Other Assets

3 Months Ended

Mar. 31, 2020

A Variable Interest Entity (“VIE”) is an entity in which the equity investors have not provided enough equity to finance the entity’s activities or the equity investors: (1) cannot directly or indirectly make decisions about the entity’s activities through their voting rights or similar rights; (2) do not have the obligation to absorb the expected losses of the entity; (3) do not have the right to receive the expected residual returns of the entity; or (4) have voting rights that are not proportionate to their economic interests and the entity’s activities involve or are conducted on behalf of an investor with a disproportionately small voting interest.

We have determined that TUI Cruises GmbH, our 50%-owned joint venture, which operates the brand TUI Cruises, is a VIE. As of March 31, 2020, the net book value of our investment in TUI Cruises was $613.9 million, primarily consisting of $467.9 million in equity and a loan of €130.8 million, or approximately $143.5 million based on the exchange rate at March 31, 2020. As of December 31, 2019, the net book value of our investment in TUI Cruises was $598.1 million, primarily consisting of $443.1 million in equity and a loan of €133.2 million, or approximately $149.5 million based on the exchange rate at December 31, 2019. The loan, which was made in connection with the sale of Splendour of the Seas in April 2016, accrues interest at a rate of 6.25% per annum and is payable over 10 years. This loan is 50% guaranteed by TUI AG, our joint venture partner in TUI Cruises, and is secured by a first priority mortgage on the ship. The majority of these amounts were included within Other assets in our consolidated balance sheets. TUI Cruises has various ship construction and financing agreements which include certain restrictions on each of our and TUI AG’s ability to reduce our current ownership interest in TUI Cruises below 37.55% through May 2031.

Our investment amount, outstanding term loan and the potential obligations under the bank loan guarantee are substantially our maximum exposure to loss in connection with our investment in TUI Cruises. We have determined that we are not the primary beneficiary of TUI Cruises. We believe that the power to direct the activities that most significantly impact TUI Cruises’ economic performance are shared between ourselves and TUI AG. All the significant operating and financial decisions of TUI Cruises require the consent of both parties, which we believe creates shared power over TUI Cruises. Accordingly, we do not consolidate this entity and account for this investment under the equity method of accounting.

On February 7, 2020, TUI Cruises entered into an agreement to acquire Hapag-Lloyd Cruises, a luxury and expedition brand for German-speaking guests, from TUI AG. Hapag-Lloyd Cruises operates two luxury liners and three smaller expedition ships. The transaction is subject to regulatory approval and customary closing conditions. The majority of the purchase price for this acquisition is being financed by third-party financing, however, each shareholder is making a contribution of €75 million to fund a portion of the purchase price.

We have determined that Pullmantur Holdings, in which we have a 49% noncontrolling interest and Springwater Capital LLC has a 51% interest, is a VIE for which we are not the primary beneficiary, as we do not have the power to direct the activities that most significantly impact the entity's economic performance. Accordingly, we do not consolidate this entity and we account for this investment under the equity method of accounting. As of March 31, 2020, we did not have any exposure to loss in Pullmantur Holdings as a result of the loans and net receivables written-off as of March 31, 2020. Refer to Note 3. Impairment and Credit Losses for further information on our credit loss evaluation related to these receivables as of March 31, 2020.

As of December 31, 2019, our maximum exposure to loss in Pullmantur Holdings was $49.7 million, consisting of loans and other receivables. These amounts were included within Trade and other receivables, net and Other assets in our consolidated balance sheets.

We have provided a non-revolving working capital facility to a Pullmantur Holdings subsidiary in the amount of up to €15.0 million or approximately $16.5 million based on the exchange rate at March 31, 2020. Proceeds of the facility, which were available to be drawn through December 2018 accrued interest at an interest rate of 6.5% per annum and are payable through 2022. An affiliate of Springwater Capital LLC has guaranteed repayment of 51% of the outstanding amounts under the facility. As of March 31, 2020, €11.4 million, or approximately $12.5 million, based on the exchange rate at March 31, 2020, was outstanding under this facility and was fully written-off as of March 31, 2020. As of December 31, 2019, €11.0 million, or approximately $12.3 million, based on the exchange rate at December 31, 2019, was outstanding under this facility.

