, Adjusted Net Yield, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS. Definitions of these non-GAAP financial measures are included below. For further information about our non-GAAP financial measures including detailed adjustments made in calculating our non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measure, we refer you to “Results of Operations” below.

 

Unless otherwise indicated in this report, the following terms have the meanings set forth below:

 

Acquisition of Prestige. In November 2014, pursuant to the Merger Agreement, we acquired Prestige in a cash and stock transaction for total consideration of $3.025 billion, including the assumption of debt.

 

Adjusted EBITDA. EBITDA adjusted for other income (expense) and other supplemental adjustments.

 

Adjusted EPS. Adjusted Net Income divided by the number of diluted weighted-average shares outstanding.

 

Adjusted Net Cruise Cost Excluding Fuel. Net Cruise Cost Excluding Fuel adjusted for supplemental adjustments.

 

Adjusted Net Income. Net income adjusted for supplemental adjustments.

 

Adjusted Net Revenue. Net Revenue adjusted for supplemental adjustments.

 

Adjusted Net Yield. Net Yield adjusted for supplemental adjustments.

 

Bareboat Charter. The hire of a ship for a specified period of time whereby no crew or provisions are provided by the Company.

 

Berths. Double occupancy capacity per cabin (single occupancy per studio cabin) even though many cabins can accommodate three or more passengers.

 

Breakaway Class Ships. Norwegian Breakaway and Norwegian Getaway.

 

• Breakaway Plus Class Ships. The next generation of ships which are similar in design and innovation to Breakaway Class Ships.

 

Business Enhancement Capital Expenditures. Capital expenditures other than those related to new ship construction and ROI Capital Expenditures.

 

Capacity Days. Available Berths multiplied by the number of cruise days for the period. 

 

Constant Currency. A calculation whereby foreign currency-denominated revenue and expenses in a period are converted at the U.S. dollar exchange rate of a comparable period in order to eliminate the effects of foreign exchange fluctuations.

 

Dry-dock. A process whereby a ship is positioned in a large basin where all of the fresh/sea water is pumped out in order to carry out cleaning and repairs of those parts of a ship which are below the water line.

 

EBITDA. Earnings before interest, taxes, and depreciation and amortization.

 

EPS. Earnings per share.

 

Explorer Class Ships. Regent’s Seven Seas Explorer and a second ship on order.

 

GAAP. Generally accepted accounting principles in the U.S.

 

Gross Cruise Cost. The sum of total cruise operating expense and marketing, general and administrative expense.

 

Gross Tons. A unit of enclosed passenger space on a cruise ship, such that one gross ton = 100 cubic feet or 2.831 cubic meters.

 

Gross Yield. Total revenue per Capacity Day. 

 

Management NCL Corporation Units. NCLC’s previously outstanding profits interests issued to management (or former management) of NCLC which were converted into units in NCLC. All Management NCL Corporation Units were exchanged for NCLH ordinary shares and restricted shares in the fourth quarter of 2014.

 

Merger Agreement. Agreement and Plan of Merger, dated as of September 2, 2014, by and among Prestige, NCLH, Portland Merger Sub, Inc. and Apollo Management, L.P., as amended, for the Acquisition of Prestige.

 

Net Cruise Cost. Gross Cruise Cost less commissions, transportation and other expense and onboard and other expense.

 

Net Cruise Cost Excluding Fuel. Net Cruise Cost less fuel expense.

 

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Net Revenue. Total revenue less commissions, transportation and other expense and onboard and other expense.

 

Net Yield. Net Revenue per Capacity Day. 

 

New Revolving Loan Facility. $750.0 million senior secured revolving credit facility maturing on June 6, 2021, subject to an earlier springing maturity date as described in Note 6— “Long-Term Debt” in our consolidated financial statements included herein. The New Revolving Loan Facility amended and restated the Revolving Loan Facility.

 

Occupancy Percentage. The ratio of Passenger Cruise Days to Capacity Days. A percentage in excess of 100% indicates that three or more passengers occupied some cabins.

 

Passenger Cruise Days. The number of passengers carried for the period, multiplied by the number of days in their respective cruises.

 

Revolving Loan Facility. $625.0 million senior secured revolving credit facility which was to mature on May 24, 2018 and was amended and restated in June 2016 (such amendment and restatement is referred to herein as the New Revolving Loan Facility).

 

ROI Capital Expenditures. Comprised of project-based capital expenditures which have a quantified return on investment.

 

Secondary Equity Offering(s). Secondary public offering(s) of NCLH’s ordinary shares in December 2015, August 2015, May 2015, March 2015, March 2014, December 2013 and August 2013.

 

Shipboard Retirement Plan. An unfunded defined benefit pension plan for certain crew members which computes benefits based on years of service, subject to certain requirements.

 

Non-GAAP Financial Measures

 

We use certain non-GAAP financial measures, such as Net Revenue, Adjusted Net Revenue, Net Yield, Adjusted Net Yield, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel, Adjusted EBITDA, Adjusted Net Income and Adjusted EPS, to enable us to analyze our performance. See “Terminology” for the definitions of these non-GAAP financial measures. We utilize Net Revenue and Net Yield to manage our business on a day-to-day basis and believe that they are the most relevant measures of our revenue performance because they reflect the revenue earned by us net of significant variable costs. In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Cost and Adjusted Net Cruise Cost Excluding Fuel to be the most relevant indicators of our performance.

 

As our business includes the sourcing of passengers and deployment of vessels outside of the U.S., a portion of our revenue and expenses are denominated in foreign currencies, particularly British pound, Canadian dollar, euro and Australian dollar which are subject to fluctuations in currency exchange rates versus our reporting currency, the U.S. dollar. In order to monitor results excluding these fluctuations, we calculate certain non-GAAP measures on a Constant Currency basis whereby current period revenue and expenses denominated in foreign currencies are converted to U.S. dollars using currency exchange rates of the comparable period. We believe that presenting these non-GAAP measures on both a reported and Constant Currency basis is useful in providing a more comprehensive view of trends in our business.

 

We believe that Adjusted EBITDA is appropriate as a supplemental financial measure as it is used by management to assess operating performance. We believe that Adjusted EBITDA is a useful measure in determining our performance as it reflects certain operating drivers of our business, such as sales growth, operating costs, marketing, general and administrative expense and other operating income and expense. Adjusted EBITDA is not a defined term under GAAP. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments and it includes other supplemental adjustments.

 

In addition, Adjusted Net Revenue and Adjusted Net Yield, which exclude certain business combination accounting entries, are non-GAAP financial measures that we believe are useful as supplemental measures in evaluating the performance of our operating business and provide greater transparency into our results of operations. Adjusted Net Income and Adjusted EPS are non-GAAP financial measures that exclude certain amounts and are used to supplement GAAP net income and EPS. We use Adjusted Net Income and Adjusted EPS as key performance measures of our earnings performance. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparison to our historical performance. In addition, management uses Adjusted EPS as a performance measure for our incentive compensation. The amounts excluded in the presentation of these non-GAAP financial measures may vary from period to period; accordingly, our presentation of Adjusted Net Revenue, Adjusted Net Yield, Adjusted Net Income and Adjusted EPS may not be indicative of future adjustments or results. For example, for the nine months ended September 30, 2016, we incurred an $11.2 million write-off, primarily due to deferred financing fees due to the refinancing of certain credit facilities. We included the deferred financing fees as an adjustment in the reconciliation of Adjusted Net Income since these amounts are not representative of our day-to-day operations and we have included other write-offs of deferred financing fees as adjustments in prior periods.

 

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You are encouraged to evaluate each adjustment used in calculating our non-GAAP financial measures and the reasons we consider our non-GAAP financial measures appropriate for supplemental analysis. In evaluating our non-GAAP financial measures, you should be aware that in the future we may incur expenses similar to the adjustments in our presentation. Our non-GAAP financial measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of our non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our non-GAAP financial measures may not be comparable to other companies. Please see a historical reconciliation of these measures to the most comparable GAAP measure presented in our consolidated financial statements below in the “Results of Operations” section.

 

Financial Presentation

 

Revenue from our cruise and cruise-related activities are categorized by us as “passenger ticket revenue” and “onboard and other revenue.” Passenger ticket revenue and onboard and other revenue vary according to product offering, the size of the ship in operation, the length of cruises operated and the markets in which the ship operates. Our revenue is seasonal based on demand for cruises, which has historically been strongest during the Northern Hemisphere’s summer months.

 

Passenger ticket revenue primarily consists of revenue for accommodations, meals in certain restaurants on the ship, certain onboard entertainment, and includes revenue for service charges and air and land transportation to and from the ship to the extent guests purchase these items from us. Onboard and other revenue primarily consists of revenue from gaming, beverage sales, shore excursions, specialty dining, retail sales, spa services, photo services as well as certain Bareboat Charter revenue. We record onboard revenue from onboard activities we perform directly or that are performed by independent concessionaires, from which we receive a share of their revenue.

 

Our cruise operating expense is classified as follows:

 

  Commissions, transportation and other primarily consists of direct costs associated with passenger ticket revenue. These costs include travel agent commissions, air and land transportation expenses, related credit card fees, costs associated with service charges, certain port expenses and the costs associated with shore excursions and hotel accommodations included as part of the overall cruise purchase price.

 

  Onboard and other primarily consists of direct costs that are incurred in connection with onboard and other revenue. These include costs incurred in connection with gaming, beverage sales and shore excursions.

 

  Payroll and related consists of the cost of wages and benefits for shipboard employees and costs of certain inventory items, including food, for a third party that provides crew and other hotel services for certain ships.

 

  Fuel includes fuel costs, the impact of certain fuel hedges and fuel delivery costs.

 

  Food consists of food costs for passengers and crew on certain ships.

 

  Other consists of repairs and maintenance (including Dry-dock costs), ship insurance and other ship expenses.

 

Critical Accounting Policies

 

We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicates the carrying value of a reporting unit may not be recoverable. Based on the recent performance of the Oceania Cruises’ reporting unit, we performed an interim goodwill impairment evaluation. Based on that evaluation, we determined that there was no impairment of goodwill because its fair value exceeded its carrying value. However, if the fair value of that reporting unit declines in future periods, its goodwill may become impaired at that time. As of September 30, 2016, there was $523.0 million of goodwill for the Oceania Cruises’ reporting unit.

 

For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2015 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have made no significant changes to our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

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Quarterly Overview

  

Three months ended September 30, 2016 (“2016”) compared to the three months ended September 30, 2015 (“2015”)

 

Total revenue increased 15.6% to $1.5 billion in 2016 compared to $1.3 billion in 2015 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased 1.5%. Net Revenue in 2016 increased 17.4% to $1.1 billion from $975.2 million in 2015 due to an increase in Capacity Days of 13.9% and an increase in Net Yield of 3.1%. The increase in Capacity Days was primarily due to the delivery of Norwegian Escape in October 2015, Sirena joining our fleet in April 2016 and the delivery of Seven Seas Explorer in June 2016. The increase in Net Yield was primarily due to improved pricing.

 

We had net income and diluted EPS of $342.4 million in 2016 and $1.50, respectively. Operating income was $413.6 million in 2016 compared to $306.8 million in 2015. We had Adjusted Net Income and Adjusted EPS of $369.3 million and $1.62, respectively, in 2016, which includes $26.9 million of adjustments primarily consisting of expenses related to non-cash compensation, severance and other fees and certain other adjustments. Adjusted EBITDA improved 22.3% in 2016 compared to 2015. We refer you to our “Results of Operations” below for a calculation of Net Revenue, Gross Yield, Net Yield, Adjusted Net Income and Adjusted EBITDA.

 

Results of Operations

 

The following table sets forth operating data as a percentage of total revenue:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Revenue                    
Passenger ticket   72.2%   73.8%   70.2%   72.7%
Onboard and other   27.8%   26.2%   29.8%   27.3%
Total revenue   100.0%   100.0%   100.0%   100.0%
Cruise operating expense                    
Commissions, transportation and other   16.8%   17.6%   16.5%   17.8%
Onboard and other   6.1%   6.6%   6.1%   6.4%
Payroll and related   13.0%   13.3%   14.8%   14.8%
Fuel   5.8%   6.9%   6.6%   8.1%
Food   3.4%   3.6%   4.0%   4.0%
Other   7.7%   7.9%   9.4%   9.3%
Total cruise operating expense   52.8%   55.9%   57.4%   60.4%
Other operating expense                    
Marketing, general and administrative   11.8%   11.7%   13.5%   12.4%
Depreciation and amortization   7.5%   8.5%   8.5%   9.5%
Total other operating expense   19.3%   20.2%   22.0%   21.9%
Operating income   27.9%   23.9%   20.6%   17.7%
Non-operating income (expense)                    
Interest expense, net   (4.1)%   (3.9)%   (5.0)%   (4.6)%
Other expense   (0.4)%   (0.1)%   (0.4)%   (1.1)%
Total non-operating income (expense)   (4.5)%   (4.0)%   (5.4)%   (5.7)%
                     
Net income before income taxes   23.4%   19.9%   15.2%   12.0%
Income tax expense   (0.3)%   (0.3)%   (0.2)%   (0.2)%
Net income   23.1%   19.6%   15.0%   11.8%
                     

 

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The following table sets forth selected statistical information:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Passengers carried   635,654    574,011    1,761,967    1,615,213 
Passenger Cruise Days   4,674,286    4,208,605    13,196,600    11,925,493 
Capacity Days   4,209,562    3,696,549    12,175,012    10,887,160 
Occupancy Percentage   111.0%   113.9%   108.4%   109.5%

 

Net Revenue, Adjusted Net Revenue, Gross Yield, Net Yield and Adjusted Net Yield were calculated as follows (in thousands, except Capacity Days and Yield data):  

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2016
Constant
Currency
   2015   2016   2016
Constant
Currency
   2015 
Passenger ticket revenue  $1,071,815   $1,080,784   $948,059   $2,630,405   $2,655,815   $2,406,533 
Onboard and other revenue   412,921    412,921    336,851    1,118,798    1,118,798    901,992 
Total revenue   1,484,736    1,493,705    1,284,910    3,749,203    3,774,613    3,308,525 
Less:                              
Commissions, transportation and other expense   249,519    251,488    225,586    618,492    624,775    589,851 
Onboard and other expense   90,661    90,661    84,171    230,416    230,416    210,701 
Net Revenue   1,144,556    1,151,556    975,153    2,900,295    2,919,422    2,507,973 
Non-GAAP Adjustment:                              
Deferred revenue (1)   300    300    3,026    1,057    1,057    31,514 
Adjusted Net Revenue  $1,144,856   $1,151,856   $978,179   $2,901,352   $2,920,479   $2,539,487 
Capacity Days   4,209,562    4,209,562    3,696,549    12,175,012    12,175,012    10,887,160 
Gross Yield  $352.71   $354.84   $347.60   $307.94   $310.03   $303.89 
Net Yield  $271.89   $273.56   $263.80   $238.22   $239.79   $230.36 
Adjusted Net Yield  $271.97   $273.63   $264.62   $238.30   $239.87   $233.26 

 

(1)Reflects deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules.

