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August 26, 2005

S&P affirms Star Cruises' credit rating

Standard & Poor's Ratings Services said today it affirmed its 'BB' corporate credit ratings on Hong Kong headquartered Star Cruises Ltd, and its subsidiary, NCL Corp. Ltd. The outlooks on both companies are stable, says Standard & Poor's.

"The affirmation on the ratings reflects the Star Cruises group's established market position in the Asian cruise market, and strategic importance to its parent, Malaysia-based Genting Bhd.," said Standard & Poor's credit analyst Nancy Koh. "Nevertheless, the ratings are constrained by the relatively small size of the Star Cruises group, its less competitive and profitable fleet, intense industry competition, and the group's volatile profitability and very aggressive capital structure."

The rating on NCL Corp. Ltd. is closely tied to the creditworthiness of its parent, Star Cruises, given the importance of NCL as the North American arm of the group, the strong influence of Star Cruises on NCL's business operations and financial policies, and the expectation of continued support from Star Cruises.

Standard & Poor's says the rating on Star Cruises is constrained by its weaker market position and small size relative to its two main competitors, Carnival Corp. (A-/Positive/A-2) and Royal Caribbean Cruises Ltd. (RCL; BB+/Positive/--). As a result, Star Cruises lacks the critical mass and scale benefits enjoyed by its larger peers. A key challenge for the group is to strengthen its position in North America without letting its relatively older fleet with fewer facilities damage its brand equity.

The group has a very aggressive capital structure and volatile profitability—operating margins of 17%-22% in the past four years reflect its weaker competitive position and vulnerability to geopolitical and economic factors. Operating cash flows have been insufficient to cover capital expenditure, resulting in heavy reliance on debt to fund its growth.

In addition, the emergence of Singapore's two integrated resorts could threaten Star Cruises' position in the Asian cruise market, as a large portion of its revenue comes from gaming activities on board its cruise ships.

Nevertheless, this concern could be mitigated if Star Cruises (jointly with Genting Bhd.) wins a bid for the proposed resorts. As with the other cruise operators, Star Cruises is exposed to the sensitivity of the travel and leisure industry to economic cycles and geopolitical risks.

These weaknesses are, however, offset by the group's established 63% share in the Asian cruise market. The company should be able to sustain its position in the region due to its well-known "Star Cruises" brand. Ownership by Malaysia-based Genting Bhd. (BBB+/Stable/--) and ultimate shareholder, Tan Sri Lim Goh Tong and his family, which together control more than 50% of Star Cruises, also supports the group's credit strength.

The stable outlooks on NCL and Star Cruises reflect the expectations of moderate industry growth, and continued support from Genting and the Lim family given the Star Cruises group's importance in the Genting group's core leisure and hospitality business.

In addition, the stable outlook on Star Cruises reflects the expectation that Star Cruises will continue to maintain a financial profile that supports the existing ratings level, even as it strives to improve its market position through its fleet renewal program. Standard & Poor's believes that there is strong incentive for Star Cruises and Genting to be competitive in their joint bid for one of the two Singapore integrated resorts. Nevertheless, should Star Cruises substantially increase its gearing level and weaken its cash flow protection measures to pursue ambitious acquisitive or expansion growth, the rating could be subject to downward pressure.

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