UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 

10-Q

(Mark One)

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

For the quarterly period ended March 31, 2022

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: 333-128780

NCL CORPORATION LTD.

(Exact name of registrant as specified in its charter)

Bermuda	20-0470163
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7665 Corporate Center Drive, Miami, Florida 33126	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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

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  ◻    No  ⌧

(Note: The registrant is a voluntary filer of reports required to be filed under Section 13 or 15 (d) of the Securities Exchange Act of 1934).

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes  ⌧    No  ◻

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

Large accelerated filer ◻	Accelerated filer ◻
Non-accelerated filer ⌧	Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ◻

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

There were 31,164,004 ordinary shares outstanding as of April 30, 2022.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 6.	Exhibits	40
SIGNATURES		41

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NCL Corporation Ltd.

Consolidated Statements of Operations

(Unaudited)

(in thousands)

	Three Months Ended
	March 31,
	2022		2021
Revenue
Passenger ticket	$	342,455	$	166
Onboard and other		179,485		2,934
Total revenue		521,940		3,100
Cruise operating expense
Commissions, transportation and other		87,958		9,033
Onboard and other		32,550		1,259
Payroll and related		240,727		82,138
Fuel		135,509		42,603
Food		39,516		6,308
Other		199,153		59,514
Total cruise operating expense		735,413		200,855
Other operating expense
Marketing, general and administrative		296,134		203,066
Depreciation and amortization		179,076		170,316
Total other operating expense		475,210		373,382
Operating loss		(688,683)		(571,137)
Non-operating income (expense)
Interest expense, net		(348,324)		(460,332)
Other income (expense), net		(28,878)		(289,265)
Total non-operating income (expense)		(377,202)		(749,597)
Net loss before income taxes		(1,065,885)		(1,320,734)
Income tax expense		(4,393)		(1,728)
Net loss	$	(1,070,278)	$	(1,322,462)

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

3

NCL Corporation Ltd.

Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands)

	Three Months Ended
	March 31,
	2022		2021
Net loss	$	(1,070,278)	$	(1,322,462)
Other comprehensive income (loss):
Shipboard Retirement Plan		2,476		98
Cash flow hedges:
Net unrealized gain (loss)		39,304		(73,037)
Amount realized and reclassified into earnings		(7,502)		21,838
Total other comprehensive income (loss)		34,278		(51,101)
Total comprehensive loss	$	(1,036,000)	$	(1,373,563)

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

4

NCL Corporation Ltd.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share data)

	March 31,		December 31,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	2,130,858	$	1,500,357
Short-term investments		—		240,000
Accounts receivable, net		544,961		1,167,473
Inventories		141,956		118,205
Prepaid expenses and other assets		386,200		264,691
Total current assets		3,203,975		3,290,726
Property and equipment, net		13,532,399		13,528,806
Goodwill		98,134		98,134
Trade names		500,525		500,525
Other long-term assets		1,909,925		1,300,804
Total assets	$	19,244,958	$	18,718,995
Liabilities and shareholders’ equity
Current liabilities:
Current portion of long-term debt	$	1,009,741	$	876,890
Accounts payable		91,786		233,172
Accrued expenses and other liabilities		1,097,523		1,058,401
Due to NCLH		40,459		37,995
Advance ticket sales		1,977,325		1,561,336
Total current liabilities		4,216,834		3,767,794
Long-term debt		10,394,517		9,863,980
Exchangeable notes		2,352,435		1,801,517
Other long-term liabilities		1,007,692		997,055
Total liabilities		17,971,478		16,430,346
Commitments and contingencies (Note 9)
Shareholders’ equity:
Preference shares (Series A-1: $1,000 par value; 2,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2022 and December 31, 2021; Series A-3: $1,000 par value; 1,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2022 and December 31, 2021; Series A-4: $1,000 par value; 2,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2022 and December 31, 2021; and Series A-5: $1,000 par value; 1,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2022)		—		—
Ordinary shares ($0.0012 par value; 40,000,000 shares authorized; 31,164,004 shares issued and outstanding at March 31, 2022 and December 31, 2021)		37		37
Additional paid-in capital		8,510,601		8,489,770
Accumulated other comprehensive income (loss)		(252,521)		(286,799)
Accumulated deficit		(6,984,637)		(5,914,359)
Total shareholders’ equity		1,273,480		2,288,649
Total liabilities and shareholders’ equity	$	19,244,958	$	18,718,995

