New York, October 18, 2022 -- Moody's Investors Service ("Moody's") assigned a B2 rating to Carnival Holdings (Bermuda) Limited's (a subsidiary of Carnival Corporation and Carnival plc ("Carnival")) planned senior unsecured priority notes. There is no change to Carnival's other ratings including its senior secured first lien rating of Ba3, senior secured second lien rating of B1 or existing senior unsecured rating of B3. The company's speculative grade liquidity rating of SGL-3 is also unchanged. The outlook is negative.
Carnival is creating a newly formed subsidiary – Carnival Holdings (Bermuda) Limited ("Newco") – that is planning to issue $2 billion of unsecured priority notes that will be guaranteed on an unsecured basis by Carnival and certain other operating subsidiaries. Various Carnival brands will move 12 unencumbered vessels into Newco – these assets are some of the company's newest, most fuel efficient ships. Per Carnival, these assets have a net book value at August 31, 2022 of $8.3 billion. The company will be limited to a 25% loan to value covenant ($2 billion) or 50% loan to value ($4 billion) if the company issues additional debt. But any potential additional debt above $2 billion would be guaranteed only on a junior priority basis and may be rated differently based on a weaker guarantee structure.
The assignment of a B2 to the planned senior unsecured priority notes – one notch above the existing B3 unsecured rating – reflects the value in the overall guarantee package which includes the guarantee from Carnival and certain other operating subsidiaries.
Assignments:
..Issuer: Carnival Holdings (Bermuda) Limited
....Senior Unsecured Regular Bond/Debenture, Assigned B2 (LGD4)
Outlook Actions:
..Issuer: Carnival Holdings (Bermuda) Limited
....Outlook, Assigned Negative
RATINGS RATIONALE
Carnival's B2 CFR is supported by its adequate liquidity given its sizeable cash balances, its pre-pandemic position as the largest worldwide cruise line in terms of revenue, fleet size and number of passengers carried and its brand diversification. Moody's believes Carnival will also benefit over the long run from the value proposition of a cruise vacation relative to land-based destinations as well as a group of loyal cruise customers that will support a base level of demand. Carnival's credit profile is constrained by its very weak credit metrics – Moody's forecasts that Carnival's debt/EBITDA will exceed 7x at the end of 2023 (includes Moody's standard adjustments). The company's EBITDA turned positive in the third quarter of 2022 but free cash flow available for debt reduction will continue to be constrained by rising interest costs and new ship commitments. The normal ongoing credit risks include the highly seasonal and capital intensive nature of the cruise industry, 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.
The negative outlook reflects Moody's concerns that the company will not be able to generate sufficient cash flow to reduce debt such that debt/EBITDA approaches 6.5x.
The company's adequate liquidity is supported by sizeable cash balances that are sufficient to cover its cash needs over the next 12 months. Prior to this planned transaction, the company had cash of about $7.1 billion at August 31, 2022. The company plans to use the proceeds of this debt issuance to make principal payments on debt and for general corporate purposes. The company may use all or a portion of the net proceeds to temporarily repay amounts outstanding under the revolver. This amount of cash is sufficient to enable the company to cover its negative free cash flow over the next 18 months and repay the approximate $3.4 billion of maturities that are due in the fourth quarter of 2022 and 2023. Moody's forecasts the company will end 2023 with just over $2 billion of liquidity. Carnival's revolving credit facility is comprised of the following: a US $1.7 billion, EUR1.0 billion and GBP150 million committed multicurrency revolving credit facility that expires in August 2024. The company's $3.0 billion revolver had availability of about $300 million at August 31, 2022. Carnival's debt facilities require it to comply with several maintenance covenants including minimum interest coverage, debt to capital and minimum liquidity. We expect the company will maintain adequate covenant cushion over the next 12 months. The company's ability to access alternate forms of liquidity are deemed to be modest in the current operating environment but include the potential to sell ships or a brand.
In accordance with Moody's Loss Given Default for Speculative-Grade Companies (LGD) Methodology, the Ba3 rating on the company's secured debt and the B1 rating on the second lien secured debt reflect the considerable amount of unsecured debt (approximately $25 billion) below it in the capital structure. The B2 rating on the planned senior unsecured guaranteed notes reflects the guarantee of Newco, Carnival and its other operating subsidiaries. The B3 rating on the existing unsecured debt – one notch below the corporate family rating (CFR) – reflects its structural subordination to about $12 billion of secured debt ahead of it in the capital structure.
Headquartered in Miami, Florida, USA and Southampton, UK, Carnival Corporation and Carnival plc effectively operate as a dual listed company and have executed appropriate cross guarantees that have, in our view, resulted in a unified economic entity. A dual listed company structure allows the two companies to manage the business as a single operation while remaining as separate legal and publicly listed entities. Carnival Corporation is incorporated in Panama. Incorporation in a foreign jurisdiction complicates the prediction of recovery prospects in a bankruptcy scenario.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade would require material debt reduction or earnings expansion that resulted in debt/EBITDA maintained below 5.5x, with consistently positive free cash flow and maintenance of good liquidity. Ratings could be downgraded if liquidity weakened in any way, including due to slower than anticipated earnings recovery, which could raise refinancing risk. The ratings could also be downgraded if it appears that debt/EBITDA will remain above 7.0x over the longer term or the company will not be able to consistently produce positive free cash flow.
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 and are headquartered in Miami, Florida, US and Southampton, UK. Net revenue for the trailing 12 month period ended August 31, 2022 were approximately $7.1 billion.
The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
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Peter Trombetta
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
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Jessica Gladstone, CFA
Associate Managing Director
Corporate Finance Group
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