 

Gross Cruise Cost, Net Cruise Cost, Net Cruise Cost Excluding Fuel and Adjusted Net Cruise Cost Excluding Fuel were calculated as follows (in thousands, except Capacity Days and per Capacity Day data):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2016
Constant
Currency
   2015   2016   2016
Constant
Currency
   2015 
Total cruise operating expense  $784,734   $786,209   $717,722   $2,155,115   $2,162,546   $1,997,701 
Marketing, general and administrative expense   174,813    175,353    150,558    504,694    505,957    411,879 
Gross Cruise Cost   959,547    961,562    868,280    2,659,809    2,668,503    2,409,580 
Less:                              
Commissions, transportation and other expense   249,519    251,488    225,586    618,492    624,775    589,851 
Onboard and other expense   90,661    90,661    84,171    230,416    230,416    210,701 
Net Cruise Cost   619,367    619,413    558,523    1,810,901    1,813,312    1,609,028 
Less: Fuel expense   86,250    86,250    88,829    248,529    248,529    267,784 
Net Cruise Cost Excluding Fuel   533,117    533,163    469,694    1,562,372    1,564,783    1,341,244 
Less Non-GAAP Adjustments:                              
Non-cash deferred compensation (1)   792    792    3,277    2,375    2,375    5,759 
Non-cash share-based compensation (2)   16,840    16,840    13,691    48,289    48,289    27,857 
Secondary Equity Offerings’ expenses (3)           362            1,384 
Severance payments and other fees (4)   2,587    2,587    1,369    5,486    5,486    15,045 
Management NCL Corporation Units exchange expenses (5)                       624 
Acquisition of Prestige expenses (6)   1,696    1,696    6,098    4,710    4,710    17,389 
Contingent consideration adjustment (7)                       (43,400)
Contract termination expenses (8)           3,319            3,319 
Adjusted Net Cruise Cost Excluding Fuel  $511,202   $511,248   $441,578   $1,501,512   $1,503,923   $1,313,267 
                               
Capacity Days   4,209,562    4,209,562    3,696,549    12,175,012    12,175,012    10,887,160 
Gross Cruise Cost per Capacity Day  $227.94   $228.42   $234.89   $218.46   $219.18   $221.32 
Net Cruise Cost per Capacity Day  $147.13   $147.14   $151.09   $148.74   $148.94   $147.79 
Net Cruise Cost Excluding Fuel per Capacity Day  $126.64   $126.66   $127.06   $128.33   $128.52   $123.20 
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day  $121.44   $121.45   $119.46   $123.33   $123.53   $120.63 

 

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  (1) Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
  (2) Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
  (3) Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense.
  (4) Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
  (5) Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense.
  (6) Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
  (7) Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.
  (8) Contract termination expenses related to the Acquisition of Prestige, which are included in other cruise operating expense.

 

Adjusted Net Income and Adjusted EPS were calculated as follows (in thousands, except share and per share data):

 

  

Three Months Ended 

September 30,

  

Nine Months Ended

September 30,

 
   2016   2015   2016   2015 
Net income   342,378    251,787    560,853    388,825 
Non-GAAP Adjustments:                    
Non-cash deferred compensation (1)   792    3,277    2,375    5,759 
Non-cash share-based compensation (2)   16,840    13,691    48,289    28,030 
Secondary Equity Offerings’ expenses (3)       362        1,384 
Severance payments and other fees (4)   2,587    1,369    5,486    15,045 
Management NCL Corporation Units exchange expenses (5)               624 
Acquisition of Prestige expenses (6)   1,696    6,098    4,710    17,389 
Deferred revenue (7)   300    3,026    1,057    31,514 
Amortization of intangible assets (8)   5,267    20,914    15,802    59,973 
Contingent consideration adjustment (9)               (43,400)
Derivative adjustment (10)       3,767    (1,185)   33,370 
Contract termination expenses (11)       6,848        6,848 
Deferred financing fees and other (12)   (558)       11,156     
Adjusted Net Income  $369,302   $311,139   $648,543   $545,361 
Diluted weighted–average shares outstanding   227,598,607    230,274,756    227,859,617    229,860,900 
Diluted earnings per share  $1.50   $1.09   $2.46   $1.69 
Adjusted EPS  $1.62   $1.35   $2.85   $2.37 

 

  (1) Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
  (2) Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
  (3) Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense.
  (4) Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.

 

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  (5) Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense.
  (6) Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
  (7) Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in Net Revenue.
  (8) Amortization of intangible assets related to the Acquisition of Prestige, which are included in depreciation and amortization expense.
  (9) Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.
  (10) Losses and net gains for the fair value adjustment of a foreign exchange collar which did not receive hedge accounting and losses due to the dedesignation of certain fuels swaps. These adjustments are included in other expense.
  (11) Contract termination expenses related to the Acquisition of Prestige, which are included in other cruise operating expense and depreciation and amortization expense.
  (12) For the nine months ended September 30, 2016, primarily reflects the write-off of deferred financing fees related to the refinancing of certain credit facilities, which is included in interest expense, net. For the three months ended September 30, 2016, reflects a tax benefit adjustment.

 

EBITDA and Adjusted EBITDA were calculated as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Net income  $342,378   $251,787   $560,853   $388,825 
Interest expense, net   60,662    49,784    188,836    153,219 
Income tax expense   5,241    3,528    8,944    6,931 
Depreciation and amortization expense   111,575    109,798    317,480    314,381 
EBITDA   519,856    414,897    1,076,113    863,356 
Other expense (1)   5,333    1,733    13,281    35,589 
Non-GAAP Adjustments:                    
Non-cash deferred compensation (2)   792    3,277    2,375    5,759 
Non-cash share-based compensation (3)   16,840    13,691    48,289    27,857 
Secondary Equity Offerings’ expenses (4)       362        1,384 
Severance payments and other fees (5)   2,587    1,369    5,486    15,045 
Management NCL Corporation Units exchange expenses (6)               624 
Acquisition of Prestige expenses (7)   1,696    6,098    4,710    17,389 
Deferred revenue (8)   300    3,026    1,057    31,514 
Contingent consideration adjustment (9)               (43,400)
Contract termination expenses (10)       3,319        3,319 
Adjusted EBITDA  $547,404   $447,772   $1,151,311   $958,436 

 

(1) Primarily consists of gains and losses, net for derivative contracts and forward currency exchanges.
(2) Non-cash deferred compensation expenses related to the crew pension plan and other crew expenses, which are included in payroll and related expense.
(3) Non-cash share-based compensation expenses related to equity awards, which are included in marketing, general and administrative expense and payroll and related expense.
(4) Expenses related to the Secondary Equity Offerings, which are included in marketing, general and administrative expense.
(5) Severance payments and other expenses related to restructuring costs and other severance arrangements, which are included in marketing, general and administrative expense.
(6) Expenses related to the exchange of Management NCL Corporation Units for ordinary shares, which are included in marketing, general and administrative expense.
(7) Expenses related to the Acquisition of Prestige, which are included in marketing, general and administrative expense.
(8) Deferred revenue fair value adjustments related to the Acquisition of Prestige that were made pursuant to business combination accounting rules, which are primarily included in Net Revenue.
(9) Contingent consideration fair value adjustment related to the Acquisition of Prestige, which is included in marketing, general and administrative expense.
(10) Contract termination expenses related to the Acquisition of Prestige, which are included in other cruise operating expense.

 

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Three months ended September 30, 2016 (“2016”) compared to three months ended September 30, 2015 (“2015”)

 

Revenue

 

Total revenue increased 15.6% to $1.5 billion in 2016 compared to $1.3 billion in 2015 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased 1.5%. Net Revenue in 2016 increased 17.4% to $1.1 billion from $975.2 million in 2015 due to an increase in Capacity Days of 13.9% and an increase in Net Yield of 3.1%.The increase in Capacity Days was primarily due to the delivery of Norwegian Escape in October 2015, Sirena joining our fleet in April 2016 and the delivery of Seven Seas Explorer in June 2016. The increase in Net Yield was primarily due to improved pricing. Adjusted Net Revenue includes a deferred revenue fair value adjustment of $3.0 million in 2015 related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 3.7% and 3.4%, respectively, in 2016 compared to 2015. We refer you to the “Results of Operations” above for a reconciliation of Gross Yield to Adjusted Net Yield.

 

Expense

 

Gross Cruise Cost increased 10.5% in 2016 compared to 2015 due to an increase in total cruise operating expense and marketing, general and administrative expense. Total cruise operating expense increased 9.3% in 2016 compared to 2015 primarily due to the increase in Capacity Days as discussed above. Total other operating expense increased 10.0% in 2016 compared to 2015 primarily due to an increase in marketing, general and administrative expenses, which included an increase in marketing expenses of $16.0 million. Depreciation and amortization expense was relatively unchanged as the increase due to the addition of Norwegian Escape and ship improvement projects in 2016 was offset by the recognition in 2015 of an incremental $15.6 million of amortization of intangible assets due to the Acquisition of Prestige. On a Capacity Day basis, Net Cruise Cost decreased 2.6% on an actual and a Constant Currency basis as the increases in expenses discussed above were primarily offset by the decrease in fuel expense. The average fuel price decreased 11.5% to $500 per metric ton in 2016 from $565 per metric ton in 2015. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 1.7% on an actual and a Constant Currency basis primarily due to the increase in marketing, general and administrative expenses discussed above. We refer you to the “Results of Operations” above for a reconciliation of Gross Cruise Cost to Adjusted Net Cruise Cost Excluding Fuel.

 

Interest expense, net increased to $60.7 million in 2016 from $49.8 million in 2015 primarily due to an increase in average debt balances outstanding primarily associated with the delivery of Norwegian Escape in October 2015 and Seven Seas Explorer in June 2016 as well as slightly higher interest rates due to an increase in LIBOR rates.

 

Other expense was $5.3 million in 2016 compared to $1.7 million in 2015. In 2016, the expense was primarily related to unrealized and realized losses on fuel swap derivative hedge contracts and foreign exchange derivative hedge contracts and foreign currency transaction losses. In 2015, the expense was primarily related to the dedesignation of certain fuel swap derivative hedge contracts and the ineffectiveness of settled fuel swaps in 2015. The expense in 2015 was partially offset by income related to the fair value adjustment for a foreign exchange collar which did not receive hedge accounting treatment and foreign currency transaction gains.

 

In 2016, we had an income tax expense of $5.2 million compared to $3.5 million in 2015.

 

Nine months ended September 30, 2016 (“2016”) compared to nine months ended September 30, 2015 (“2015”)

 

Revenue

 

Total revenue increased 13.3% to $3.7 billion in 2016 compared to $3.3 billion in 2015 primarily due to an increase in Capacity Days and improved pricing. Gross Yield increased 1.3%. Net Revenue in 2016 increased 15.6% to $2.9 billion from $2.5 billion in 2015 due to an increase in Capacity Days of 11.8% and an increase in Net Yield of 3.4%. The increase in Capacity Days was primarily due to the delivery of Norwegian Escape in October 2015, Sirena joining our fleet in April 2016 and the delivery of Seven Seas Explorer in June 2016, slightly offset by the scheduled Dry-docks in 2016. The increase in Net Yield was primarily due to improved pricing. Adjusted Net Revenue includes a deferred revenue fair value adjustment of $31.5 million in 2015 related to the Acquisition of Prestige. On a Constant Currency basis, Net Yield and Adjusted Net Yield increased 4.1% and 2.8%, respectively, in 2016 compared to 2015. We refer you to the “Results of Operations” above for a reconciliation of Gross Yield to Adjusted Net Yield.

 

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Expense 

 

Gross Cruise Cost increased 10.4% in 2016 compared to 2015 due to an increase in total cruise operating expense and marketing, general and administrative expense. Total cruise operating expense increased 7.9% in 2016 compared to 2015 primarily due to the increase in Capacity Days as discussed above and an increase in Dry-dock expenses. Total other operating expense increased 13.2% in 2016 compared to 2015 primarily due to an increase in marketing, general and administrative expenses which included an increase in marketing expenses of $28.5 million and share-based compensation of $20.5 million. The increase was also due to recognition of a $43.4 million contingent consideration adjustment related to the Acquisition of Prestige which resulted in a reduction to expense in 2015 but not in 2016. Depreciation and amortization expense was relatively unchanged as the increase due to the addition of Norwegian Escape and ship improvement projects in 2016 was offset by the recognition in 2015 of an incremental $44.2 million of amortization of intangible assets due to the Acquisition of Prestige. On a Capacity Day basis, Net Cruise Cost remained relatively unchanged on an actual and a Constant Currency basis, due to the increases in expenses discussed above which were primarily offset by a decrease in fuel expense. The average fuel price decreased 14.9% to $468 per metric ton in 2016 from $550 per metric ton in 2015. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 2.2% primarily due to the expenses discussed above (2.4% on a Constant Currency basis). We refer you to the “Results of Operations” above for a reconciliation of Gross Cruise Cost to Adjusted Net Cruise Cost Excluding Fuel.

 

Interest expense, net increased to $188.8 million in 2016 from $153.2 million in 2015 primarily due to an increase in average debt balances outstanding primarily associated with the delivery of Norwegian Escape in October 2015 and Seven Seas Explorer in June 2016 as well as higher interest rates due to an increase in LIBOR rates. The increase in interest expense, net also includes a write-off of $11.5 million of deferred financing fees related to the refinancing of certain of our credit facilities.

 

Other expense was $13.3 million in 2016 compared to $35.6 million in 2015. In 2016, the expense was primarily related to unrealized and realized losses on fuel swap derivative hedge contracts and losses on foreign exchange partially offset by gains on foreign exchange derivative hedge contracts. In 2015, the expense was primarily related to the dedesignation of certain fuel swap derivative hedge contracts and the ineffectiveness of settled fuel swaps in 2015. Also included in 2015 was the expense related to the fair value adjustment for a foreign exchange collar which did not receive hedge accounting treatment.

 

In 2016, we had an income tax expense of $8.9 million compared to $6.9 million in 2015. 

 

Liquidity and Capital Resources

 

General

 

As of September 30, 2016, our liquidity was $905.4 million consisting of $155.4 million in cash and cash equivalents and $750.0 million under our New Revolving Loan Facility. Our primary ongoing liquidity requirements are to finance working capital, capital expenditures and debt service.

 

As of September 30, 2016, we had a working capital deficit of $1.9 billion. This deficit included $1.2 billion of advance ticket sales, which represents the revenue we collect in advance of sailing dates, and accordingly, are substantially more like deferred revenue balances rather than actual current cash liabilities. Our business model, along with our New Revolving Loan Facility, allows us to operate with a working capital deficit and still meet our operating, investing and financing needs.

 

We evaluate potential sources of additional liquidity, including the capital markets, in the ordinary course of business. We believe that prevailing market conditions, particularly in the debt capital markets, are generally favorable. We will continue to evaluate opportunities to increase our liquidity in the near term, taking into consideration our current and expected requirements, our assessment of prevailing market conditions and expectations regarding future conditions, and the contractual and other restrictions to which we are subject.