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

5

NCL Corporation Ltd.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Three Months Ended
	March 31,
	2022		2021
Cash flows from operating activities
Net loss	$	(1,070,278)	$	(1,322,462)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		216,101		204,528
Loss on derivatives		47,220		297,822
Loss on extinguishment of debt		188,433		237,065
Provision for bad debts and inventory obsolescence		1,294		4,329
Gain on involuntary conversion of assets		—		(418)
Share-based compensation expense		32,792		26,601
Net foreign currency adjustments		(4,126)		(5,141)
Changes in operating assets and liabilities:
Accounts receivable, net		618,853		(2,648)
Inventories		(24,141)		(2,351)
Prepaid expenses and other assets		(632,610)		(406,807)
Accounts payable		(136,767)		6,626
Accrued expenses and other liabilities		(25,258)		34,027
Advance ticket sales		417,877		75,634
Net cash used in operating activities		(370,610)		(853,195)
Cash flows from investing activities
Additions to property and equipment, net		(165,284)		(136,350)
Purchases of short-term investments		—		(205,000)
Proceeds from maturities of short-term investments		240,000		—
Cash paid on settlement of derivatives		—		(4,642)
Other		4,940		2,726
Net cash provided by (used in) investing activities		79,656		(343,266)
Cash flows from financing activities
Repayments of long-term debt		(935,444)		(870,396)
Proceeds from long-term debt		2,073,175		1,161,672
Due to NCLH, net		2,464		1,909
Contribution from NCLH		—		1,558,957
Net share settlement of restricted share units		(11,961)		(16,043)
Early redemption premium		(172,012)		(611,164)
Deferred financing fees		(34,767)		(25,742)
Net cash provided by financing activities		921,455		1,199,193
Net increase in cash and cash equivalents		630,501		2,732
Cash and cash equivalents at beginning of period		1,500,357		3,299,340
Cash and cash equivalents at end of period	$	2,130,858	$	3,302,072

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

6

NCL Corporation Ltd.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

(in thousands)

	Three Months Ended March 31, 2022
					Accumulated
			Additional		Other				Total
	Ordinary		Paid-in		Comprehensive		Accumulated		Shareholders’
	Shares		Capital		Income (Loss)		Deficit		Equity
Balance, December 31, 2021	$	37	$	8,489,770	$	(286,799)	$	(5,914,359)	$	2,288,649
Share-based compensation		—		32,792		—		—		32,792
Net share settlement of restricted share units		—		(11,961)		—		—		(11,961)
Other comprehensive income, net		—		—		34,278		—		34,278
Net loss		—		—		—		(1,070,278)		(1,070,278)
Balance, March 31, 2022	$	37	$	8,510,601	$	(252,521)	$	(6,984,637)	$	1,273,480

	Three Months Ended March 31, 2021
					Accumulated
			Additional		Other				Total
	Ordinary		Paid-in		Comprehensive		Accumulated		Shareholders’
	Shares		Capital		Income (Loss)		Deficit		Equity
Balance, December 31, 2020	$	37	$	5,721,725	$	(241,830)	$	(2,308,624)	$	3,171,308
Share-based compensation		—		26,601		—		—		26,601
Net share settlement of restricted share units		—		(16,043)		—		—		(16,043)
Contribution from NCLH		—		1,558,957		—		—		1,558,957
Other comprehensive loss, net		—		—		(51,101)		—		(51,101)
Net loss		—		—		—		(1,322,462)		(1,322,462)
Balance, March 31, 2021	$	37	$	7,291,240	$	(292,931)	$	(3,631,086)	$	3,367,260

