New York, August 24, 2020 — Moody’s Investors Service, (“Moody’s”) downgraded the ratings of Carnival Corporation and Carnival plc (together “Carnival”) including its Corporate Family Rating to B1 from Ba1, Probability of Default Rating to B1-PD from Ba1-PD, senior secured rating to Ba2 from Baa3, senior secured second lien rating to B1 from Ba1, and senior unsecured rating to B2 from Ba2. The company’s Speculative Grade Liquidity rating of SGL-2 remains unchanged. The outlook is negative. This concludes the review for downgrade that was initiated on July 14, 2020.
“The downgrade reflects Moody’s expectation that Carnival’s metrics will remain weak over at least the next two years with debt/EBITDA well above 6.5x and EBITA/interest expense below 2.0x,” stated Pete Trombetta, Moody’s lodging and cruise analyst. “The downgrade also reflects our assumption that Carnival’s available capacity will be modest in the first half of 2021 as the industry puts in place acceptable guidelines that satisfy the requirements for the Centers for Disease Control and Prevention (CDC) to lift its no sail order put in place in March,” added Trombetta. Carnival’s liquidity, including about $8.8 billion (pro forma for its recent second lien debt issuance), provides the company sufficient runway to get through this period of unprecedented earnings pressure.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today’s action reflects the impact on Carnival from the deterioration in credit quality it has triggered, given its exposure to travel restrictions in the US, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
…. Probability of Default Rating, Downgraded to B1-PD from Ba1-PD
…. Corporate Family Rating, Downgraded to B1 from Ba1
….Senior Secured Bank Credit Facility, Downgraded to Ba2 (LGD2) from Baa3 (LGD2)
….Senior Secured 2nd Lien Regular Bond/Debenture, Downgraded to B1 (LGD3) from Ba1 (LGD3)
….Senior Secured 1st Lien Regular Bond/Debenture, Downgraded to Ba2 (LGD2) from Baa3 (LGD2)
….Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD5) from Ba2 (LGD5)
….Senior Secured Regular Bond/Debenture, Downgraded to Ba2 (LGD2) from Baa3 (LGD2)
….Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD5) from Ba2 (LGD5)
Carnival’s credit profile is supported by its good liquidity given its significant cash balances and Moody’s view that over the long run, the value proposition of a cruise vacation relative to land-based destinations, as well as a group of loyal cruise customers, supports a base level of demand once health safety concerns have been effectively addressed. The company also benefits from its position as the largest worldwide cruise line in terms of revenues, fleet size and number of passengers carried, with significant geographic and brand diversification. In the short run, Carnival’s credit profile will be dominated by the length of time that cruise operations continue to be highly disrupted and the resulting impact on the company’s cash consumption, liquidity and credit metrics. The normal ongoing credit risks include Carnival’s near term very high leverage, the highly seasonal and capital intensive nature of cruise companies, competition with all other vacation options, and the cruise industry’s exposure to economic and industry cycles as well as weather related incidents and geopolitical events. At the end of the second quarter 2020, Carnival’s debt/EBITDA had weakened to 8.2x and EBITA/interest expense was 1.2x. Moody’s expects Carnival’s leverage and coverage metrics to continue to weaken over the next twelve months at which point they will begin a slow recovery.
The negative outlook reflects Carnival’s very high leverage and the uncertainty around the pace and level of recovery in demand that will enable the company to reduce leverage to below 5.5x.
Carnival’s liquidity is good. Moody’s expects the company’s cash balances, about $8.8 billion (pro forma for its recent second lien debt issuance), to be sufficient to cover the company’s cash needs over the next 12 to 18 months. Carnival has entered into several amendments that have waived its required covenant compliance under several export agreements and bank agreements through 2021. The company’s $3.0 billion revolver is fully drawn. The company’s ability to access alternate forms of liquidity are deemed to be modest in the current operating environment.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded further in the near term if the company’s liquidity weakened in any way or if the recovery in cruising activity is delayed beyond our base assumptions which include a resumption of US cruising in the first half of 2021 with capacity days reaching at least 65% of their 2019 levels and occupancy reaching at least 70% by the second quarter with continued improvement from there. The ratings could also be downgraded if there are indications that the company is not on a path to restoring leverage to a sustainable level. The outlook could be revised to stable if the impacts from the spread of the coronavirus stabilizes and cruise operations resume at a level that enables the company to maintain debt/EBITDA below 5.5x. Ratings could be upgraded if the company is able to maintain leverage below 4.5x with EBITA/interest expense of at least 3.0x.
Carnival Corporation and Carnival plc own the world’s largest passenger cruise fleet operating under multiple brands including Carnival Cruise Line, Holland America, Princess Cruises, AIDA Cruises, Costa Cruises, and P&O Cruises, among others. Carnival Corporation and Carnival plc operate as a dual listed company. Headquartered in Miami, Florida, US and Southampton, United Kingdom. Annual net revenues for fiscal 2019 were approximately $16 billion.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
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Peter Trombetta Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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