 

Sources and Uses of Cash

 

In this section, references to “2016” refer to the nine months ended September 30, 2016 and references to “2015” refer to the nine months ended September 30, 2015.

 

Net cash provided by operating activities was $1.1 billion in 2016 as compared to $973.4 million in 2015. The change in net cash provided by operating activities reflects net income in 2016 of $560.9 million compared to a net income in 2015 of $388.8 million. The net cash provided by operating activities included timing differences in cash receipts and payments relating to operating assets and liabilities.

 

Net cash used in investing activities was $950.2 million in 2016, primarily related to payments for the delivery of Seven Seas Explorer, ship improvements, ships under construction and shoreside projects. Net cash used in investing activities was $330.5 million in 2015, primarily related to payments for ship improvements, ships under construction and shoreside projects.

 

Net cash used in financing activities was $99.0 million in 2016 primarily due to net repayments of our New Revolving Loan Facility, and other loan facilities and the repurchase of our ordinary shares and deferred financing fees and other. Net cash used in financing activities was $497.6 million in 2015 primarily due to net repayments of our Revolving Loan Facility and other loan facilities.

 

Future Capital Commitments

 

Future capital commitments consist of contracted commitments, including ship construction contracts, and future expected capital expenditures necessary for operations as well as our ship refurbishment projects. As of September 30, 2016, anticipated capital expenditures were $157.5 million for the remainder of 2016 and $1.3 billion for each of the years ending December 31, 2017 and 2018, of which we have export credit financing in place for the expenditures related to ship construction contracts of $47.8 million for the remainder of 2016, $762.6 million for 2017 and $732.9 million for 2018. These future expected capital expenditures will significantly increase our depreciation and amortization expense.

 

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We have Norwegian Joy, Norwegian Bliss and one additional Breakaway Plus Class Ship on order with Meyer Werft shipyard for delivery in the spring of 2017, spring of 2018 and the fall of 2019, respectively. These ships will be amongst the largest in our fleet, reaching approximately 164,600 Gross Tons. The combined contract price of these three ships is approximately €2.6 billion, or $2.9 billion based on the euro/U.S. dollar exchange rate as of September 30, 2016. We have export credit financing in place that provides financing for 80% of their contract prices. We have an Explorer Class Ship on order with Fincantieri shipyard with an original contract price of approximately €422.0 million, or approximately $474.1 million based on the euro/U.S. dollar exchange rate as of September 30, 2016. We have export credit financing in place that provides financing for 80% of the contract price. The Explorer Class Ship is expected to be delivered in the winter of 2020.

 

In connection with the contracts to build these ships, we do not anticipate any contractual breaches or cancellation to occur. However, if any would occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us, subject to certain refund guarantees, and potential claims and impairment losses which may materially impact our business, financial condition and results of operations.

 

Capitalized interest for the three and nine months ended September 30, 2016 was $8.9 million and $24.9 million, respectively, and for the three and nine months ended September 30, 2015 was $9.1 million and $24.2 million, respectively, primarily associated with the construction of our Breakaway Plus Class Ships.

 

Off-Balance Sheet Transactions

 

None.

 

Contractual Obligations 

 

As of September 30, 2016, our contractual obligations with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, were as follows (in thousands):

 

    Total     Less than
1 year
    1-3 years     3-5 years     More than
5 years
 
Long-term debt (1)   $ 6,503,978     $ 566,911     $ 1,104,015     $ 3,231,018     $ 1,602,034  
Operating leases (2)     153,735       15,135       30,277       28,927       79,396  
Ship construction contracts (3)     3,220,716       953,312       1,115,038       1,152,366        
Port facilities (4)     265,083       42,876       63,260       59,329       99,618  
Interest (5)     990,580       210,620       383,240       242,487       154,233  
Other (6)     164,170       56,146       54,186       30,266       23,572  
Total   $ 11,298,262     $ 1,845,000     $ 2,750,016     $ 4,744,393     $ 1,958,853  

 

(1) Includes premiums aggregating $0.6 million. Also includes capital leases. The amount excludes deferred financing fees which are included in the consolidated balance sheets as an offset to long-term debt.
(2) Primarily for offices, motor vehicles and office equipment.
(3) For our newbuild ships based on the euro/U.S. dollar exchange rate as of September 30, 2016. Export credit financing is in place from syndicates of banks.
(4) Primarily for our usage of certain port facilities.
(5) Includes fixed and variable rates with LIBOR held constant as of September 30, 2016.
(6) Future commitments for service and maintenance contracts and other Business Enhancement Capital Expenditures.

 

The table above does not include $11.2 million of unrecognized tax benefits.

 

Other

 

Certain service providers may require collateral in the normal course of our business. The amount of collateral may change based on certain terms and conditions.

 

As a routine part of our business, depending on market conditions, exchange rates, pricing and our strategy for growth, we regularly consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships, potential acquisitions and strategic alliances. If any of these were to occur, they may be financed through the incurrence of additional permitted indebtedness, through cash flows from operations, or through the issuance of debt, equity or equity-related securities.

 

Funding Sources

 

Our debt agreements contain covenants that, among other things, require us to maintain a minimum level of liquidity, as well as limit our net funded debt-to-capital ratio, maintain certain other ratios and restrict our ability to pay dividends. Substantially all of our ships and other property and equipment are pledged as collateral for our debt. We believe we were in compliance with these covenants as of September 30, 2016.

 

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The impact of changes in world economies and especially the global credit markets has created a challenging environment and may reduce future consumer demand for cruises and adversely affect our counterparty credit risks. In the event this environment deteriorates, our business, financial condition and results of operations could be adversely impacted.

 

We believe our cash on hand, expected future operating cash inflows, additional available borrowings under our New Revolving Loan Facility and our ability to issue debt securities or raise additional equity, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance with covenants under our debt agreements over the next twelve-month period. There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations. 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

General

 

We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal operating and financing activities and through the use of derivatives. The financial impacts of these derivative instruments are primarily offset by corresponding changes in the underlying exposures being hedged. We achieve this by closely matching the amount, term and conditions of the derivatives with the underlying risk being hedged. We do not hold or issue derivatives for trading or other speculative purposes. Derivative positions are monitored using techniques including market valuations and sensitivity analyses.

 

Interest Rate Risk

 

As of September 30, 2016, we had interest rate swap agreements to hedge our exposure to interest rate movements and to manage our interest expense. As of September 30, 2016, 56% of our debt was fixed and 44% was variable, which includes the effects of the interest rate swaps. The notional amount of outstanding debt associated with the interest rate swap agreements as of September 30, 2016 was $339.8 million. Based on our September 30, 2016 outstanding variable rate debt balance, a one percentage point increase in annual LIBOR interest rates would increase our annual interest expense by approximately $28.9 million excluding the effects of capitalization of interest.

 

Foreign Currency Exchange Rate Risk

 

As of September 30, 2016, we had foreign currency derivatives to hedge the exposure to volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. These derivatives hedge the foreign currency exchange rate risk on a portion of the payments on our ship construction contracts. The payments not hedged aggregate €506.4 million, or $568.9 million based on the euro/U.S. dollar exchange rate as of September 30, 2016. We estimate that a 10% change in the euro as of September 30, 2016 would result in a $56.9 million change in the U.S. dollar value of the foreign currency denominated remaining payments.

 

Fuel Price Risk

 

Our exposure to market risk for changes in fuel prices relates to the forecasted purchases of fuel on our ships. Fuel expense, as a percentage of our total cruise operating expense, was 11.0% and 12.4% for the three months ended September 30, 2016 and 2015, respectively, and 11.5% and 13.4% for the nine months ended September 30, 2016 and 2015, respectively. We use fuel derivative agreements to mitigate the financial impact of fluctuations in fuel prices and as of September 30, 2016, we had hedged approximately 90%, 79%, 57%, 48% and 5% of our remaining 2016, 2017, 2018, 2019 and 2020 projected metric tons of fuel purchases, respectively. We estimate that a 10% increase in our weighted-average fuel price would increase our anticipated 2016 fuel expense by $6.5 million. This increase would be partially offset by an increase in the fair value of our fuel swap agreements of $4.5 million. Fair value of our derivative contracts is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms such as maturity, as well as other inputs such as fuel types, fuel curves, creditworthiness of the counterparty and the Company, as well as other data points. 

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of September 30, 2016. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2016 to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 

 

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Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

In the normal course of our business, various claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits are covered by insurance and, accordingly, the maximum amount of our liability is typically limited to our deductible amount.

 

Nonetheless, the ultimate outcome of these claims and lawsuits that are not covered by insurance cannot be determined at this time. We have evaluated our overall exposure with respect to all of our threatened and pending litigation and, to the extent required, we have accrued amounts for all estimable probable losses associated with our deemed exposure. We are currently unable to estimate any other potential contingent losses beyond those accrued, as discovery is not complete nor is adequate information available to estimate such range of loss or potential recovery. However, based on our current knowledge, we do not believe that the aggregate amount or range of reasonably possible losses with respect to these matters will be material to our consolidated results of operations, financial condition or cash flows. We intend to vigorously defend our legal position on all claims and, to the extent necessary, seek recovery.

 

Item 1A. Risk Factors

 

We refer you to our 2015 Annual Report on Form 10-K for a discussion of the risk factors that affect our business and financial results. We wish to caution the reader that the risk factors discussed in “Item 1A. Risk Factors” in our 2015 Annual Report on Form 10-K, elsewhere in this report or other Securities and Exchange Commission filings, could cause future results to differ materially from those stated in any forward-looking statements.

 

Other than the risk factors set forth below, there have been no material changes to our risk factors disclosed in our 2015 Annual Report on Form 10-K. The first risk factor below is an amended and restated version of a risk factor included in “Item 1A. Risk Factors” in our 2015 Annual Report on Form 10-K:

 

Conducting business internationally may result in increased costs and risks.

 

We operate our business internationally and plan to continue to develop our international presence. Operating internationally exposes us to a number of risks, including political risks, risks of increases in duties and taxes, risks relating to anti-bribery laws, as well as risks that laws and policies affecting cruising, vacation or maritime businesses, or governing the operations of foreign-based companies may change. Additional risks include imposition of trade barriers, restrictions on repatriation of earnings, withholding and other taxes on remittances and other payments by subsidiaries and changes in and application of foreign taxation structures, including value added taxes. If we are unable to address these risks adequately, our business, financial condition and results of operations could be materially and adversely affected.

 

Operating internationally also exposes us to numerous and sometimes conflicting legal and regulatory requirements. In many parts of the world, including countries in which we operate, practices in the local business communities might not conform to international business standards. We have implemented safeguards and policies to prevent violations of various anti-corruption laws that prohibit improper payments or offers of payments to foreign governments and their officials for the purpose of obtaining or retaining business by our employees and agents. However, our existing safeguards and policies and any future improvements may prove to be less than effective and our employees or agents may engage in conduct prohibited by our policies, but for which we nevertheless may be held responsible. If our employees or agents violate our policies, if we fail to maintain adequate record-keeping and internal accounting practices to accurately record our transactions or if we fail to implement or maintain other adequate safeguards, we may be subject to regulatory sanctions or severe criminal or civil sanctions and penalties.

 

We have operations in and source passengers from the United Kingdom and other member countries of the European Union. On June 23, 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union. The proposed withdrawal has resulted in increased volatility in the global financial markets and caused severe volatility in global currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies, such as the euro, in which we do business. The proposed withdrawal could potentially adversely affect tax, legal and regulatory regimes to which our business in the region is subject. The withdrawal could also, among other potential outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the European Union. Further, uncertainty around these issues could lead to adverse effects on the economy of the United Kingdom and the other economies in which we operate making it more difficult to source passengers from these regions. These events could have a material adverse effect on our business, financial condition and results of operations.

 

An impairment of our tradenames or goodwill could adversely affect our financial condition and operating results.

 

We evaluate tradenames and goodwill for impairment on an annual basis, or more frequently when circumstances indicate that the carrying value of a reporting unit may not be recoverable. Several factors including a challenging operating environment, impacts affecting consumer demand or spending, the deterioration of general macroeconomic conditions, or other factors could result in a change to the future cash flows we expect to derive from our operations. Reductions of the cash flows used in the impairment analyses may result in the recording of an impairment charge to a reporting unit’s tradename or goodwill. We will continue to monitor these intangible assets for potential impairment and perform interim testing of our tradenames or goodwill as necessary.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Purchases of Equity Securities by the Issuer

 

On April 29, 2014, NCLH’s Board of Directors authorized, and NCLH announced, a three-year share repurchase program for up to $500.0 million. NCLH may make repurchases in the open market, in privately negotiated transactions, in accelerated repurchase programs or in structured share repurchase programs, and any repurchases may be made pursuant to Rule 10b5-1 plans. There was no share repurchase activity during the three months ended September 30, 2016 and as of September 30, 2016, $263.5 million remained available for repurchases of our outstanding ordinary shares under the share repurchase program.

 

Item 6. Exhibits

 

2.1 Agreement and Plan of Merger, dated as of September 2, 2014, by and among Prestige Cruises International, Inc., Norwegian Cruise Line Holdings Ltd., Portland Merger Sub, Inc. and Apollo Management, L.P. (incorporated herein by reference to Exhibit 2.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 4, 2014 (File No. 001-35784))
   
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of October 6, 2014, by and among Prestige Cruises International, Inc., Norwegian Cruise Line Holdings Ltd., Portland Merger Sub, Inc. and Apollo Management, L.P. (incorporated herein by reference to Exhibit 2.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on October 8, 2014 (File No. 001-35784))
   
10.1* Supplemental Agreement, dated July 26, 2016, to €590.5 million Breakaway Four Credit Agreement, dated October 12, 2012, by and among Breakaway Four, Ltd., as borrower, NCL Corporation Ltd., as guarantor, NCL International, Ltd., as shareholder and KfW IPEX-Bank GmbH, as facility agent and lender +
   
10.2 Employment Agreement by and between Prestige Cruise Services, LLC and Robert J. Binder, entered into on September 16, 2016 (incorporated herein by reference to Exhibit 10.1 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 19, 2016 (File No. 001-35784)) #
   
10.3 Employment Agreement by and between NCL (Bahamas) Ltd. and Andrew Stuart, entered into on September 16, 2016 (incorporated herein by reference to Exhibit 10.2 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 19, 2016 (File No. 001-35784)) #
   
10.4 Employment Agreement by and between Prestige Cruise Services, LLC and Jason Montague, entered into on September 16, 2016 (incorporated herein by reference to Exhibit 10.3 to Norwegian Cruise Line Holdings Ltd.’s Form 8-K filed on September 19, 2016 (File No. 001-35784)) #
   
31.1* Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
   
31.2* Certification of the Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
   
32.1** Certifications of the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code
   
101* The following unaudited consolidated financial statements are from Norwegian Cruise Line Holdings Ltd.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in Extensible Business Reporting Language (XBRL), as follows:

 

  (i) the Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015;
     
  (ii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015;
     
  (iii) the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015;
     
  (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015;
     
  (v) the Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2016 and 2015; and
     
  (vi) the Notes to the Consolidated Financial Statements, tagged in summary and detail.