We have determined that Grand Bahama, a ship repair and maintenance facility in which we have a 40% noncontrolling interest, is a VIE. This facility serves cruise and cargo ships, oil and gas tankers and offshore units. We utilize this facility, among other ship repair facilities, for our regularly scheduled drydocks and certain emergency repairs as may be required. During the quarters ended March 31, 2020 and 2019, we made payments of $0.2 million and $40.3 million, respectively, to Grand Bahama for ship repair and maintenance services. We have determined that we are not the primary beneficiary of this facility as we do not have the power to direct the activities that most significantly impact the facility’s economic performance. Accordingly, we do not consolidate this entity and we account for this investment under the equity method of accounting. During the quarter ended March 31, 2020, we performed an impairment evaluation on our investment in Grand Bahama. As a result of the evaluation, we did not deem our investment balance to be recoverable and recorded an impairment charge of $30.1 million. Refer to Note 3. Impairment and Credit Losses for further information regarding the impairment evaluation. As of March 31, 2020, the net book value of our investment in Grand Bahama was $24.0 million, consisting of loans. As of December 31, 2019, the net book value of our investment in Grand Bahama was $47.9 million, consisting of $27.0 million in equity and loans of $20.9 million. These amounts represent our maximum exposure to loss related to our investment in Grand Bahama. Our loans to Grand Bahama mature between December 2020 and March 2026 and bear interest at LIBOR plus 2.00% to 3.75%, capped at 5.75% for the majority of the outstanding loan balance. Interest payable on the loans is due on a semi-annual basis. We did not receive any principal and interest payments during the quarter ended March 31, 2020. During the quarter ended March 31, 2019, we received principal and interest payments of $6.6 million. The loan balances are included within Trade and other receivables, net and Other assets in our consolidated balance sheets. As of March 31, 2020, the loans were accruing interest under the effective yield method. Effective April 1, 2020, we determined the loans to be in non-accrual status.

We monitor credit risk associated with the loans through our participation on Grand Bahama’s board of directors along with our review of Grand Bahama’s financial statements and projected cash flows. Based on this review, we do not expect to realize credit losses associated with the outstanding loans as of March 31, 2020.

The following tables set forth information regarding our investments accounted for under the equity method of accounting, including the entities discussed above (in thousands):


	Quarter Ended March 31,
	2020		2019
Share of equity (loss) income from investments	$	(10,392)	$	33,694
Dividends received (1)	$	1,991	$	42,435

(1)There were no dividends received from TUI Cruises for the quarter ended March 31, 2020. For the quarter ended March 31, 2019, amount includes dividends of €50.0 million from TUI Cruises, net of tax withholdings.


	As of March 31, 2020		As of December 31, 2019
Total notes receivable due from equity investments	$	167,352	$	193,351
Less-current portion (1)	27,323		19,681
Long-term portion (2)	$	140,029	$	173,670

(1)Included within Trade and other receivables, net in our consolidated balance sheets.

(2)Included within Other assets in our consolidated balance sheets.

We also provide ship management services to TUI Cruises GmbH and Pullmantur Holdings. Additionally, we bareboat charter to Pullmantur Holdings the vessels currently operated by its brands, which were retained by us following the sale of our 51% interest in Pullmantur Holdings. We recorded the following as it relates to these services in our operating results within our consolidated statements of comprehensive income (loss) (in thousands):


	Quarter Ended March 31,
	2020		2019
Revenues	$	7,411	$	11,882
Expenses	$	782	$	974

As of March 31, 2020 and December 31, 2019, our total credit loss allowance related to receivables subject to credit loss evaluation was $5.7 million and $5.6 million, respectively.