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

7

NCL Corporation 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 NCLC (as defined below) and its subsidiaries (including Prestige (as defined below), (ii) “NCLC” refers to NCL Corporation Ltd., (iii) “NCLH” refers to Norwegian Cruise Line Holdings Ltd., (iv) “Norwegian Cruise Line” or “Norwegian” refers to the Norwegian Cruise Line brand and its predecessors, and (v) “Prestige” refers to Prestige Cruises International S. de R.L. (formerly Prestige Cruises International, Inc.), together with its consolidated subsidiaries, including Prestige Cruise Holdings S. de R.L. (formerly Prestige Cruise Holdings, Inc.), Prestige’s direct wholly-owned subsidiary, which in turn is the parent of Oceania Cruises S. de R.L. (formerly 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).

References to the “U.S.” are to the United States of America, and “dollar(s)” or “$” are to U.S. dollars, the “U.K.” are to the United Kingdom and “euro(s)” or “€” are to the official currency of the Eurozone. We refer you to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations— Terminology” for the capitalized terms used and not otherwise defined throughout these notes to consolidated financial statements.

1.            Description of Business and Organization

We are a leading global cruise company which operates the Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. As of March 31, 2022, we had 28 ships with approximately 59,150 Berths and had orders for nine additional ships to be delivered through 2027. Due to COVID-19, we temporarily suspended all global cruise voyages from March 2020 until July 2021, when we resumed cruise voyages on a limited basis. We refer you to Note 2 – “Summary of Significant Accounting Policies” for further information.

We have six Prima Class Ships on order with expected delivery dates from 2022 through 2027. We have one Explorer Class Ship on order for delivery in 2023. We have two Allura Class Ships on order for delivery in 2023 and 2025. These additions to our fleet will increase our total Berths to approximately 83,000.

2.            Summary of Significant Accounting Policies

Liquidity and Management’s Plan

Due to the impact of COVID-19, travel restrictions and limited access to ports around the world, in March 2020, the Company implemented a voluntary suspension of all cruise voyages across its three brands. In the third quarter of 2021, we began a phased relaunch of certain cruise voyages with our ships initially operating at reduced occupancy levels. As of May 7, 2022, all of our ships were operating with guests on board.

Significant events affecting travel typically have an impact on demand for cruise vacations, with the full extent of the impact determined by the length of time the event influences travel decisions. The level of occupancy on our ships and the percentage of our fleet in service will depend on a number of factors including, but not limited to, the duration and extent of the COVID-19 pandemic, further resurgences and new more contagious and/or vaccine-resistant variants of COVID-19, the availability, distribution, rate of public acceptance and efficacy of vaccines and therapeutics for COVID-19, our ability to comply with governmental regulations and implement new health and safety protocols, port availability, travel restrictions, bans and advisories, our ability to staff our ships, and the impact of other events impacting travel or consumer discretionary spending, such as inflation, the price of fuel, or Russia’s recent invasion of Ukraine and the actions taken by the United States and other governments in response to the invasion. We believe the ongoing effects of these events on our operations and global bookings have had, and will continue to have, a significant impact on our financial results and liquidity.

8

The estimation of our future cash flow projections includes numerous assumptions that are subject to various risks and uncertainties. Our principal assumptions for future cash flow projections include:

● Expected gradual return to historical occupancy levels;

● Expected increase in revenue per passenger cruise day through a combination of both passenger ticket and onboard revenue as compared to 2019;

● Forecasted cash collections in accordance with the terms of our credit card processing agreements (see Note 9 - “Commitments and Contingencies”);

● Expected continued expenses to maintain and comply with additional health and safety protocols; and

● Expected increases in fuel prices and the impact of inflation.

