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Rating Action:

MOODY'S DOWNGRADES CARNIVAL'S LONG-TERM RATING TO A3, AND ITS SHORT-TERM RATING TO PRIME-2, AND LEAVES ITS RATINGS ON REVIEW FOR POSSIBLE DOWNGRADE, AND LEAVES P&O PRINCESS plc's RATINGS ON REVIEW FOR POSSIBLE UPGRADE.

14 Apr 2003
MOODY'S DOWNGRADES CARNIVAL'S LONG-TERM RATING TO A3, AND ITS SHORT-TERM RATING TO PRIME-2, AND LEAVES ITS RATINGS ON REVIEW FOR POSSIBLE DOWNGRADE, AND LEAVES P&O PRINCESS plc's RATINGS ON REVIEW FOR POSSIBLE UPGRADE.

Approximately $5.6 billion of debt affected.

New York, April 14, 2003 -- Moody's Investors Service downgraded the long-term ratings of Carnival Corporation (Carnival) to A3 from A2, and its short-term rating to Prime-2 from Prime-1 to reflect its expected combination with P&O Princess Cruises, plc (P&O). The long-term ratings of Carnival Corporation remain on review for further possible downgrade pending final resolution of the combined group's capital structure, and the ratings for P&O remain on review for possible upgrade.

The downgrade of Carnival's ratings reflects Moody's expectation that:

(1) The combination of P&O and Carnival will result in increased proforma leverage.

(2) Continued company and industry-wide capacity expansion will continue to pressure Carnival's earnings and cash flow, given that it is occurring at a time when net revenue yields and margins are already challenged as a result of new capacity, a soft economy, concerns related to terrorism and the war in Iraq, and cost increases.

(3) Carnival will generate negative free cash flow in 2003 and 2004 as a result of the significant committed capital spending program for both Carnival and P&O brands.

(4) Carnival's net borrowing needs could increase if booking volumes fail to keep pace with capacity expansion.

Carnival's long-term ratings remain on review for further possible downgrade, while P&O's ratings remain on review for possible upgrade, pending final resolution of the combined group's capital structure. The ongoing review will focus on the degree of effective and structural subordination in the capital structure, including the implications of the cross-guarantees that are required for new, but not existing, lenders. A further downgrade, if any, of Carnival's ratings would be modest. The company's ratings could be confirmed if the level of subordination does not impair the position of unsecured creditors, and if existing bondholders are not disadvantaged by the cross-guarantees envisaged for new lenders.

P&O's ratings remain on review for possible upgrade also pending final resolution of the combined group's capital structure. The review of P&O's ratings will focus on the degree of effective subordination in P&O's capital structure, P&O's strategic role in the combined group, as well as the implications of the cross-guarantees that are required for new, but not existing, lenders.

The downgrade of Carnival's ratings to A3, and Prime-2 reflects the continuing downward pressure on cruise pricing that first began in 2000, and was significantly impacted by the events of September 11, 2001. Pricing on a per available lower berth day basis remains well below the peak levels achieved in 1999, and capacity expansion, economic weakness, and geopolitical risks continue to exert downward pressure on net revenue yields. This environment increases the risk that the combined entity's borrowing needs may be higher than anticipated and could cause credit statistics to deteriorate. Both Carnival and P&O have reduced costs on a per available lower berth day basis, which has helped to mitigate the decline in margins, but recent increases in fuel and insurance costs are expected to put downward pressure on margins. Moody's has incorporated the positive aspects of Carnival's combination with P&O into its ratings, including the addition of complementary well-known brands, acceleration of Carnival's expansion outside North America, and potential cost synergies. The combination with P&O will also lead to improved geographic diversification, and reduces the average age of Carnival's fleet. Moody's also considers Carnival's relatively conservative financial policies, and strong management team to be a credit positive.

Moody's notes that on a combined entity basis, 2002 proforma retained cash flow to total adjusted debt was approximately 27%, and total coverage was 7.6x. Together Carnival and P&O have 17 ships on order for delivery through 2006. The combined entity will be a net borrower in 2003 and 2004, as internally generated cash will not be sufficient to finance total capital and dividend needs. Moody's estimates that the combined entity can finance between 60%-70% of its total capital, and dividend requirements from internally generated cash flow over the next two years.

Carnival currently has secured debt of about $121 million on one ship, and debt at subsidiaries of approximately $1.0 billion. P&O currently has approximately $1.4 billion of secured debt, and has commitments of about $1.0 billion to finance up to three new ship deliveries with secured debt.

Both Carnival and P&O have sufficient liquidity in the form of committed financing to meet their respective cash needs. Carnival maintains revolving credit facilities of $1.65 billion that mature in June 2006, and currently has cash balances totaling about $710 million. P&O has committed lines of credit of $435 million that mature in September 2005, and undrawn committed secured financing facilities of $1.0 billion. Neither company has significant debt maturities in 2003 or 2004. However, Carnival's convertible debt issues are puttable in 2005, and 2006.

The merger of Carnival and P&O under a dual listed company structure has been approved by Carnival's shareholders at a special board meeting held on 4/14/03, and is expected to be approved by shareholders of P&O at a special board meeting scheduled to take place on April 16, 2003. A dual listed company structure will allow the two companies to effectively merge while remaining as separate legal, and publicly listed entities. This will be accomplished through a series of agreements that equalizes the voting and economic interests of shareholders of each company, and established corporate governance procedures. Carnival has offered to purchase each P&O Princess share in exchange for Carnival stock for a total value of approximately $5.5 billion based upon Carnival's recent stock price.

Ratings downgraded:

Commercial paper to Prime-2 from Prime-1.

Ratings downgraded, and that remain on review for possible downgrade:

Carnival Corporation

Senior unsecured notes, debentures, and convertible notes to A3 from A2.

Senior unsecured shelf registration to (P) A3 from (P) A2.

Subordinated shelf registration to (P) Baa1 from (P) A3.

Preferred stock shelf registration to (P) Baa2 from (P) Baa1.

Costa Finance S.A.

Senior unsecured Euro notes, guaranteed by Carnival Corporation to A3 from A2.

Ratings that remain on review for possible upgrade:

P&O Princess Cruises plc

Senior unsecured notes guaranteed by P&O Cruises Limited at Baa3

Carnival Corporation, headquartered in Miami, Florida and its subsidiaries operate six brands under the names, Carnival Cruise Lines, Holland America Line, Costa, Windstar Cruises, Cunard Line and Seabourn Cruise Line. During the year ended November 30, 2002, Carnival's revenues were approximately $4.4 billion. P&O Princess Cruises plc and its subsidiaries operates seven brands under the names, Princess, P&O Cruises (UK), Ocean Village, Swan Hellenic, AROSA, AIDA Cruises, and P&O Cruises (Australia). During the year ended December 31, 2002, P&O's revenues were approximately $2.6 billion.

New York
Angela Jameson
Managing Director
Industrial
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Peggy Holloway
VP - Senior Credit Officer
Industrial
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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