 

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* Filed herewith.
** Furnished herewith.
+ Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
# Management contract or compensatory plan.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

NORWEGIAN CRUISE LINE HOLDINGS LTD.

(Registrant)

     
  By: /s/ FRANK J. DEL RIO 
  Name:  Frank J. Del Rio
  Title: President and Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ WENDY A. BECK 
  Name: Wendy A. Beck
  Title: Executive Vice President and Chief Financial
    Officer
    (Principal Financial Officer)

 

Dated: November 9, 2016

   

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Exhibit 10.1

 

[*]: THE CONFIDENTIAL PORTION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION.

Private & Confidential

 

Dated 26 July 2016

 

 

  BREAKAWAY FOUR, LTD. (1)
  (as Borrower)  
     
  NCL CORPORATION LTD. (2)
  (as Guarantor)  
     
  NCL INTERNATIONAL LTD. (3)
  (as Shareholder)  
     
  KFW IPEX-BANK GMBH (4)
  (as Lender)  
     
  KFW IPEX-BANK GMBH (5)
  (as Facility Agent)  
     
  KFW IPEX-BANK GMBH (6)
  (as Hermes Agent)  
     
  KFW IPEX-BANK GMBH (7)
  (as Initial Mandated Lead Arranger)  
     
  KFW IPEX-BANK GMBH (8)
  (as Collateral Agent)  
     
  KFW IPEX-BANK GMBH (9)
  (as CIRR Agent)  

 

 

 

 

SUPPLEMENTAL AGREEMENT TO
THE SECURED CREDIT AGREEMENT
dated 12 October 2012 for the dollar
equivalent of up to €590,478,870 pre and
post delivery finance for Hull No. [*]

 

 

 

 

 

 

 

 

 

 

 

 

 

Contents

 

Clause Page
     
1 Definitions 2
     
2 Agreement of the Finance Parties 3
     
3 Increased Commitments 3
     
4 Amendments to Original Credit Agreement 3
     
5 Representations and warranties 3
     
6 Conditions 4
     
7 Confirmations 5
     
8 Fee and expenses 5
     
9 Miscellaneous and notices 6
     
10 Applicable law 6
     
Schedule 1 Documents and evidence required as conditions precedent (referred to in clause 6.1) 7
     
Schedule 2 Form of Amended and Restated Credit Agreement 9

 

 

 

 

THIS SUPPLEMENTAL AGREEMENT is dated 26 July 2016 and made BETWEEN:

 

(1)BREAKAWAY FOUR, LTD., a Bermuda company with its registered office at Cumberland House, 9th Floor, 1 Victoria Street, Hamilton HM11, Bermuda (the Borrower);

 

(2)NCL CORPORATION LTD., a company incorporated under the laws of Bermuda and having its registered office at Cumberland House, 9th Floor, 1 Victoria Street, Hamilton HM 11, Bermuda as guarantor (the Guarantor);

 

(3)NCL INTERNATIONAL, LTD.., a company organised and existing under the laws of Bermuda, having its registered office at Cumberland House, 1 Victoria Street, Hamilton HM 11 as shareholder (the Shareholder);

 

(4)KFW IPEX-BANK GMBH of Palmengartenstrasse 5-9, 60325 Frankfurt am Main, Germany as lender (the Lender);

 

(5)KFW IPEX-BANK GMBH of Palmengartenstrasse 5-9, 60325 Frankfurt am Main, Germany as facility agent (the Facility Agent);

 

(6)KFW IPEX-BANK GMBH of Palmengartenstrasse 5-9, 60325 Frankfurt am Main, Germany as Hermes agent (the Hermes Agent);

 

(7)KFW IPEX-BANK GMBH of Palmengartenstrasse 5-9, 60325 Frankfurt am Main, Germany as initial mandated lead arranger (the Initial Mandated Lead Arranger);

 

(8)KFW IPEX-BANK GMBH of Palmengartenstrasse 5-9, 60325 Frankfurt am Main, Germany as collateral agent for itself and the Lender (as hereinafter defined) (the Collateral Agent); and

 

(9)KFW IPEX-BANK GMBH of Palmengartenstrasse 5-9, 60325 Frankfurt am Main, Germany as CIRR agent (the CIRR Agent).

 

WHEREAS:

 

(A)This Agreement is supplemental to a credit agreement dated 12 October 2012 (the Original Credit Agreement) made between, inter alia, the Borrower, the bank named therein as lender and the Facility Agent, where the Lender granted to the Borrower a secured loan in the maximum amount of the Dollar Equivalent of five hundred and ninety million, four hundred and seventy-eight thousand, eight hundred and seventy Euro (€590,478,870) (the Loan) for the purpose of enabling the Borrower to finance (among other things) the construction of the Vessel (as such term is defined in the Original Credit Agreement) on the terms and conditions therein contained.

 

(B)As a result of certain agreed change orders relating to the Vessel, the Borrower has requested an increase in the Permitted Change Orders in the amount of [*] and, as a result the Borrower has requested that Total Comment and the Commitment be increased by €139,375,815.50 (the Additional Commitment) to €729,854,685.50 and that the Original Credit Agreement be amended to reflect such increase.

 

(C)This Agreement sets out the terms and conditions upon which the Facility Agent and the Lender shall, at the request of the Borrower, agree to, amongst other things, increase the Total Commitments by the Additional Commitment.

 

 1 

 

 

NOW IT IS HEREBY AGREED as follows:

 

1Definitions

 

1.1Defined expressions

 

Words and expressions defined in the Original Credit Agreement shall, unless the context otherwise requires or unless otherwise defined herein, have the same meanings when used in this Agreement.

 

1.2Definitions

 

In this Agreement, unless the context otherwise requires:

 

Credit Agreement means the Original Credit Agreement as amended and restated by this Agreement.

 

Finance Party means the Facility Agent, the Hermes Agent, the Collateral Agent, the CIRR Agent or a Lender.

 

Obligor means the Borrower, the Guarantor and the Shareholder.

 

Restatement Date means the date on which the Facility Agent notifies the Borrower and the Lender in writing that the Facility Agent has received the documents and evidence specified in clause 6 and Schedule 1 in a form and substance reasonably satisfactory to it.

 

1.3References

 

References in:

 

(a)this Agreement to Sections of the Credit Agreement are to the Sections of the amended and restated credit agreement set out in Schedule 2;

 

(b)references in the Original Credit Agreement to “this Agreement” shall, with effect from the Effective Date and unless the context otherwise requires, be references to the Original Credit Agreement as amended and restated by this Agreement and words such as “herein”, “hereof”, “hereunder”, “hereafter”, “hereby” and “hereto”, where they appear in the Original Credit Agreement, shall be construed accordingly;

 

(c)this Agreement to any defined terms shall have meanings to be equally applicable to both the singular and plural forms of the terms defined and references to this Agreement or any other document (or to any specified provision of this Agreement or any other document) shall be construed as references to this Agreement, that provision or that document as from time to time amended, restated, supplemented and/or novated.

 

1.4Clause headings

 

The headings of the several clauses and subclauses of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement.

 

1.5Contracts (Rights of Third Parties) Act 1999

 

A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce or enjoy the benefit of any term of this Agreement unless expressly provided to the contrary in this Agreement.  Notwithstanding any term of this Agreement, the consent of any person who is not a party to this Agreement is not required to rescind or vary this Agreement at any time.

 

 2 

 

 

2Agreement of the Finance Parties

 

The Finance Parties, relying upon the representations and warranties on the part of the Obligors contained in clause 5, agree with the Borrower that, subject to the terms and conditions of this Agreement and in particular, but without prejudice to the generality of the foregoing, fulfilment of the conditions contained in clause 6 and Schedule 1, the Original Credit Agreement shall be amended and restated on the terms set out in clause 3.

 

3Increased Commitments

 

(a)Subject to the terms and conditions of this Agreement, the Lender agrees to increase the Total Commitments by the Additional Commitment.

 

(b)It is agreed that the Total Commitment and the Commitment of the Lender shall be increased on the Restatement Date to €729,854,685.50.

 

4Amendments to Original Credit Agreement

 

4.1Amendments

 

The Original Credit Agreement (but without its Exhibits which, subject to clause 7.2(c), shall remain in the same form and deemed to form part of the Credit Agreement) shall, with effect on and from the Restatement Date, be (and it is hereby) amended and restated so as to read in accordance with the form of the amended and restated Credit Agreement set out in Schedule 2 and (as so amended) and, together with the Exhibits, will continue to be binding upon the parties to it in accordance with its terms as so amended and restated.

 

4.2Continued force and effect

 

Save as amended by this Agreement, the provisions of the Original Credit Agreement shall continue in full force and effect and the Original Credit Agreement and this Agreement shall be read and construed as one instrument.

 

5Representations and warranties

 

5.1Primary representations and warranties

 

Each of the Obligors represents and warrants to the Finance Parties that:

 

(a)Power and authority

 

it has the power to enter into and perform this Agreement and the transactions contemplated hereby and has taken all necessary action to authorise the entry into and performance of this Agreement and such transactions. This Agreement constitutes its legal, valid and binding obligations enforceable in accordance with its terms and in entering into this Agreement, it is acting on its own account;

 

(b)No violation

 

the entry into and performance of this Agreement and the transactions contemplated hereby do not and will not conflict with:

 

(i)any law or regulation or any official or judicial order; or

 

(ii)its constitutional documents; or

 

(iii)any agreement or document to which any member of the NCLC Group is a party or which is binding upon it or any of its assets, nor result in the creation or imposition of any Lien on it or its assets pursuant to the provisions of any such agreement or

 

 3 

 

 

document and in particular but without prejudice to the foregoing the entry into and performance of this Agreement and the transactions and documents contemplated hereby and thereby will not render invalid, void or voidable any security granted by it to the Collateral Agent;

  

(c)Governmental approvals

 

all authorisations, approvals, consents, licenses, exemptions, filings, registrations, notarisations and other matters, official or otherwise, required in connection with the entry into, performance, validity and enforceability of this Agreement and the transactions contemplated hereby have been obtained or effected and are in full force and effect;

 

(d)Fees, governing law and enforcement

 

no fees or taxes, including, without limitation, stamp, transaction, registration or similar taxes, are required to be paid to ensure the legality, validity, or enforceability of this Agreement. The choice of the laws of England as set forth in this Agreement is a valid choice of law, and the irrevocable submission by each Obligor to jurisdiction and consent to service of process and, where necessary, appointment by such Obligor of an agent for service of process, as set forth in this Agreement, is legal, valid, binding and effective; and

 

(e)True and complete disclosure

 

each Obligor has fully disclosed in writing to the Facility Agent all facts relating to such Obligor which it knows or should reasonably know and which might reasonably be expected to influence the Lender in deciding whether or not to enter into this Agreement.

 

5.2Repetition of representations and warranties

 

Each of the representations and warranties contained in clause 5.1 of this Agreement shall be deemed to be repeated by the Obligors on the Restatement Date as if made with reference to the facts and circumstances existing on such day.

 

6Conditions

 

6.1Documents and evidence

 

The agreement of the Finance Parties referred to in clause 2 shall be subject to the receipt by the Facility Agent or its duly authorised representative of the documents and evidence specified in Schedule 1 in each case, in form and substance reasonably satisfactory to the Facility Agent and its lawyers.

 

6.2General conditions precedent

 

The agreement of the Finance Parties referred to in clause 2 shall be further subject to:

 

(a)the representations and warranties in clause 5 being true and correct on the Restatement Date as if each was made with respect to the facts and circumstances existing at such time; and

 

(b)no Event of Default or Default having occurred and continuing at the time of the Restatement Date.

 

6.3Conditions subsequent

 

The Borrower undertakes as soon as possible (but in any event within 10 days of the Restatement Date) to deliver to the Facility Agent copies of the financing statements (Form UCC-1 or the equivalent) and the search results (Form UCC-11) prepared, filed and/or obtained

 

 4 

 

 

by the Borrower’s counsel, Paul, Weiss, Rifkind, Wharton & Garrison LLP, in connection with the restatement of the Original Credit Agreement pursuant to this Agreement.

 

6.4Waiver of conditions precedent

 

The conditions specified in this clause 6 are inserted solely for the benefit of the Finance Parties and may be waived by the Finance Parties in whole or in part with or without conditions.

 

7Confirmations

 

7.1Guarantee

 

The Guarantor hereby confirms its consent to the amendments to the Original Credit Agreement contained in this Agreement and agrees that the guarantee and indemnity provided in Section 15 (Parent Guaranty) of the Original Credit Agreement, and the obligations of the Guarantor thereunder, shall remain and continue in full force and effect notwithstanding the said amendments to the Original Credit Agreement contained in this Agreement.

 

7.2Credit Documents

 

Each Obligor further acknowledges and agrees, for the avoidance of doubt, that:

 

(a)each of the Credit Documents to which it is a party, and its obligations thereunder, shall remain in full force and effect notwithstanding the amendments made to the Original Credit Agreement by this Agreement;

 

(b)each of the Security Documents to which it is a party shall remain in full force and effect as security for the obligations of the Borrower under the Credit Agreement; and

 

(c)with effect from the Restatement Date, references in the Credit Documents to which it is a party to the Credit Agreement shall henceforth be reference to the Original Credit Agreement as amended and restated by this Agreement and as from time to time hereafter amended.

 

8Fees and expenses

 

8.1Fees

 

The Borrower agrees to pay, on or before the Restatement Date, certain fees to the Facility Agent (on behalf of the Lender) in the amounts set out in a separate letter of even date between the Borrower and the Facility Agent.

 

8.2Expenses

 

The Borrower agrees to pay to the Facility Agent on demand:

 

(a)all reasonable and documented expenses (including external legal and out-of-pocket expenses and disbursements) incurred by the Facility Agent or the Hermes Agent in connection with the negotiation, preparation, execution and, where relevant, registration of this Agreement and of any amendment or extension of or the granting of any waiver or consent under this Agreement; and

 

(b)all expenses (including legal and out-of-pocket expenses) incurred by the Finance Parties in contemplation of, or otherwise in connection with, the enforcement of, or preservation of any rights under this Agreement or otherwise in respect of the monies owing and obligations incurred under this Agreement,

 

 5 

 

 

together with interest at the rate referred to in Section 2.06 (Interest) of the Credit Agreement from the date on which such expenses were incurred to the date of payment (as well after as before judgment).

 

8.3Value Added Tax

 

All expenses payable pursuant to this clause 8 shall be paid together with VAT or any similar tax (if any) properly chargeable thereon.