We cannot make assurances that our assumptions used to estimate our liquidity requirements will not change due to the unique and ongoing unpredictable nature of the events, including the magnitude and duration. Accordingly, the full effect of the COVID-19 pandemic and other events impacting travel and consumer discretionary spending, including Russia’s recent invasion of Ukraine, on our financial performance and financial condition cannot be quantified at this time. We have made reasonable estimates and judgments of the impact of these events within our financial statements and there may be material changes to those estimates in future periods. We have taken actions to improve our liquidity, including completing various capital market transactions and making capital expenditure and operating expense reductions, and we expect to continue to pursue other opportunities to improve our liquidity.

Based on these actions and assumptions regarding the impact of COVID-19 and other events impacting travel and consumer discretionary spending, including Russia’s recent invasion of Ukraine, and considering our available liquidity of $3.1 billion as of March 31, 2022, including cash and cash equivalents and our $1 billion undrawn commitment, we have concluded that we have sufficient liquidity to satisfy our obligations for at least the next twelve months.

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; however, our cruise voyages were completely suspended from March 2020 until July 2021 due to the COVID-19 pandemic and our resumption of cruise voyages was phased in gradually. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021, which are included in our most recent Annual Report on Form 10-K filed with the SEC on March 1, 2022.

Revisions to Previously Reported Quarterly Financial Statements

During the fourth quarter of 2021, the Company identified an error in its Consolidated Balance Sheet as of March 31, 2021 and Consolidated Statement of Cash Flows for the three months ended March 31, 2021 Based on their nature, certain amounts shown as cash and cash equivalents should have been classified as short-term investments. We have determined that these errors were not material to the previously issued interim financial statements for the period ended March 31, 2021.

9

As a result of the error, the amounts previously reported as cash and cash equivalents have been reclassified to cash flows from investing activities in the Consolidated Statement of Cash Flows for the three months ended March 31, 2021 as follows (in thousands):

	Three months ended March 31, 2021
	Previously				As
	Reported		Adjustments		Reported
Cash flows from investing activities
Purchases of short-term investments	$	—	$	(205,000)	$	(205,000)
Net cash used in investing activities		(138,266)		(205,000)		(343,266)
Net increase (decrease) in cash and cash equivalents		207,732		(205,000)		2,732
Cash and cash equivalents at end of period		3,507,072		(205,000)		3,302,072

Foreign Currency

The majority of our transactions are settled in U.S. dollars. We remeasure assets and liabilities denominated in foreign currencies 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 income (expense), net. We recognized a gain of $8.4 million and $4.8 million for the three months ended March 31, 2022 and 2021, respectively, related to transactions denominated in other currencies.

Depreciation and Amortization Expense

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

Accounts Receivable, Net

Accounts receivable, net included $426.2 million and $1.1 billion due from credit card processors as of March 31, 2022 and December 31, 2021, respectively.

Recently Issued Accounting Guidance

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provided guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying GAAP to contracts, hedging relationships and other transactions impacted by reference rate reform. The provisions apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. As of March 31, 2022, we have not adopted any expedients and exceptions under ASU 2020-04. We will continue to evaluate the impact of ASU 2020-04 on our consolidated financial statements.

10

3.            Revenue Recognition

Disaggregation of Revenue

Revenue and cash flows are affected by economic factors in various geographical regions. Revenues by destination were as follows (in thousands):

	Three Months Ended
	March 31,
	2022
North America	$	487,435
Europe		24,797
Asia-Pacific		8,292
South America		1,416
Total revenue	$	521,940

Amounts for the comparative three months ended March 31, 2021 are excluded as the information is not meaningful. North America includes the U.S., the Caribbean, Canada and Mexico. Europe includes the Baltic region, Canary Islands and Mediterranean. Asia-Pacific includes Australia, New Zealand and Asia. Other includes all other international territories.

Segment Reporting

We have concluded that our business has a single reportable segment. Each brand, Norwegian, Oceania Cruises and Regent, constitutes a business for which discrete financial information is available and management regularly reviews the brand level operating results and, therefore, each brand is considered an operating segment. Our operating segments have similar economic and qualitative characteristics, including similar long-term margins and similar products and services; therefore, we aggregate all of the operating segments into one reportable segment.

