Limited Life Equity

Earlier this month, Color Group AS successfully completed a new subordinated perpetual hybrid bond issue with an initial tranche of NOK 500 million and a borrowing limit of NOK 1 billion. With no specified maturity, the bonds have a first call date in December 2024 (4.25 years) after which there is an annual 5% step-up to incentivize redemption. The bonds were priced at three-month NIBOR + 1,200 bps, at the wide end of initial price talk. Although unsecured, the bonds are guaranteed by the issuer’s operating subsidiary, Color Line AS. Net proceeds from the new bond issue will be used for general corporate purposes. Details of the offering are shown below in the Guts of the Deal.

While neither fish nor fowl, the hybrid bond ranks legally as subordinated debt, and is senior to common equity, although it appears informally as equity-in-kind. While it pays a rich coupon, the bond has no scheduled maturity, amortization, covenants, or any express event-of-default provisions. Finally, under its terms, the issuer would be permitted to defer interest payments at its own discretion, but they would accrue interest at a rate equal to that on the bond. Do not let looks deceive you, it is classified as equity, under IFRS rules, and will therefore strengthen the company’s balance sheet.

The Color Group is a regular issuer of unsecured NOK bonds in the Nordic high-yield market. Prior to this offering, the company had four bonds outstanding with total principal of NOK 3.1 billion. Of immediate concern is the COLG13 bond which has NOK 375 million outstanding and matures in December 2020. It is likely that a portion of the proceeds of this latest issue will be used to settle that bond debt.

Established in 1990 in Oslo, Color Line is Norway’s largest short-sea shipping company, offering quality cruise and efficient transportation through its leading Northern European cruise and ferry franchise. In 2019, the company transported about 3.9 million passengers, 961,000 cars and 177,000 trucks. The company was formed through the merger of two Kosmos’ companies, Jahre Line and Norway Line, and later that same year the acquisition of the ferry activities of Fred. Olsen Lines. It continued in consolidation mode acquiring Larvik Line in 1996 and Scandi Line two years later. Along the way, it acquired the Color Hotel in Skagen. Color Group is privately owned by O.N. Sunde AS (“ONS”), which acquired the company in 1996 and de-listed it in 1999.

To serve both the cruise & transport division (“Cruise”) and the efficient transport & shopping division (“Transport”), the company operates seven vessels on four routes to seven ports in Norway, Germany, Denmark, and Sweden. The company offers a complete cruise experience between Oslo and Kiel, Germany utilizing the Color Fantasy and Color Magic, which were built in 2004/2007 with a capacity of 750/550 cars, 1,270 lane meters for trucks and 2,600/2,800 passengers. The key targeted customer segments are: 1) 2- to 3-day experiences; 2) holiday-motivated 3) shopping/enjoyment, and 4) work-motivated. Its Transport segment operates four vessels between Norway and Denmark/Sweden over three routes focusing on passenger transportation, freight, and shopping. Serving the Sandefjord to Strömstad route are the Color Viking (1,773 pax, 370 cars, 490 lane meters) and the Color Hybrid (2,000 pax, 500 cars and 760 lane meters). The latter, the world’s largest plug-in hybrid newbuilding vessel was delivered in August 2019 and highlights the company’s focus on the environment. The Super Speed 1 (2,400 pax, 750 cars and 1990 lane meters) and the Super Speed 2 (2000 pax, 764 cars and 2036 lane meters) trade between Kristiansand and Hirtshals and Sandefjord and Hirtshals respectively. Offering high capacity and frequency, the vessels’ daily capacity is 17,000 pax (equivalent to 90 Boeing 737-800s), 6,000 cars and 16,000 lane meters. Lastly, reflecting its commitment to the environmentally friendly shipment of goods, the company added a RoRo vessel, Color Carrier (1,775 lane meters), to serve the Oslo to Kiel route, doubling the freight capacity on that trade.