 

8.4Stamp and other duties

 

The Borrower agrees to pay to the Facility Agent on demand all stamp, documentary, registration or other like duties or taxes (including any duties or taxes payable by the Facility Agent) imposed on or in connection with this Agreement and shall indemnify the Facility Agent against any liability arising by reason of any delay or omission by the Borrower to pay such duties or taxes.

 

9Miscellaneous and notices

 

9.1Notices

 

The provisions of Section 14.03 (Notices) of the Credit Agreement shall extend and apply to the giving or making of notices or demands hereunder as if the same were expressly stated herein with all necessary changes.

 

9.2Counterparts

 

This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts, each of which when so executed and delivered shall be an original but all counterparts shall together constitute one and the same instrument.

 

9.3Further assurance

 

The provisions of Section 9.10(a) (Further Assurances) of the Credit Agreement shall extend and apply to this Agreement as if the same were expressly stated herein with all necessary changes.

 

10Applicable law

 

10.1Law

 

This Agreement and any non-contractual obligations connected with it are governed by and shall be construed in accordance with English law.

 

10.2Exclusive jurisdiction and service of process

 

The provisions of Section 14.07(b) and (c) (Governing Law; Exclusive Jurisdiction of English Courts; Service of Process) of the Credit Agreement shall apply to this Agreement as if the same were expressly stated herein with all necessary changes.

 

This Agreement has been executed on the date stated at the beginning of this Agreement.

 

 6 

 

 

Schedule 1
Documents and evidence required as conditions precedent
(referred to in clause 6.1)

 

1Corporate authorisation

 

In relation to each Obligor:

 

(a)Constitutional documents

 

copies certified by an officer of that Obligor, as true, complete and up to date copies, of all documents which contain or establish or relate to the constitution of that party or an officer's certificate confirming that there have been no changes or amendments to the constitutional documents certified copies of which were previously delivered to the Facility Agent pursuant to the Original Credit Agreement or any previous supplement to it;

 

(b)Resolutions

 

a copy, certified by an officer of that Obligor to be a true copy, and as being in full force and effect and not amended or rescinded, of resolutions of its board of directors or equivalent:

 

(i)approving the transactions contemplated by this Agreement; and

 

(ii)authorising a person or persons to sign and deliver on behalf of that Obligor or, as the case may be, authorising the sealing by that Obligor of this Agreement and any notices or other documents to be given pursuant hereto,

 

together with originals or certified copies of any powers of attorney issued by any Obligor pursuant to such resolutions; and

 

(c)certificate of incumbency

 

a certificate signed by an officer of each Obligor certified to be true, complete and up to date of (i) the directors and officers of that Obligor specifying the names and positions of such persons, (ii) its issued share capital and shareholders, (iii) specimen signatures of those persons authorised to sign this Agreement on its behalf and (iv) a declaration of solvency.

 

2Consents

 

A certificate signed by an officer of each Obligor confirming that all governmental and other licences, approvals, consents, registrations and filings necessary for any matter or thing contemplated by this Agreement on behalf of that Obligor and for the legality, validity, enforceability, admissibility in evidence and effectiveness thereof have been obtained or effected on an unconditional basis and remain in full force and effect (or, in the case of the effecting of any registrations and filings, that arrangements satisfactory to the Facility Agent have been made for the effecting of the same within any applicable time limit).

 

3Process agent

 

An original or certified true copy of a letter from each Obligor’s agent for receipt of service of proceedings accepting its appointment under this Agreement as each Obligor’s process agent.

 

 7 

 

 

4Hermes consent

 

Confirmation from Hermes of their approval in principle that the Hermes Cover will be amended in respect of the Additional Commitment.

 

5Receipt of fee

 

Evidence that the fee payable under clause 8.1 has been paid in full.

 

6Legal opinions

 

Such legal opinions or confirmations as to the continued effect of any existing legal opinions in relation to the laws of England, Bermuda, New York and Florida as the Facility Agent shall in its reasonable discretion deem appropriate.

 

 8 

 

 

Schedule 2
Form of Amended and Restated Credit Agreement

 

 9 

 

 

 

 

€729,854,685.50

CREDIT AGREEMENT

 

among

 

NCL CORPORATION LTD.,

as Parent,

 

BREAKAWAY FOUR, LTD.,
as Borrower,

 

VARIOUS LENDERS,

 

KFW IPEX-BANK GMBH,

as Facility Agent, Collateral Agent and CIRR Agent,

 

KFW IPEX-BANK GMBH,
as Bookrunner,

 

and

 

KFW IPEX-BANK GMBH,
as Hermes Agent

 

__________________________________

 

Dated October 12, 2012

as amended and restated on 26 July 2016

__________________________________

 

KFW IPEX-BANK GMBH

 

as Initial Mandated Lead Arranger

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
SECTION 1. Definitions and Accounting Terms   1
     
1.01 Defined Terms   1
     
SECTION 2. Amount and Terms of Credit Facility   29
     
2.01 The Commitments   29
2.02 Amount and Timing of Each Borrowing; Currency of Disbursements   29
2.03 Notice of Borrowing   31
2.04 Disbursement of Funds   31
2.05 Pro Rata Borrowings   32
2.06 Interest   32
2.07 Election of Floating Rate.   33
2.08 Floating Rate Interest Periods   34
2.09 Increased Costs, Illegality, Market Disruption, etc.   35
2.10 Indemnification; Breakage Costs   37
2.11 Change of Lending Office; Limitation on Additional Amounts   38
2.12 Replacement of Lenders   39
2.13 Disruption to Payment Systems, Etc   39
     
SECTION 3. Commitment Commission; Fees; Reductions of Commitment   40
     
3.01 Commitment Commission   40
3.02 CIRR Fees.   41
3.03 Other Fees.   41
3.04 Voluntary Reduction or Termination of Commitments   41
3.05 Mandatory Reduction of Commitments   41
     
SECTION 4. Prepayments; Repayments; Taxes   42
     
4.01 Voluntary Prepayments   42
4.02 Mandatory Repayments and Commitment Reductions   43
4.03 Method and Place of Payment   44
4.04 Net Payments; Taxes   44
4.05 Application of Proceeds   45
     
SECTION 5. Conditions Precedent to the Initial Borrowing Date   46
     
5.01 Effective Date   46
5.02 [Intentionally omitted]   46
5.03 Corporate Documents; Proceedings; etc.   47
5.04 Know Your Customer   47
5.05 Construction Contract and Other Material Agreements   47
5.06 Share Charge   47
5.07 Assignment of Contracts   47

 

 (i) 

 

 

5.08 Consents Under Existing Credit Facilities   48
5.09 Process Agent   48
5.10 Opinions of Counsel   48
5.11 KfW Refinancing   49
5.12 Equity Payment   49
5.13 Financing Statements   49
5.14 Security Trust Deed   49
5.15 Hermes Cover   50
     
SECTION 6. Conditions Precedent to each Borrowing Date   50
     
6.01 No Default; Representations and Warranties   50
6.02 Consents   50
6.03 Refund Guarantees   50
6.04 Equity Payment   51
6.05 Fees, Costs, etc.   51
6.06 Construction Contract   51
6.07 Notice of Borrowing   51
6.08 Solvency Certificate   51
6.09 Litigation   52
     
SECTION 7. Conditions Precedent to the Delivery Date   52
     
7.01 Delivery of Vessel   52
7.02 Collateral and Guaranty Requirements   52
7.03 Evidence of [*] Payment   53
7.04 Hermes Compliance; Compliance with Applicable Laws and Regulations   53
7.05 Opinion of Counsel   53
     
SECTION 8. Representations and Warranties   54
     
8.01 Entity Status   54
8.02 Power and Authority   54
8.03 No Violation   54
8.04 Governmental Approvals   54
8.05 Financial Statements; Financial Condition   55
8.06 Litigation   55
8.07 True and Complete Disclosure   55
8.08 Use of Proceeds   55
8.09 Tax Returns and Payments   55
8.10 No Material Misstatements   56
8.11 The Security Documents   56
8.12 Capitalization   57
8.13 Subsidiaries   57
8.14 Compliance with Statutes, etc.   57
8.15 Winding-up, etc.   57
8.16 No Default   57
8.17 Pollution and Other Regulations   57
8.18 Ownership of Assets   58

 

 (ii) 

 

 

8.19 Concerning the Vessel   58
8.20 Citizenship   59
8.21 Vessel Classification   59
8.22 No Immunity   59
8.23 Fees, Governing Law and Enforcement   59
8.24 Form of Documentation   59
8.25 Pari Passu or Priority Status   60
8.26 Solvency   60
8.27 No Undisclosed Commissions   60
8.28 Completeness of Documentation   60
8.29 Money Laundering   60
     
SECTION 9. Affirmative Covenants   60
     
9.01 Information Covenants   60
9.02 Books and Records; Inspection   63
9.03 Maintenance of Property; Insurance   63
9.04 Corporate Franchises   63
9.05 Compliance with Statutes, etc.   63
9.06 Hermes Cover   63
9.07 End of Fiscal Years   64
9.08 Performance of Credit Document Obligations   64
9.09 Payment of Taxes   64
9.10 Further Assurances   64
9.11 Ownership of Subsidiaries   65
9.12 Consents and Registrations   65
9.13 Flag of Vessel   65
9.14 “Know Your Customer” and Other Similar Information   65
     
SECTION 10. Negative Covenants   66
     
10.01 Liens   66
10.02 Consolidation, Merger, Amalgamation, Sale of Assets, Acquisitions, etc.   67
10.03 Dividends   68
10.04 Advances, Investments and Loans   69
10.05 Transactions with Affiliates   69
10.06 Free Liquidity   72
10.07 Total Net Funded Debt to Total Capitalization   72
10.08 Collateral Maintenance   72
10.09 Consolidated EBITDA to Consolidated Debt Service   72
10.10 Business; Change of Name   72
10.11 Subordination of Indebtedness.   72
10.12 Activities of Borrower, etc.   73
10.13 Material Amendments or Modifications of Construction Contracts   73
10.14 No Place of Business   73
     
SECTION 11. Events of Default   74
     
11.01 Payments   74

 

 (iii) 

 

 

11.02 Representations, etc.   74
11.03 Covenants   74
11.04 Default Under Other Agreements   74
11.05 Bankruptcy, etc.   75
11.06 Total Loss   76
11.07 Security Documents   76
11.08 Guaranties   76
11.09 Judgments   76
11.10 Cessation of Business   76
11.11 Revocation of Consents   76
11.12 Unlawfulness   77
11.13 Insurances   77
11.14 Disposals   77
11.15 Government Intervention   77
11.16 Change of Control   77
11.17 Material Adverse Change   78
11.18 Repudiation of Construction Contract or other Material Documents   78
     
SECTION 12. Agency and Security Trustee Provisions   78
     
12.01 Appointment and Declaration of Trust   78
12.02 Nature of Duties   79
12.03 Lack of Reliance on the Agents   79
12.04 Certain Rights of the Agents   79
12.05 Reliance   80
12.06 Indemnification   80
12.07 The Agents in their Individual Capacities   80
12.08 Resignation by an Agent   80
12.09 The Lead Arrangers   81
12.10 Impaired Agent   81
12.11 Replacement of an Agent   82
12.12 Resignation by the Hermes Agent   82
     
SECTION 13. Benefit of Agreement   83
     
13.01 Assignments and Transfers by the Lenders   83
13.02 Assignment or Transfer Fee   84
13.03 Assignments and Transfers to Hermes or KfW   85
13.04 Limitation of Responsibility to Existing Lenders   85
13.05 [Intentionally Omitted]   85
13.06 Procedure and Conditions for Transfer   86
13.07 Procedure and Conditions for Assignment   86
13.08 Copy of Transfer Certificate or Assignment Agreement to Parent   87
13.09 Security over Lenders’ Rights   87
13.10 Assignment by a Credit Party   88
13.11 Lender Participations   88
13.12 Increased Costs   88

 

 (iv) 

 

 

SECTION 14. Miscellaneous   89
     
14.01 Payment of Expenses, etc.   89
14.02 Right of Set-off   90
14.03 Notices   90
14.04 No Waiver; Remedies Cumulative   91
14.05 Payments Pro Rata   91
14.06 Calculations; Computations   92
14.07 Governing Law; Exclusive Jurisdiction of English Courts; Service of Process   92
14.08 Counterparts   93
14.09 Effectiveness   93
14.10 Headings Descriptive   93
14.11 Amendment or Waiver; etc.   93
14.12 Survival   95
14.13 Domicile of Loans   95
14.14 Confidentiality   95
14.15 Register   95
14.16 Third Party Rights   96
14.17 Judgment Currency   96
14.18 Language   96
14.19 Waiver of Immunity   97
14.20 “Know Your Customer” Notice   97
14.21 Release of Liens and the Parent Guaranty; Flag Jurisdiction Transfer   97
14.22 Partial Invalidity   98
     
SECTION 15. Parent Guaranty   98
     
15.01 Guaranty and Indemnity   98
15.02 Continuing Guaranty   99
15.03 Reinstatement   99
15.04 Waiver of Defenses   99
15.05 Guarantor Intent   100
15.06 Immediate Recourse   100
15.07 Appropriations   100
15.08 Deferral of Guarantor’s Rights   100
15.09 Additional Security   101

 

SCHEDULE 1.01(a) - Commitments
SCHEDULE 1.01(b) - Mandatory Costs
SCHEDULE 5.07 - Notices, Acknowledgments and Consents
SCHEDULE 5.10 - Initial Borrowing Date Opinions
SCHEDULE 6.10 - Material Litigation
SCHEDULE 7.05 - Delivery Date Opinions
SCHEDULE 8.03 - Existing Agreements
SCHEDULE 8.12 - Capitalization
SCHEDULE 8.13 - Subsidiaries
SCHEDULE 8.19 - Vessel

 

 (v) 

 

 

SCHEDULE 8.21 - Approved Classification Societies
SCHEDULE 9.03 - Required Insurances
SCHEDULE 10.01 - Existing Liens
SCHEDULE 14.03A - Credit Party Addresses
SCHEDULE 14.03B - Lender Addresses
     
EXHIBIT A - Form of Notice of Borrowing
EXHIBIT B-1 - Form of BankAssure Report
EXHIBIT B-2 - Form of Insurance Broker Certificate
EXHIBIT C - Form of Interaction Agreement
EXHIBIT D - Form of Secretary’s Certificate
EXHIBIT E - Form of Transfer Certificate
EXHIBIT F - Form of Bermuda Share Charge
EXHIBIT G - Form of Assignment of Earnings and Insurances
EXHIBIT H - Form of Assignment of Charters
EXHIBIT I - Form of Deed of Covenants
EXHIBIT J - Form of Assignment of Contracts
EXHIBIT K - Form of Solvency Certificate
EXHIBIT L - Form of Assignment Agreement
EXHIBIT M - Form of Compliance Certificate
EXHIBIT N - [Intentionally omitted]
EXHIBIT O - Form of Assignment of Management Agreements
EXHIBIT P - Form of Security Trust Deed

 

 (vi) 

 

  

THIS CREDIT AGREEMENT, is made by way of deed October 12, 2012 and amended and restated on 26 July 2016, among NCL CORPORATION LTD., a Bermuda company with its registered office as of the date hereof at Cumberland House, 9th Floor, 1 Victoria Street, Hamilton HM11, Bermuda (the “Parent”), BREAKAWAY FOUR, LTD., a Bermuda company with its registered office as of the date hereof at Cumberland House, 9th Floor, 1 Victoria Street, Hamilton HM11, Bermuda (the “Borrower”), KFW IPEX-BANK GmbH, as a Lender (in such capacity, together with each of the other Persons that may become a “Lender” in accordance with Section 13, each of them individually a “Lender” and, collectively, the “Lenders”), KFW IPEX-BANK GMBH, as Facility Agent (in such capacity, the “Facility Agent”), as Collateral Agent under the Security Documents (in such capacity, the “Collateral Agent”) and as CIRR Agent (in such capacity, the “CIRR Agent”), KFW IPEX-BANK GMBH, as Bookrunner (in such capacity, the “Bookrunner”), KFW IPEX-BANK GMBH, as Hermes Agent (in such capacity, the “Hermes Agent”), and KFW IPEX-BANK GMBH, as initial mandated lead arranger in respect of the credit facility provided for herein (in such capacity the “Initial Mandated Lead Arranger”).  All capitalized terms used herein and defined in Section 1 are used herein as therein defined.