Although we sell cruises on an international basis, our passenger ticket revenue is primarily attributed to U.S.-sourced guests who make reservations in the U.S. Revenue attributable to U.S.-sourced guests has approximated 80-87% of total revenue over the preceding three fiscal years. No other individual country’s revenues exceed 10% in any given period.

Contract Balances

Receivables from customers are included within accounts receivable, net. As of March 31, 2022, our receivables from customers were $53.3 million.

Our cancellation policies permit guests to cancel cruises booked within certain windows for specified time periods up to 15 days prior to departure, and the guests will receive future cruise credits. Certain cruises booked for certain periods will be permitted a 60-day or 75-day cancellation window for refunds. Future cruise credits that have been issued are generally valid for any sailing through December 31, 2022, and we may extend this offer. The future cruise credits are not contracts, and therefore, guests who elected this option are excluded from our contract liability balance; however, the credit for the original amount paid is included in advance ticket sales.

Our contract liabilities are included within advance ticket sales. As of March 31, 2022 and December 31, 2021, our contract liabilities were $1.0 billion and $161.8 million, respectively. Of the amounts included within contract liabilities, approximately 40% were refundable in accordance with our cancellation policies. Of the deposits included within advance ticket sales, the vast majority are refundable in accordance with our cancellation policies and it is uncertain to what extent guests may request refunds. Refunds payable to guests are included in accounts payable. For the three months ended March 31, 2022, $97.0 million of revenue recognized was included in the contract liability balance at the beginning of the period.

11

For cruise vacations that had been cancelled by us due to COVID-19, during the three months ended March 31, 2022 and 2021, approximately $0.3 million and $14.8 million, respectively, in costs to obtain these contracts, consisting of protected commissions, including those paid to employees, and credit card fees, were recognized in earnings.

4.            Leases

Operating lease balances were as follows (in thousands):

	Balance Sheet location	March 31, 2022		December 31, 2021
Operating leases
Right-of-use assets	Other long-term assets	$	798,885	$	794,187
Current operating lease liabilities	Accrued expenses and other liabilities		36,487		34,407
Non-current operating lease liabilities	Other long-term liabilities		671,082		670,688

5.            Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) for the three months ended March 31, 2022 was as follows (in thousands):

	Three Months Ended March 31, 2022
						Change
	Accumulated		Change			Related to
	Other		Related to			Shipboard
	Comprehensive		Cash Flow			Retirement
	Income (Loss)		Hedges			Plan
Accumulated other comprehensive income (loss) at beginning of period	$	(286,799)	$	(280,343)		$	(6,456)
Current period other comprehensive income before reclassifications		41,685		39,304			2,381
Amounts reclassified into earnings		(7,407)		(7,502)	(1)		95	(2)
Accumulated other comprehensive income (loss) at end of period	$	(252,521)	$	(248,541)	(3)	$	(3,980)

Accumulated other comprehensive income (loss) for the three months ended March 31, 2021 was as follows (in thousands):

	Three Months Ended March 31, 2021
						Change
	Accumulated		Change			Related to
	Other		Related to			Shipboard
	Comprehensive		Cash Flow			Retirement
	Income (Loss)		Hedges			Plan
Accumulated other comprehensive income (loss) at beginning of period	$	(241,830)	$	(234,981)		$	(6,849)
Current period other comprehensive loss before reclassifications		(73,037)		(73,037)			—
Amounts reclassified into earnings		21,936		21,838	(1)		98	(2)
Accumulated other comprehensive income (loss) at end of period	$	(292,931)	$	(286,180)		$	(6,751)

(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 other income (expense), net.

(3) Includes $72.9 million of gain expected to be reclassified into earnings in the next 12 months.

