Moody's Comments On Sea Containers' Market Position

Moody's Investors Service assigned a Ba3 rating to Sea Containers Ltd.'s new $150 million senior notes, confirmed the Ba3 rating on its existing senior notes and also confirmed the B1 rating on its senior subordinated notes, and the "b1" on its cumulative and convertible cumulative preferred shares. The Ba3 senior implied rating was also confirmed. The new issue will be used primarily to repay debt incurred in the purchase of 50% of Neptun Maritime (approximately $105 million) and for general corporate purpose. The outlook is stable. The ratings continue to reflect the company's high leverage, substantial fixed charges, competitive pressures and the cyclical nature of the company's major businesses, its acquisition strategy, and the effective subordination of the note to a significant amount of secured debt. On an adjusted basis, the company's returns are somewhat weak and leverage high for its ratings category. The rating recognized the strategic changes of the company's business mix to passenger transport and hotels businesses, the increasing diversification of revenue sources resulting from these changes, the company's strong positions in niche markets, and asset coverage in the event of liquidation for debt holders. Sea Containers is highly leveraged. Additional acquisitions and/or capital expenditure programs funded primarily with debt could increase the ratio of debt to total capitalization to a point at which it would place downward pressure on the ratings. At the end of June 30, 1999, the ratio of debt to total capitalization was 77% and total debt was over $1.7 billion. On an adjusted basis the debt to total capitalization is 82%. Given the company's high leverage the stability of its cash flow is critical to maintain the current ratings. Earnings are somewhat cyclical and influenced by the global economy growth and world trade. Moody's concerns include the current uncertainties the ferry business faces, primarily the impact of the elimination of the duty-free sales. Competitive pressures on fare increases, and alternative transportation modes combined with lower on board sales, may substantially alter the economics of the industry and substantially lower earnings. Sea Containers is engaged in three major businesses: passenger transport primarily ferry, rail, and port operations; marine container leasing; and leisure operations, principally hotels, restaurants, tourist trains, and river cursing. The company is making a strategic change of its business mix to expand its passenger transport and hotels businesses. These sectors contribute 60% of the company's operating profits in 1998, and the company expects a higher percentage in 1999. Sea Containers formed a joint venture, GE SeaCo with GE Capital in 1998 to conduct its container business. GE SeaCo, one of the biggest marine container operating lessors in the world with a diversified fleet, provides competitive advantage as well as operation efficiency. However, the rental rates and container utilization continued to decline in 1998. Moody's believes financial returns will remain flat or weak, growth will be slow and the industry will remain highly competitive and particularly sensitive to changes in world economy and trade. The ferries and ports businesses remain highly competitive and seasonal. The impact of abolishing duty-free sales on board ferries is still too early to quantify. Potential route expansion and fare increases, in Moody's view, should mitigate some of the revenue loss. Acquisition of a 50% interest in Neptun Maritime further diversifies the revenue sources as Neptun provides market share in the northern Baltic and profitable charters of cruise ships. In addition, Neptun's Silja Line, as a result of its route structure, is able to offer duty-free sales on some of its routes. However, Neptun is not consolidated with Sea Containers and is not subject to the restrictions on subsidiaries in the indenture. For 1999, Moody's estimates that container leasing will represent 12% of Sea Containers' revenues and 45% of EBITDA, ferry, port and rail will represent 67% of revenues and 33% of EBITDA and the leisure division will represent 19% of revenues and 25% of EBITDA.