 

W I T N E S S E T H:

 

WHEREAS, the Borrower has requested that the Lenders make available to the Borrower a multi-draw term loan credit facility in an aggregate principal amount of up to €729,854,685.50 and which Loans may be incurred to finance, in part, the construction and acquisition costs of the Vessel and the related Hermes Premium; and

 

WHEREAS, subject to and upon the terms and conditions set forth herein, the Lenders are willing to make available to the Borrower the term loan facility provided for herein.

 

NOW, THEREFORE, IT IS AGREED:

 

SECTION 1.   Definitions and Accounting Terms.

 

1.01         Defined Terms.  As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined) and references to this Agreement or any other document (or to any specified provision of this Agreement or any other document) shall be construed as references to this Agreement, that provision or that document as from time to time amended, restated, supplemented and/or novated:

 

Acceptable Bank” means (a) a bank or financial institution which has a rating for its long-term unsecured and non credit-enhanced debt obligations of A- or higher by S&P or A2 or higher by Moody's or a comparable rating from an internationally recognized credit rating agency; or (b) any other bank or financial institution approved by each Agent.

 

Acceptable Flag Jurisdiction” shall mean the Bahamas, Bermuda, Panama, the Marshall Islands, the United States or such other flag jurisdiction as may be acceptable to the Required Lenders in their reasonable discretion.

 

 

 

 

Acquisition” means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of fifty percent (50%) of the Capital Stock of any Person or otherwise causing any Person to become a Subsidiary of a Borrower, or (c) a merger, amalgamation or consolidation or any other combination with another Person.

 

Adjusted Construction Price” shall mean the sum of the Initial Construction Price of the Vessel and the total permitted increases to the Initial Construction Price of the Vessel pursuant to Permitted Change Orders (it being understood that the Final Construction Price may exceed the Adjusted Construction Price).

 

Additional Hermes Premium” means the additional premium payable to Hermes as a result of the increase to the Hermes Cover arising as a consequence of the increase in the Total Commitments pursuant to the Supplemental Agreement.

 

Affiliate” shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person; provided, however, that for purposes of Section 10.05, an Affiliate of the Parent or any of its Subsidiaries, as applicable, shall include any Person that directly or indirectly owns more than 10% of any class of the Capital Stock of the Parent or such Subsidiary, as applicable, and any officer or director of the Parent or such Subsidiary.  A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise.  Notwithstanding anything to the contrary contained above, for purposes of Section 10.05, neither the Facility Agent, nor the Collateral Agent, nor the Lead Arrangers nor any Lender (or any of their respective affiliates) shall be deemed to constitute an Affiliate of the Parent or its Subsidiaries in connection with the Credit Documents or its dealings or arrangements relating thereto.

 

Affiliate Transaction” shall have the meaning provided in Section 10.05.

 

Agent” or “Agents” shall mean, individually and collectively, the Facility Agent, the Collateral Agent, the Hermes Agent and the CIRR Agent.

 

Agreement” shall mean this Credit Agreement, as modified, supplemented, amended, restated or novated from time to time.

 

Apollo” shall mean Apollo Management, L.P., and its Affiliates.

 

Applicable Margin” shall mean a percentage per annum equal to 1.50%.

 

Appraised Value” of the Vessel at any time shall mean the fair market value or, as the case may be, the average of the fair market value of the Vessel on an individual charter free basis as set forth on the appraisal or, as the case may be, the appraisals most recently delivered to, or obtained by, the Facility Agent prior to such time pursuant to Section 9.01(c).

 

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Approved Appraisers” shall mean Brax Shipping AS; Barry Rogliano Salles S.A., Paris; Clarksons, London; R.S. Platou Shipbrokers, A.S., Oslo; Fearnsale, a division of Astrup Fearnley AS, Oslo; and Rocca & Partners S.R.L.

 

Approved Stock Exchange” shall mean the New York Stock Exchange, NASDAQ or such other stock exchange in the United States of America, the United Kingdom or Hong Kong as is approved in writing by the Facility Agent or, in each case, any successor thereto.

 

Assignment Agreement” shall mean an Assignment Agreement substantially in the form of Exhibit L (appropriately completed) or any other form agreed between the relevant assignor and assignee (and if required to be executed by the Borrower, the Borrower).

 

Assignment of Charters” shall have the meaning provided in the definition of “Collateral and Guaranty Requirements”.

 

Assignment of Contracts” shall have the meaning provided in Section 5.07.

 

Assignment of Earnings and Insurances” shall have the meaning provided in the definition of “Collateral and Guaranty Requirements”.

 

Assignment of Management Agreements” shall have the meaning provided in the definition of “Collateral and Guaranty Requirements”.

 

Bankruptcy Code” shall have the meaning provided in Section 11.05(b).

 

Basel II” shall mean the “International Convergence of Capital Measurement and Capital Standards, a Revised Framework” published by the Basel Committee on Banking Supervision in June 2004 in the form existing on the date of this Agreement.

 

Basel III” shall mean, together, “Basel III: A global regulatory framework for more resilient banks and banking systems” and “Basel III: International framework for liquidity risk measurement, standards and monitoring” both published by the Basel Committee on Banking Supervision on December 16, 2010.

 

Borrower” shall have the meaning provided in the first paragraph of this Agreement.

 

Borrowing” shall mean the borrowing of Loans from all the Lenders (other than any Lender which has not funded its share of a Borrowing in accordance with this Agreement) having Commitments on a given date.

 

Borrowing Date” shall mean each date (including the Initial Borrowing Date) on which a Borrowing occurs as set forth in Section 2.02.

 

Business Day” shall mean any day except Saturday, Sunday and any day which shall be in New York, London or Frankfurt am Main a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close.

 

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Capital Stock” means:

 

(1)         in the case of a corporation, corporate stock or shares;

 

(2)         in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock;

 

(3)         in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and

 

(4)         any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.

 

Cash Balance” shall mean, at any date of determination, the unencumbered and otherwise unrestricted cash and Cash Equivalents of the NCLC Group.

 

Cash Equivalents” shall mean (i) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than one year from the date of acquisition, (ii) time deposits and certificates of deposit of any commercial bank having, or which is the principal banking subsidiary of a bank holding company having capital, surplus and undivided profits aggregating in excess of $200,000,000, with maturities of not more than one year from the date of acquisition by any Person, (iii) repurchase obligations with a term of not more than 90 days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (ii) above, (iv) commercial paper issued by any Person incorporated in the United States rated at least A-1 or the equivalent thereof by S&P or at least B-1 or the equivalent thereof by Moody’s and in each case maturing not more than one year after the date of acquisition by any other Person, and (v) investments in money market funds substantially all of whose assets are comprised of securities of the types described in clauses (i) through (iv) above.

 

CERCLA” shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as the same may be amended from time to time, 42 U.S.C. § 9601 et seq.

 

Change of Control” shall mean (x) at any time when the ordinary Capital Stock of the Parent (or a parent company of the Parent in a Qualified IPO) is not listed on an Approved Stock Exchange or at any time when a dividend is to be paid to the existing shareholders of the Parent by way of a share issue pursuant to a public offering on an Approved Stock Exchange, the Permitted Holders in the aggregate do not, directly or indirectly, control the Parent and beneficially own, directly or indirectly, at least 51% of the issued Capital Stock of, and Equity Interest in, the Parent; or (y) at any time following the listing of the ordinary Capital Stock of the Parent (or a parent company of the Parent in a Qualified IPO) on an Approved Stock Exchange:

 

(i)         any Third Party:

 

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(A)owns legally and/or beneficially and either directly or indirectly at least thirty three per cent (33%) of the ordinary share capital of the Parent; or

 

(B)has the right or the ability to control either directly or indirectly the affairs of or the composition of the majority of the board of directors (or equivalent) of the Parent; and

 

at the same time as any of the events described in paragraphs (A) or (B) of this definition have occurred and are continuing, the Permitted Holders in the aggregate do not, directly or indirectly, beneficially own at least 51% of the issued Capital Stock of, and Equity Interest in, the Parent; or

 

(ii)         the Parent (or such parent company of the Parent) ceases to be a listed company on an Approved Stock Exchange without the prior written consent of the Required Lenders,

 

(and, for the purpose of Section 11.16   “control” of any company, limited partnership or other legal entity (a “body corporate”) controlled by a Permitted Holder means that one or more members of a Permitted Holder in the aggregate has, directly or indirectly, the power to direct the management and policies of such a body corporate, whether through the ownership of more than 50% of the issued voting capital of that body corporate or by contract, trust or other arrangement).

 

CIRR Agent” shall have the meaning provided in the first paragraph of this Agreement, and shall include any successor thereto.

 

CIRR General Terms and Conditions” shall mean the CIRR General Terms and Conditions for interest rate make-up in ship financing schemes (August 29, 2012 edition).

 

CIRR Representative” shall mean KfW, acting in its capacity as CIRR mandatary in connection with this Agreement.

 

Collateral” shall mean all property (whether real or personal) with respect to which any security interests have been granted (or purported to be granted) pursuant to any Security Document, including, without limitation, all Share Charge Collateral, all Earnings and Insurance Collateral, the Construction Risk Insurance, the Vessel, each Refund Guarantee, the Construction Contract and all cash and Cash Equivalents at any time delivered as collateral thereunder or as collateral required hereunder.

 

Collateral Agent” shall have the meaning provided in the first paragraph of this agreement, and shall include any successor thereto, acting as mortgagee, security trustee or collateral agent for the Secured Creditors pursuant to the Security Documents.

 

Collateral and Guaranty Requirements” shall mean with respect to the Vessel, the requirement that:

 

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(i)         (A) the Borrower shall have duly authorized, executed and delivered an Assignment of Earnings and Insurances substantially in the form of Exhibit G or otherwise reasonably acceptable to the Lead Arrangers (as modified, supplemented or amended from time to time, the “Assignment of Earnings and Insurances”) (to the extent incorporated into or required by such Exhibit or otherwise agreed by the Borrower and the Lead Arrangers) with appropriate notices, acknowledgements and consents relating thereto and (B) the Borrower shall (x) use its commercially reasonable efforts to obtain an Assignment of Charters substantially in the form of Exhibit H (as modified, supplemented or amended from time to time, the “Assignment of Charters”) with (to the extent incorporated into or required by such Exhibit or otherwise agreed by the Borrower and the Lead Arrangers) appropriate notices, acknowledgements and consents relating thereto for any charter or similar contract that has as of the execution date of such charter or similar contract a remaining term of 13 months or greater (including any renewal option) and (y) have obtained a subordination agreement from the charterer for any Permitted Chartering Arrangement that the Borrower has entered into with respect to the Vessel, and shall use commercially reasonable efforts to provide appropriate notices and consents related thereto, together covering all of the Borrower’s present and future Earnings and Insurance Collateral, in each case together with:

 

(a)         proper financing statements (Form UCC-1 or the equivalent) fully prepared for filing in accordance with the UCC or in other appropriate filing offices of each jurisdiction as may be necessary or, in the reasonable opinion of the Collateral Agent, desirable to perfect or give notice to third parties of, as the case may be, the security interests purported to be created by the Assignment of Earnings and Insurances; and

 

(b)         certified copies of lien search results (Form UCC-11) listing all effective financing statements that name each Credit Party as debtor and that are filed in the District of Columbia and Florida, together with Form UCC-3 Termination Statements (or such other termination statements as shall be required by local law) fully prepared for filing if required by applicable law to terminate for any financing statement which covers the Collateral except to the extent evidencing Permitted Liens.

 

(ii)         the Borrower shall have duly authorized, executed and delivered an Assignment of Management Agreements in respect of the Management Agreements for the Vessel substantially in the form of Exhibit O or otherwise reasonably acceptable to the Lead Arrangers (as modified, supplemented or amended from time to time, the “Assignment of Management Agreements”) and shall have obtained (or in the case of any Manager that is not a Subsidiary of the Parent, used commercially reasonable efforts to obtain) a Manager’s Undertakings for the Vessel;

 

(iii)         the Borrower shall have duly authorized, executed and delivered, and caused to be registered in the appropriate vessel registry a first priority mortgage and a deed of covenants (as modified, amended or supplemented from time to time in accordance with the terms thereof and hereof, and together with the Vessel Mortgage delivered pursuant to the definition of Flag Jurisdiction Transfer, the “Vessel Mortgage”), substantially in the form of Exhibit I or otherwise reasonably acceptable to the Lead Arrangers with respect to the Vessel,

 

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and the Vessel Mortgage shall be effective to create in favor of the Collateral Agent a legal, valid and enforceable first priority security interest, in and Lien upon the Vessel, subject only to Permitted Liens;

 

(iv)         all filings, deliveries of notices and other instruments and other actions by the Credit Parties and/or the Collateral Agent necessary or desirable in the reasonable opinion of the Collateral Agent to perfect and preserve the security interests described in clauses (i) through and including (iii) above shall have been duly effected and the Collateral Agent shall have received evidence thereof in form and substance reasonably satisfactory to the Collateral Agent; and

 

(v)         the Facility Agent shall have received each of the following:

 

(a)         certificates of ownership from appropriate authorities showing (or confirmation updating previously reviewed certificates and indicating) the registered ownership of the Vessel by the Borrower; and

 

(b)         the results of maritime registry searches with respect to the Vessel, indicating that the Vessel has been deleted from all new building registers and that there are no record liens other than Liens in favor of the Collateral Agent and/or the Lenders and Permitted Liens; and

 

(c)         class certificates reasonably satisfactory to it from Det Norske Veritas or another classification society listed on Schedule 8.21 hereto (or another internationally recognized classification society reasonably acceptable to the Facility Agent), indicating that the Vessel meets the criteria specified in Section 8.21; and

 

(d)         certified copies of all Management Agreements; and

 

(e)         certified copies of all ISM and ISPS Code documentation for the Vessel; and

 

(f)         the Facility Agent shall have received a report, in substantially the form of Exhibit B-1 or otherwise reasonably acceptable to the Facility Agent, from BankAssure or another firm of independent marine insurance brokers reasonably acceptable to the Facility Agent with respect to the insurance maintained (or to be maintained) by the Credit Parties in respect of the Vessel, together with a certificate in substantially the form of Exhibit B-2 or otherwise reasonably acceptable to the Facility Agent, from another broker certifying that such insurances (i) are placed with such insurance companies and/or underwriters and/or clubs, in such amounts, against such risks, and in such form, as are customarily insured against by similarly situated insureds and (ii) include the Required Insurance.  In addition, the Borrower shall reimburse the Facility Agent for the reasonable and documented costs of procuring customary mortgagee interest insurance and additional perils insurance in connection with the Vessel as contemplated by Section 9.03 (including Schedule 9.03).