12

6.            Long-Term Debt

In February 2022, NCLC conducted a private offering (the “Notes Offering”) of $1,000 million in aggregate principal amount of 5.875% senior secured notes due 2027 (the “2027 Secured Notes”) and $600 million in aggregate principal amount of 7.750% senior notes due 2029 (the “2029 Unsecured Notes”).

The 2027 Secured Notes are jointly and severally guaranteed on a senior secured basis by Pride of Hawaii, LLC, Norwegian Epic, Ltd. and Sirena Acquisition. The 2027 Secured Notes and the related guarantees are secured by a first-priority interest in, among other things and subject to certain agreed security principles, three of our vessels, namely the Norwegian Jade vessel, the Norwegian Epic vessel and the Sirena vessel.

NCLC may redeem the 2027 Secured Notes at its option, in whole or in part, at any time and from time to time prior to February 15, 2024, at a “make-whole” redemption price, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. NCLC may redeem the 2027 Secured Notes at its option, in whole or in part, at any time and from time to time on or after February 15, 2024, at the redemption prices set forth in the indenture governing the 2027 Secured Notes, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. At any time and from time to time prior to February 15, 2024, NCLC may choose to redeem up to 40% of the aggregate principal amount of the 2027 Secured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 105.875% of the principal amount of the 2027 Secured Notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date, so long as at least 60% of the aggregate principal amount of the 2027 Secured Notes issued remains outstanding following such redemption.

NCLC may redeem the 2029 Unsecured Notes at its option, in whole or in part, at any time and from time to time prior to November 15, 2028, at a “make-whole” redemption price, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. NCLC may redeem the 2029 Unsecured Notes at its option, in whole or in part, at any time and from time to time on or after November 15, 2028, at a redemption price equal to 100% of the principal amount of 2029 Unsecured Notes redeemed, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. At any time and from time to time prior to February 15, 2025, NCLC may choose to redeem up to 40% of the aggregate principal amount of the 2029 Unsecured Notes with the net proceeds of certain equity offerings, subject to certain restrictions, at a redemption price equal to 107.750% of the principal amount of the 2029 Unsecured Notes redeemed plus accrued and unpaid interest to, but excluding, the redemption date, so long as at least 60% of the aggregate principal amount of the 2029 Unsecured Notes issued remains outstanding following such redemption.

The indentures governing the 2027 Secured Notes and the 2029 Unsecured Notes include requirements that, among other things and subject to a number of qualifications and exceptions, restrict our ability and the ability of our restricted subsidiaries, as applicable, to (i) incur or guarantee additional indebtedness; (ii) pay dividends or distributions on, or redeem or repurchase, equity interests and make other restricted payments; (iii) make investments; (iv) consummate certain asset sales; (v) engage in certain transactions with affiliates; (vi) grant or assume certain liens; and (vii) consolidate, merge or transfer all or substantially all of our assets.

In February 2022, NCLC also conducted a private offering (the “Exchangeable Notes Offering”) of $473.2 million in aggregate principal amount of 2.5% exchangeable senior notes due 2027 (the “2027 2.5% Exchangeable Notes”). The 2027 2.5% Exchangeable Notes are guaranteed by NCLH on a senior basis. Holders may exchange their 2027 2.5% Exchangeable Notes at their option into redeemable preference shares of NCLC. Upon exchange, the preference shares will be immediately and automatically exchanged, for each $1,000 principal amount of exchanged 2027 2.5% Exchangeable Notes, into a number of NCLH’s ordinary shares based on the exchange rate. The exchange rate will initially be 28.9765 ordinary shares per $1,000 principal amount of 2027 2.5% Exchangeable Notes (equivalent to an initial exchange price of approximately $34.51 per ordinary share). The maximum exchange rate is 44.1891 and reflects potential adjustments to the initial exchange rate, which would only be made in the event of certain make-whole fundamental changes or tax redemption events. The exchange rate referred to above is also subject to adjustment for any stock split, stock dividend or similar transaction. The 2027 2.5% Exchangeable Notes pay interest at 2.5% per annum, semiannually on February 15 and August 15 of each year, to holders of record at the close of business on the immediately preceding February 1 and August 1, respectively.