With a resilient business model, the company has historically generated highly stable revenues and strong operating cash flow. For the two segments, total revenues in 2019 were ~NOK 5.3 billion which were split 45% and 55% respectively between the Cruise division and Transport division. Similarly, total EBITDAR was approximately NOK 1.1 billion split 47% and 53% between Cruise and Transport, respectively. The EBITDAR result was down slightly from 2018 as a result of increased bunker costs and a weaker NOK, but ~30% above the average during the period 2014-2016, despite being impacted by one-off items amounting approximately to NOK 90 million (largely related to the delayed delivery of the M/S Color Hybrid and operational difficulties with the M/S Bohus).

From 2009, revenues remained relatively flat at ~NOK 4.5 billion through 2015, when they began to rise reaching approximately NOK 5.0 billion in 2016 and 2017. From 2009 through 2014, EBITDAR showed slight but steady declines as competition increased. With the implementation of a new digital platform, cost initiatives, an improved refund scheme for seafarers, and a new pricing strategy, EBITDAR, beginning in 2015, improved 13.5% from NOK 833 million to NOK 1.2 billion in 2018 as revenues and margins improved. With the strategic shift towards attracting higher margin consumer groups, passenger volumes have remained stable, basically unchanged from 2016 to 2019 while total revenue per passenger increased 2.8% over the same period.

With the arrival of Covid-19, the wheels fell off the bus. Color Group was forced to suspend most operations after the authorities closed Norway’s borders in March. The exception was freight, where three ships continued cargo operations at reduced levels. As a result, H1 revenues declined almost 51%, driven by a 62% reduction in the number of passengers: 621 thousand during H1 2020 versus 1.6 million in the comparable period in 2019. Ultimately freight units shipped were only down 4.2%; however, these only made up 22.2% of total revenue. The impact was quick and devastating with liquidity halving and leverage rising. The company went into survival mode putting into place cost-saving measures which are expected to reduce costs by approximately NOK 250 million from 2021, as well as actions to improve liquidity. The situation took a turn for the better. By mid-June, the company resumed passenger carrying services between Norway and Denmark and after Norway opened up to tourism from July 15th onwards passenger traffic increased.

As of June 30th, Color Group has total liquidity of ~NOK 880 million, including cash & cash equivalents and undrawn credit lines, which is well below year-end-2019’s liquidity of more than NOK 1.9 billion. In light of the uncertainty surrounding the full consequences of the Covid-19 virus outbreak, Color Group also reached agreement in June 2020 with the company’s bankers and credit institutions for six months’ deferral of installments, totaling NOK 200 million, with the option of a further six-month deferral, subject to certain conditions while also securing various adjustments to covenants through and including 30 June 2021. The hybrid bond also provides a further financial buffer adding strength to the balance sheet. Beyond self-help, Color Group also received NOK 129 million from the Norwegian government in H1 to cover a proportion of unavoidable fixed costs and will likely receive additional support albeit scaled back later this year, having resumed some operations.

In the interim, operational activity has slowly resumed. Passenger volumes for the Oslo to Kiel route are recovering as the ship operates in Norwegian cruise only mode, with extreme infection control measures on board. Cargo volumes are returning to normal levels. From week 12 to week 25 only the SuperSpeed 1, SuperSpeed 2 and Color Carrier sailed with cargo. As of June 30, 2020, the number of freight units has improved, with the 12-month equivalent being 85,759 compared to 89,503 in the same period last year. All ships are expected to be sailing by the end of September/October.

The company’s trades are tenuous as the Norwegian authorities open and close borders weekly forcing the fleet back into freight-only mode on short notice. This is expected to be the new normal for next year and perhaps longer. On the positive side, the company has demonstrated an ability to adapt quickly, which should enable them to make the most of this difficult situation, and as back-up there is the additional liquidity the company now has in place.

Arctic Securities, Danske Bank, DNB Markets, Nordea, and SEB acted as Joint Lead Managers in connection with the placement of the new bond issue.