 

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Collateral Disposition” shall mean (i) the sale, lease, transfer or other disposition of the Vessel by the Borrower to any Person (it being understood that a Permitted Chartering Arrangement is not a Collateral Disposition) or the sale of 100% of the Capital Stock of the Borrower or (ii) any Event of Loss of the Vessel.

 

Commitment” shall mean, for each Lender, the amount denominated in Euro set forth opposite such Lender’s name in Schedule 1.01(a) hereto as the same may be (x) reduced from time to time pursuant to Sections 3.04, 3.05, 4.02 and/or 11 or (y) adjusted from time to time as a result of assignments and/or transfers to or from such Lender pursuant to Section 2.12 or Section 13.

 

Commitment Termination Date” shall mean the date falling [*] after the last scheduled Delivery Date as at the date of this Agreement, namely [*] or, where an Election Notice (as defined in Article 14, Clause 16.4 of the Construction Contract) has been issued by the Yard pursuant to the said Article 14, Clause 16.4 of the Construction Contract, the date referred to above shall be extended by the same period by which the Delivery Date has been extended pursuant to such Election Notice.

 

Commitment Commission” shall have the meaning provided in Section 3.01(a).

 

Consolidated Debt Service” shall mean, for any relevant period, the sum (without double counting), determined in accordance with GAAP, of:

 

(i)the aggregate principal payable or paid during such period on any Indebtedness for Borrowed Money of any member of the NCLC Group, other than:

 

(a)principal of any such Indebtedness for Borrowed Money prepaid at the option of the relevant member of the NCLC Group or by virtue of cash sweep” or “special liquidity” cash sweep provisions (or analogous provisions) in any debt facility of the NCLC Group;

 

(b)principal of any such Indebtedness for Borrowed Money prepaid upon a sale or an Event of Loss of any vessel (as if references in that definition were to all vessels and not just the Vessel) owned or leased under a capital lease by any member of the NCLC Group; and

 

(c)balloon payments of any such Indebtedness for Borrowed Money payable during such period (and for the purpose of this paragraph (c) a “balloon payment” shall not include any scheduled repayment installment of such Indebtedness for Borrowed Money which forms part of the balloon);

 

(ii)Consolidated Interest Expense for such period;

 

(iii)the aggregate amount of any dividend or distribution of present or future assets, undertakings, rights or revenues to any shareholder of any member

 

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of the NCLC Group (other than the Parent, or one of its wholly owned Subsidiaries) or any Dividends other than the tax distributions described in Section 10.03(ii) in each case paid during such period; and

 

(iv)all rent under any capital lease obligations by which the Parent, or any consolidated Subsidiary is bound which are payable or paid during such period and the portion of any debt discount that must be amortized in such period,

 

as calculated in accordance with GAAP and derived from the then latest consolidated unaudited financial statements of the NCLC Group delivered to the Facility Agent in the case of any period ending at the end of any of the first three fiscal quarters of each fiscal year of the Parent and the then latest audited consolidated financial statements (including all additional information and notes thereto) of the Parent and its consolidated Subsidiaries together with the auditors’ report delivered to the Facility Agent in the case of the final quarter of each such fiscal year.

 

Consolidated EBITDA” shall mean, for any relevant period, the aggregate of:

 

(i)Consolidated Net Income from the Parent’s operations for such period; and

 

(ii)         the aggregate amounts deducted in determining Consolidated Net Income for such period in respect of gains and losses from the sale of assets or reserves relating thereto, Consolidated Interest Expense, depreciation and amortization, impairment charges and any other non-cash charges and deferred income tax expense for such period.

 

Consolidated Interest Expense” shall mean, for any relevant period, the consolidated interest expense (excluding capitalized interest) of the NCLC Group for such period.

 

Consolidated Net Income” shall mean, for any relevant period, the consolidated net income (or loss) of the NCLC Group for such period as determined in accordance with GAAP.

 

Construction Contract” shall mean the Shipbuilding Contract (in relation to Hull No. [*]) for the Vessel, dated as of [*], among the Parent, the Borrower and the Yard, as such Shipbuilding Contract may be amended, modified or supplemented from time to time in accordance with the terms thereof and hereof.

 

Construction Risk Insurance” shall mean any and all insurance policies related to the Construction Contract and the construction of the Vessel.

 

Credit Documents” shall mean this Agreement, the Supplemental Agreement, any Fee Letters, each Security Document, the Security Trust Deed, any Transfer Certificate, any Assignment Agreement, the Interaction Agreement and, after the execution and delivery thereof, each additional guaranty or additional security document executed pursuant to Section 9.10.

 

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Credit Document Obligations” shall mean, except to the extent consisting of obligations, liabilities or indebtedness with respect to Interest Rate Protection Agreements or Other Hedging Agreements, the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations, liabilities and indebtedness (including, without limitation, principal, premium, interest, fees and indemnities (including, without limitation, all interest that accrues after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency, reorganization or similar proceeding of any Credit Party at the rate provided for in the respective documentation, whether or not a claim for post-petition interest is allowed in any such proceeding)) of each Credit Party to the Lender Creditors (provided, in respect of the Lender Creditors which are Lenders, such aforementioned obligations, liabilities and indebtedness shall arise only for such Lenders (in such capacity) in respect of Loans and/or Commitments), whether now existing or hereafter incurred under, arising out of, or in connection with this Agreement and the other Credit Documents to which such Credit Party is a party (including, in the case of each Credit Party that is a Guarantor, all such obligations, liabilities and indebtedness of such Credit Party under the Parent Guaranty) and the due performance and compliance by such Credit Party with all of the terms, conditions and agreements contained in this Agreement and in such other Credit Documents.

 

Credit Party” shall mean the Borrower, the Parent and each Subsidiary of the Parent that owns a direct interest in the Borrower.

 

Default” shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default.

 

Defaulting Lender” shall mean any Lender with respect to which a Lender Default is in effect.

 

Delivery Date” shall mean the date of delivery of the Vessel to the Borrower, which, as of the Effective Date, is scheduled to occur during the period [*] up to and including [*].

 

Discharged Rights and Obligations” shall have the meaning provided in Section 13.06(c).

 

Dispute” shall have the meaning provided in Section 14.07(a).  

 

Disqualified Stock” means, with respect to any Person, any Capital Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is redeemable or exchangeable), or upon the happening of any event:

 

(1) matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise (other than as a result of a change of control or asset sale),

 

(2) is convertible or exchangeable for Indebtedness or Disqualified Stock of such Person, or

 

(3) is redeemable at the option of the holder thereof, in whole or in part (other  than solely as a result of a change of control or asset sale), in each case prior to 91 days

 

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after the Maturity Date; provided, however, that only the portion of Capital Stock which so matures or is mandatorily redeemable, is so convertible or exchangeable or is so redeemable at the option of the holder thereof prior to such date shall be deemed to be Disqualified Stock; provided, however, that if such Capital Stock is issued to any employee or to any plan for the benefit of employees of the Parent or its Subsidiaries or by any such plan to such employees, such Capital Stock shall not constitute Disqualified Stock solely because it may be required to be repurchased by the Parent in order to satisfy applicable statutory or regulatory obligations or as a result of such employee’s termination, death or disability; provided, further, that any class of Capital Stock of such Person that by its terms authorizes such Person to satisfy its obligations thereunder by delivery of Capital Stock that is not Disqualified Stock shall not be deemed to be Disqualified Stock.

 

Disruption Event” means either or both of:

 

(a)         a material disruption to those payment or communications systems or to those financial markets which are, in each case, required to operate in order for payments to be made in connection with this Agreement (or otherwise in order for the transactions contemplated by the Credit Documents to be carried out) which disruption is not caused by, and is beyond the control of, any of the parties to this Agreement; or

 

(b)         the occurrence of any other event which results in a disruption (of a technical or systems-related nature) to the treasury or payments operations of a party to this Agreement preventing such party, or any other party to this Agreement:

 

(i)         from performing its payment obligations under the Credit Documents; or

 

(ii)        from communicating with other parties to this Agreement in accordance with the terms of the Credit Documents,

 

and which (in either such case) is not caused by, and is beyond the control of, the party to this Agreement whose operations are disrupted.

 

Dividend” shall mean, with respect to any Person, that such Person or any Subsidiary of such Person has declared or paid a dividend or returned any equity capital to its stockholders, partners or members or the holders of options or warrants issued by such Person with respect to its Capital Stock or membership interests or authorized or made any other distribution, payment or delivery of property (other than common stock or the right to purchase any of such stock of such Person) or cash to its stockholders, partners or members or the holders of options or warrants issued by such Person with respect to its Capital Stock or membership interests as such, or redeemed, retired, purchased or otherwise acquired, directly or indirectly, for a consideration any shares of any class of its Capital Stock or any other Capital Stock outstanding on or after the Effective Date (or any options or warrants issued by such Person with respect to its Capital Stock or other Equity Interests), or set aside any funds for any of the foregoing purposes, or shall have permitted any of its Subsidiaries to purchase or otherwise acquire for a consideration any shares of any class of the Capital Stock or any other Equity

 

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Interests of such Person outstanding on or after the Effective Date (or any options or warrants issued by such Person with respect to its Capital Stock or other Equity Interests).  Without limiting the foregoing, “Dividends” with respect to any Person shall also include all payments made or required to be made by such Person with respect to any stock appreciation rights, plans, equity incentive or achievement plans or any similar plans or setting aside of any funds for the foregoing purposes.

 

Dollars” and the sign “$” shall each mean lawful money of the United States.

 

Dollar Equivalent” shall mean, with respect to the Euro denominated Commitments being utilized on a Borrowing Date, the amount calculated by applying (x) in the event that the Borrower and/or the Parent have entered into Earmarked Foreign Exchange Arrangements with respect to the installment payment to be partially financed by the Loans to be disbursed on such Borrowing Date, the EUR/USD weighted average rate with respect to such Borrowing Date (i) as notified by the Borrower to the Facility Agent in the Borrowing Notice at least three Business Days prior to the relevant Borrowing Date, (ii) which EUR/USD weighted average rate for any particular set of Earmarked Foreign Exchange Arrangements shall take account of all applicable foreign exchange spot, forward and derivative arrangements, including collars, options and the like, entered into in respect of such Borrowing Date and (iii) for which the Borrower has provided evidence to the Facility Agent to determine which foreign exchange arrangements (including spot transactions) will be the Earmarked Foreign Exchange Arrangements that shall apply to such Borrowing Date and (y) in the event that the Borrower and/or the Parent have not entered into Earmarked Foreign Exchange Arrangements with respect to the installment payment to be partially or wholly funded by the Loans to be disbursed on such Borrowing Date, the Spot Rate applicable to such Borrowing Date.

 

Dormant Subsidiary” means a Subsidiary that owns assets in an amount equal to no more than $5,000,000 or is dormant or otherwise inactive.

 

Earmarked Foreign Exchange Arrangements” shall mean the Euro/Dollar foreign exchange arranged by the Borrower and/or the Parent in connection with an installment payment to be partially financed by the Loans to be disbursed on the date on which such installment payment is to be made.  

 

Earnings and Insurance Collateral” shall mean all “Earnings” and “Insurances”, as the case may be, as defined in the Assignment of Earnings and Insurances.

 

Effective Date” has the meaning specified in Section 14.09.

 

Eligible Transferee” shall mean and include a commercial bank, insurance company, financial institution, fund or other Person which regularly purchases interests in loans or extensions of credit of the types made pursuant to this Agreement.

 

Environmental Approvals” shall have the meaning provided in Section 8.17(b).

 

Environmental Claims” shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, directives, claims, liens, notices of noncompliance or violation, relating in any way to any Environmental Law or any permit issued,

 

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or any approval given, under any such Environmental Law (hereafter, “Claims”), including, without limitation, (a) any and all Claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief in connection with alleged injury or threat of injury to health, safety or the environment due to the presence of Hazardous Materials.

 

Environmental Law” shall mean any applicable Federal, state, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy and rule of common law now or hereafter in effect and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on the Parent or any of its Subsidiaries, relating to the environment, and/or Hazardous Materials, including, without limitation, CERCLA; OPA; the Federal Water Pollution Control Act, 33 U.S.C. § 1251 et seq.; the Hazardous Material Transportation Act, 49 U.S.C. § 1801 et seq.; the Occupational Safety and Health Act, 29 U.S.C. § 651 et seq. (to the extent it regulates occupational exposure to Hazardous Materials); and any state and local or foreign counterparts or equivalents, in each case as amended from time to time.

 

Environmental Release” shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing or migration into the environment.

 

Equity Interests” means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock).

 

Euro” and the sign “” shall each mean single currency in the member states of the European Communities that adopt or have adopted the Euro as its lawful currency under the legislation of the European Union for European Monetary Union.

 

Eurodollar Rate” shall mean with respect to each Interest Period for a Loan, the offered rate for deposits of Dollars for a period equivalent to such period at or about 11:00 A.M. (Frankfurt time) on the second Business Day before the first day of such period as is displayed on Reuters LIBOR 01 Page (or such other service as may be nominated by the British Bankers’ Association as the information vendor for displaying the London Interbank Offered Rates of major banks in the London Interbank Market) (the “Screen Rate”), provided that if on such date no such rate is so displayed, the Eurodollar Rate for such period shall be the arithmetic average (rounded up to five decimal places) of the rate quoted to the Facility Agent by the Reference Banks for deposits of Dollars in an amount approximately equal to the amount in relation to which the Eurodollar Rate is to be determined for a period equivalent to such applicable Interest Period by the prime banks in the London interbank Eurodollar market at or about 11:00 A.M. (Frankfurt time) on the second Business Day before the first day of such period (rounded up to five decimal places).  

 

Event of Default” shall have the meaning provided in Section 11.