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NCLC has used, or will use, the net proceeds from the Notes Offering and the Exchangeable Notes Offering to redeem (the “Redemption”) all of the outstanding 2024 Senior Secured Notes and 2026 Senior Secured Notes and to make scheduled principal payments on debt maturing in 2022, including, in each case, to pay any accrued and unpaid interest thereon, as well as related premiums, fees and expenses. Simultaneously with the Redemption, and pursuant to certain provisions contained in the indentures governing the 2026 Senior Unsecured Notes and the 2028 Senior Unsecured Notes, each of the guarantors party to such indentures were released from their obligations thereunder. The resulting losses on extinguishments, which are recognized in interest expense, net, were $188.4 million for the three months ended March 31, 2022.

Exchangeable Notes

The following is a summary of NCLC’s exchangeable notes as of March 31, 2022 (in thousands):

			Unamortized Debt
			Discount,
	Principal		including Deferred		Net Carrying		Fair Value
	Amount		Financing Fees		Amount		Amount		Leveling
2024 Exchangeable Notes	$	146,601	$	(41,185)	$	105,416	$	258,692	Level 2
2025 Exchangeable Notes		450,000		(121,972)		328,028		654,773	Level 2
2027 1.125% Exchangeable Notes		1,150,000		(248,721)		901,279		1,082,840	Level 2
2027 2.5% Exchangeable Notes		473,175		(103,012)		370,163		465,112	Level 2

The following is a summary of NCLC’s exchangeable notes as of December 31, 2021 (in thousands):

			Unamortized Debt
			Discount,
	Principal		including Deferred		Net Carrying		Fair Value
	Amount		Financing Fees		Amount		Amount		Leveling
2024 Exchangeable Notes	$	146,601	$	(44,772)	$	101,829	$	249,358	Level 2
2025 Exchangeable Notes		450,000		(128,603)		321,397		642,591	Level 2
2027 1.125% Exchangeable Notes		1,150,000		(259,380)		890,620		1,088,510	Level 2

The following provides a summary of the interest expense of NCLC’s exchangeable notes (in thousands):

	Three Months Ended
	March 31,
	2022		2021
Coupon interest	$	12,992	$	24,140
Amortization of discount and deferred financing fees		22,948		23,613
Total	$	35,940	$	47,753

The effective interest rate is 22.78%, 15.89%, 6.28% and 7.89% for the 2024 Exchangeable Notes, 2025 Exchangeable Notes, 2027 1.125% Exchangeable Notes and 2027 2.5% Exchangeable Notes, respectively.

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Debt Repayments

The following are scheduled principal repayments on our long-term debt including finance lease obligations as of March 31, 2022 for each of the following periods (in thousands):

Year	Amount
Remainder of 2022	$	865,990
2023		937,406
2024		3,686,473
2025		1,070,923
2026		1,974,309
2027		3,025,297
Thereafter		2,205,433
Total	$	13,765,831

Debt Covenants

During the year ended December 31, 2021, we received certain financial and other debt covenant waivers, added new free liquidity requirements and modified other financial covenants. As of March 31, 2022, taking into account such waivers, we were in compliance with all of our debt covenants. If we do not continue to remain in compliance with our covenants, including following the expiration of any current waivers, we would have to seek additional amendments to our covenants. However, no assurances can be made that such amendments would be approved by our lenders. Generally, if an event of default under any debt agreement occurs, then pursuant to cross default and/or cross acceleration clauses, substantially all of our outstanding debt and derivative contract payables could become due, and all debt and derivative contracts could be terminated, which would have a material adverse impact on our operations and liquidity.

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.

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

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classified in the same category as the cash flows from the underlying hedged transaction. If it is determined that the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings. 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, is not considered significant, as we primarily conduct business with large, well-established financial institutions with which we have established relationships, and which have credit risks acceptable to us, or the credit risk is spread out among many creditors. We do not anticipate non-performance by any of our significant counterparties.

As of March 31, 2022, we had fuel swaps, which are used to mitigate the financial impact of volatility of fuel prices pertaining to approximately 347 thousand metric tons of our projected fuel purchases, maturing through December 31, 2023.

As of March 31, 2022, we had approximately 164 thousand metric tons which were not designated as cash flow hedges maturing through December 31, 2023.

As of March 31, 2022, we had foreign currency forward contracts, matured foreign currency options and matured foreign currency collars 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 €2.4 billion, or $2.7 billion based on the euro/U.S. dollar exchange rate as of March 31, 2022.

As of March 31, 2022, we had conversion options embedded in our exchangeable notes. The notional amounts of our outstanding options as of March 31, 2022 were 10.7 million, 24.0 million, 34.1 million and 13.7 million NCLH shares for the 2024 Exchangeable Notes, 2025 Exchangeable Notes, 2027 1.125% Exchangeable Notes and 2027 2.5% Exchangeable Notes, respectively.

The derivatives measured at fair value and the respective location in the consolidated balance sheets include the following (in thousands):

		Assets				Liabilities
		March 31,		December 31,		March 31,		December 31,
	Balance Sheet Location	2022		2021		2022		2021
Derivative Contracts Designated as Hedging Instruments
Fuel contracts
	Prepaid expenses and other assets	$	81,704	$	29,349	$	—	$	—
	Other long-term assets		36,764		19,554		—		—
Foreign currency contracts
	Prepaid expenses and other assets		1,478		4,898		—		—
	Accrued expenses and other liabilities		558		—		134,845		98,592
	Other long-term liabilities		—		—		87,560		73,496
Interest rate contracts
	Accrued expenses and other liabilities		—		—		—		469
Total derivatives designated as hedging instruments		$	120,504	$	53,801	$	222,405	$	172,557
Derivative Contracts Not Designated as Hedging Instruments
Fuel contracts
	Prepaid expenses and other assets	$	26,743	$	10,836	$	—	$	—
	Other long-term assets		9,146		3,476		—		—
Debt conversion options	Exchangeable notes		—		—		647,545		487,671
Total derivatives not designated as hedging instruments		$	35,889	$	14,312	$	647,545	$	487,671
Total derivatives		$	156,393	$	68,113	$	869,950	$	660,228

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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 option pricing models 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 models used by the Company are industry standard models for valuing options and are used by the broker/dealer community. The inputs to the option pricing models are the option strike prices, underlying prices, risk-free rates of interest, time to expiration, and both historical and implied volatilities. The fair values of option contracts consider 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.

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

			Gross				Gross
	Gross		Amounts		Total Net		Amounts
March 31, 2022	Amounts		Offset		Amounts		Not Offset		Net Amounts
Assets	$	155,835	$	—	$	155,835	$	(155,835)	$	—
Liabilities		869,950		(558)		869,392		(843,613)		25,779

			Gross				Gross
	Gross		Amounts		Total Net		Amounts
December 31, 2021	Amounts		Offset		Amounts		Not Offset		Net Amounts
Assets	$	68,113	$	—	$	68,113	$	(68,113)	$	—
Liabilities		660,228		—		660,228		(660,228)		—

The effects of cash flow hedge accounting on accumulated other comprehensive income (loss) were as follows (in thousands):

					Location of Gain
					(Loss) Reclassified
					from Accumulated	Amount of Gain (Loss) Reclassified
	Amount of Gain (Loss)				Other Comprehensive	from Accumulated Other
	Recognized in Other				Income (Loss) into	Comprehensive Income
Derivatives	Comprehensive Loss				Income (Expense)	(Loss) into Income (Expense)
	Three Months		Three Months			Three Months		Three Months
	Ended		Ended			Ended		Ended
	March 31, 2022		March 31, 2021			March 31, 2022		March 31, 2021
Fuel contracts	$	92,483	$	24,050	Fuel	$	8,809	$	(8,171)
Fuel contracts