 

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Event of Loss” shall mean any of the following events: (x) the actual or constructive total loss of the Vessel or the agreed or compromised total loss of the Vessel; or (y) the capture, condemnation, confiscation, requisition (but excluding any requisition for hire by or on behalf of any government or governmental authority or agency or by any persons acting or purporting to act on behalf of any such government or governmental authority or agency), purchase, seizure or forfeiture of, or any taking of title to, the Vessel.  An Event of Loss shall be deemed to have occurred: (i) in the event of an actual loss of the Vessel, at the time and on the date of such loss or if such time and date are not known at noon Greenwich Mean Time on the date which the Vessel was last heard from; (ii) in the event of damage which results in a constructive or compromised or arranged total loss of the Vessel, at the time and on the date on which notice claiming the loss of the Vessel is given to the insurers; or (iii) in the case of an event referred to in clause (y) above, at the time and on the date on which such event is expressed to take effect by the Person making the same.  Notwithstanding the foregoing, if the Vessel shall have been returned to the Borrower or any Subsidiary of the Borrower following any event referred to in clause (y) above prior to the date upon which payment is required to be made under Section 4.02(b) hereof, no Event of Loss shall be deemed to have occurred by reason of such event so long as the requirements set forth in Section 9.10 have been satisfied.

 

Excluded Taxes” shall have the meaning provided in Section 4.04(a).

 

Existing Lender” shall have the meaning provided in Section 13.01.

 

Facility Agent” shall have the meaning provided in the first paragraph of this Agreement, and shall include any successor thereto.

 

Facility Office” means (a) in respect of a Lender, the office or offices notified by that Lender to the Facility Agent in writing on or before the date it becomes a Lender (or, following that date, by not less than five Business Days’ written notice) as the office or offices through which it will perform its obligations under this Agreement; or (b) in respect of any other Lender Creditor, the office in the jurisdiction in which it is resident for tax purposes.

 

Fee Letter” means any letter or letters entered into by reference to this Agreement and/or the Supplemental Agreement between any or all of the Facility Agent, the Initial Mandated Lead Arranger and/or the Lenders and (in any case) the Borrower setting out the amount of certain fees referred to in, or payable in connection with, this Agreement and/or the Supplemental Agreement.

 

Final Construction Price” shall mean the actual final construction price of the Vessel.

 

First Hermes Instalment” shall have the meaning provided in Section 2.02(a)(ii).

 

Fixed Interest Payment Date” shall mean (i) prior to the Delivery Date, each sixth month anniversary of the Initial Borrowing Date, (ii) the Delivery Date and (iii) after the Delivery Date, each semi-annual date on which a Scheduled Repayment is required to be made pursuant to Section 4.02(a) (or, if any of the above dates does not fall on a Business Day, the Fixed Interest Payment Date shall fall on the first Business Day falling after such date).

 

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Fixed Rate” shall mean 2.98% per annum (which includes 0.4% per annum, being the administrative fee).

 

Fixed Rate Interest Period” shall mean the period commencing on the Initial Borrowing Date and ending on the immediately succeeding Fixed Interest Payment Date and thereafter each period commencing on a Fixed Interest Payment Date and ending on the immediately succeeding Fixed Interest Payment Date.

 

Flag Jurisdiction Transfer” shall mean the transfer of the registration and flag of the Vessel from one Acceptable Flag Jurisdiction to another Acceptable Flag Jurisdiction, provided that the following conditions are satisfied with respect to such transfer:

 

(i)         On each Flag Jurisdiction Transfer Date, the Borrower shall have duly authorized, executed and delivered, and caused to be recorded in the appropriate vessel registry a Vessel Mortgage that is reasonably satisfactory in form and substance to the Facility Agent with respect to the Vessel and such Vessel Mortgage shall be effective to create in favor of the Collateral Agent and/or the Lenders a legal, valid and enforceable first priority security interest, in and lien upon the Vessel, subject only to Permitted Liens.  All filings, deliveries of instruments and other actions necessary or desirable in the reasonable opinion of the Collateral Agent to perfect and preserve such security interests shall have been duly effected and the Collateral Agent shall have received evidence thereof in form and substance reasonably satisfactory to the Collateral Agent.

 

(ii)         On each Flag Jurisdiction Transfer Date, to the extent that any Security Documents are released or discharged pursuant to Section 14.21(b), the Borrower shall have duly authorized, executed and delivered corresponding Security Documents in favor of the Collateral Agent for the new Acceptable Flag Jurisdiction.

 

(iii)         On each Flag Jurisdiction Transfer Date, the Facility Agent shall have received from counsel, an opinion addressed to the Facility Agent and each of the Lenders and dated such Flag Jurisdiction Transfer Date, which shall (x) be in form and substance reasonably acceptable to the Facility Agent and (y) cover the recordation of the security interests granted pursuant to the Vessel Mortgage to be delivered on such date and such other matters incident thereto as the Facility Agent may reasonably request.

 

(iv)         On each Flag Jurisdiction Transfer Date:

 

(A)         The Facility Agent shall have received (x) certificates of ownership from appropriate authorities showing (or confirmation updating previously reviewed certificates and indicating) the registered ownership of the Vessel transferred on such date by the Borrower and (y) the results of maritime registry searches with respect to the Vessel transferred on such date, indicating no recorded liens other than Liens in favor of the Collateral Agent and/or the Lenders and, if applicable and to the extent recordable, Permitted Liens.

 

(B)         The Facility Agent shall have received a report, in form and scope reasonably satisfactory to the Facility Agent, from a firm of independent marine insurance brokers reasonably acceptable to the Facility Agent with respect to the

 

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insurance maintained by the Credit Party in respect of the Vessel transferred on such date, together with a certificate from another broker certifying that such insurances (i) are placed with such insurance companies and/or underwriters and/or clubs, in such amounts, against such risks, and in such form, as are customarily insured against by similarly situated insureds for the protection of the Facility Agent and/or the Lenders as mortgagee and (ii) conform with the Required Insurance applicable to the Vessel.

 

(v)         On or prior to each Flag Jurisdiction Transfer Date, the Facility Agent shall have received a certificate, dated the Flag Jurisdiction Transfer Date, signed by any one of the chairman of the board, the president, any vice president, the treasurer or an authorized manager, member, general partner, officer or attorney-in-fact of the Borrower, certifying that (A) all necessary governmental (domestic and foreign) and third party approvals and/or consents in connection with the Flag Jurisdiction Transfer being consummated on such date and otherwise referred to herein shall have been obtained and remain in effect or that no such approvals and/or consents are required, (B) there exists no judgment, order, injunction or other restraint prohibiting or imposing materially adverse conditions upon such Flag Jurisdiction Transfer or the other related transactions contemplated by this Agreement and (C) copies of resolutions approving the Flag Jurisdiction Transfer of the Borrower and any other related matters the Facility Agent may reasonably request.

 

(vi)         On each Flag Jurisdiction Transfer Date, the Collateral and Guaranty Requirements for the Transferred Collateral Vessel shall have been satisfied or waived by the Facility Agent for a specific period of time.

 

Flag Jurisdiction Transfer Date” shall mean the date on which a Flag Jurisdiction Transfer occurs.

 

Floating Rate” shall mean the percentage rate per annum equal to the aggregate of (a) the Applicable Margin plus (b) the Eurodollar Rate plus (c) any Mandatory Costs.

 

Floating Rate Interest Period” shall have the meaning provided in Section 2.08.

 

Free Liquidity” shall mean, at any date of determination, the aggregate of the Cash Balance and any Commitments under this Agreement or any other amounts available for drawing under other revolving or other credit facilities of the NCLC Group, which remain undrawn, could be drawn for general working capital purposes or other general corporate purposes and would not, if drawn, be repayable within six months.

 

GAAP” shall have the meaning provided in Section 14.06(a).

 

Grace Period” shall have the meaning provided in Section 11.05(c).

 

Guarantor” shall mean Parent.

 

Hazardous Materials” shall mean: (a) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde

 

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foam insulation, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; (b) any chemicals, materials or substances defined as or included in the definition of “hazardous substances,” “hazardous waste,” “hazardous materials,” “extremely hazardous substances,” “restricted hazardous waste,” “toxic substances,” “toxic pollutants,” “contaminants,” or “pollutants,” or words of similar import, under any applicable Environmental Law; and (c) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority under Environmental Laws.

 

Heads of Terms” shall have the meaning provided in Section 14.09.

 

Hermes” shall mean the Federal Republic of Germany represented by the Federal Ministry of Economics and Technology (Bundesministerium für Wirtschaft und Technologie) represented by Euler Hermes Kreditversicherungs-AG and PriceWaterhouseCoopers Wirtschaftsprüfungsgesellschaft AG.

 

Hermes Agent” shall have the meaning provided in the first paragraph of this Agreement, and shall include any successor thereto, acting as attorney-in-fact for the Lenders with respect to the Hermes Cover to the extent described in this Agreement.  

 

Hermes Cover” shall mean the export credit guarantee (Exportkreditgarantie) on the terms of Hermes’ Declaration of Guarantee (Gewährleistungs-Erklärung) for [*] of the principal amount of the Loans and any interests and secondary financing costs of the Federal Republic of Germany acting through Euler Hermes Kreditversicherungs-AG for the period of the Loans on the terms and conditions applied for by the Lenders, and shall include any successor thereto (it being understood that the Hermes Cover shall be issued on the basis of Hermes’ applicable Hermes guidelines (Richtlinien) and general terms and conditions (Allgemeine Bedingungen)).

 

Hermes Issuing Fees” shall mean the amount of [*] payable in Euro by the Borrower to Hermes through the Hermes Agent by way of handling fees in respect of the Hermes Cover.

 

Hermes Premium” shall mean the amount payable in Euro by the Borrower to Hermes through the Hermes Agent in respect of the Hermes Cover, which shall not exceed [*], and which shall include the Additional Hermes Premium.

 

Impaired Agent” shall mean an Agent at any time when:

 

(i)it has failed to make (or has notified a party to this Agreement that it will not make) a payment required to be made by it under the Credit Documents by the due date for payment;

 

(ii)such Agent otherwise rescinds or repudiates a Credit Document;

 

(iii)(if such Agent is also a Lender) it is a Defaulting Lender; or

 

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(iv)an Insolvency Event has occurred and is continuing with respect to such Agent

 

unless, in the case of paragraph (i) above: (a) its failure to pay is caused by administrative or technical error or a Disruption Event, and payment is made within five Business Days of its due date; or (b) such Agent is disputing in good faith whether it is contractually obliged to make the payment in question.

 

Indebtedness” shall mean any obligation for the payment or repayment of money, whether as principal or as surety and whether present or future, actual or contingent including, without limitation, pursuant to an Interest Rate Protection Agreement or Other Hedging Agreement.

 

Indebtedness for Borrowed Money” shall mean Indebtedness (whether present or future, actual or contingent, long-term or short-term, secured or unsecured) in respect of:

 

(i)moneys borrowed or raised;

 

(ii)the advance or extension of credit (including interest and other charges on or in respect of any of the foregoing);

 

(iii)the amount of any liability in respect of leases which, in accordance with GAAP, are capital leases;

 

(iv)the amount of any liability in respect of the purchase price for assets or services payment of which is deferred for a period in excess of 180 days;

 

(v)all reimbursement obligations whether contingent or not in respect of amounts paid under a letter of credit or similar instrument; and

 

(vi)(without double counting) any guarantee of Indebtedness falling within paragraphs (i) to (v) above;

 

provided that the following shall not constitute Indebtedness for Borrowed Money:

 

(a)loans and advances made by other members of the NCLC Group which are subordinated to the rights of the Lenders;

 

(b)loans and advances made by any shareholder of the Parent which are subordinated to the rights of the Lenders on terms reasonably satisfactory to the Facility Agent; and

 

(c)any liabilities of the Parent or any other member of the NCLC Group under any Interest Rate Protection Agreement or any Other Hedging Agreement or other derivative transactions of a non-speculative nature.

 

Information” shall have the meaning provided in Section 8.10(a).

 

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Initial Borrowing Date” shall mean the date occurring on or after the Effective Date on which the initial Borrowing of Loans hereunder occurs, which date shall, subject to Section 5, coincide with the date of payment of the first installment of the Initial Construction Price for the Vessel under the Construction Contract.

 

Initial Construction Price” shall mean an amount of up to €698,370,000 for the construction of the Vessel pursuant to the Construction Contract, payable by the Borrower to the Yard through the four installments of the Contract Price referred to in Article 8, Clauses 2.1(i) through and including (iv) of the Construction Contract (each, a “Pre-delivery Installment”) and the installment of the Contract Price referred to in Article 8, Clause 2.1(v) of the Construction Contract (as such amount may be modified in accordance with the Construction Contract).

 

Initial Mandated Lead Arranger” shall have the meaning provided in the first paragraph of this Agreement, and shall include any successor thereto.

 

Initial Syndication Date” shall mean the date, if applicable, on which KfW IPEX-Bank GmbH ceases to be the only Lender by transferring all or part of its rights as a Lender under this Agreement to one or more banks or financial institutions pursuant to Section 13.

 

Insolvency Event” in relation to any of the parties to this Agreement shall mean that such party:

 

(i)is dissolved (other than pursuant to a consolidation, amalgamation or merger);

 

(ii)becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due;

 

(iii)makes a general assignment, arrangement or composition with or for the benefit of its creditors;

 

(iv)institutes or has instituted against it, by a regulator, supervisor or any similar official with primary insolvency, rehabilitative or regulatory jurisdiction over it in the jurisdiction of its incorporation or organization or the jurisdiction of its head or home office, a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for its winding-up or liquidation by it or such regulator, supervisor or similar official;

 

(v)has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition is instituted or presented by a person or entity not described in paragraph (iv)

 

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above and (a) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation; or (b) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof;

 

(vi)has exercised in respect of it one or more of the stabilization powers pursuant to Part 1 of the Banking Act 2009 and/or has instituted against it a bank insolvency proceeding pursuant to Part 2 of the Banking Act 2009 or a bank administration proceeding pursuant to Part 3 of the Banking Act 2009;

 

(vii)has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger);

 

(viii)seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets;

 

(ix)has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter;

 

(x)causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in paragraphs (i) to (ix) above; or

 

(xi)takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts.

 

Interaction Agreement” shall mean the interaction agreement executed or to be executed by, inter alia (i) each Lender that elects to become a Refinanced Bank, (ii) the CIRR Representative, and (iii) the CIRR Agent substantially in the form of Exhibit C.

 

Interest Determination Date” shall mean, with respect to any Loan, the second Business Day prior to the commencement of any Interest Period relating to such Loan.

 

Interest Period” shall mean either the Fixed Rate Interest Period or, as the context may require, the Floating Rate Interest Period.

 

Interest Rate Protection Agreement” shall mean any interest rate swap agreement, interest rate cap agreement, interest collar agreement, interest rate hedging agreement, interest rate floor agreement or other similar agreement or arrangement entered into between a Lender or its Affiliate, or a Lead Arranger or its Affiliate, and the Parent and/or the Borrower in relation to the Credit Document Obligations of the Borrower under this Agreement.

 

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