New York, August 08, 2022 -- Moody's Investors Service ("Moody's") downgraded the ratings of Carnival Corporation (combined herein with Carnival plc "Carnival") including its corporate family rating to B2 from B1, its probability of default rating to B2-PD from B1-PD, its senior secured note and senior secured credit facility ratings to Ba3 from Ba2, its senior unsecured note rating to B3 from B2 and its speculative grade liquidity rating to SGL-3 from SGL-2. At the same time, the company's senior secured second lien note rating was affirmed at B1. The outlook is negative.
"The downgrade reflects weaker than expected recovery in 2022 which will result in Carnival generating negative EBITDA this year", stated Pete Trombetta, Moody's VP-Senior Analyst. The B2 also reflects the risk around the company's ability to generate sufficient free cash flow to materially reduce debt, particularly in a rising interest rate environment. Moody's forecasts that Carnival's debt/EBITDA will exceed 7x in 2023 and a higher interest burden and new ship purchase commitments over the next two years will constrain cash flow and the ability to reduce debt. This, along with a substantial amount of debt that will need to be refinanced over the next several years, likely at higher interest rates, elevates the company's financial risk profile.
Several headwinds are impacting the company's earnings recovery, including the impact on bookings and increased cancellations due to the Omicron variant and Russia's invasion of Ukraine in early 2022, materially higher fuel costs and food cost inflation. These factors, which took place as more of the company's ships were coming on line for the busy summer sailing season, resulted in a shorter booking curve. As a result, the company has lowered select prices to drive higher occupancy.
Downgrades:
..Issuer: Carnival Corporation
.... Corporate Family Rating, Downgraded to B2 from B1
.... Probability of Default Rating, Downgraded to B2-PD from B1-PD
.... Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2
.... Senior Secured Bank Credit Facility, Downgraded to Ba3 (LGD2) from Ba2 (LGD2)
.... Senior Secured Regular Bond/Debenture, Downgraded to Ba3 (LGD2) from Ba2 (LGD2)
.... Senior Unsecured Regular Bond/Debenture, Downgraded to B3 (LGD4) from B2 (LGD5)
..Issuer: Carnival plc
.... Senior Secured Regular Bond/Debenture, Downgraded to Ba3 (LGD2) from Ba2 (LGD2)
.... Senior Unsecured Regular Bond/Debenture, Downgraded to B3 (LGD4) from B2 (LGD5)
..Issuer: Long Beach (City of) CA
.... Senior Secured Revenue Bonds, Downgraded to Ba3 (LGD2) from Ba2 (LGD2)
Affirmations:
..Issuer: Carnival Corporation
.... Senior Secured 2nd Lien Regular Bond/Debenture, Affirmed B1 (LGD3)
.... Senior Unsecured Commercial Paper, Affirmed NP
..Issuer: Carnival plc
.... Senior Unsecured Commercial Paper, Affirmed NP
Outlook Actions:
..Issuer: Carnival Corporation
....Outlook, Remains Negative
..Issuer: Carnival plc
....Outlook, Remains Negative
RATINGS RATIONALE
Carnival's credit profile 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 is expected to turn modestly 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. The company had cash of about $7.1 billion at May 31, 2022 and raised an additional $1 billion from a common stock issuance that closed in July. 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 $4.4 billion of maturities that are due in the second half 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 has about $300 million of availability. 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.
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 B3 rating on the unsecured debt – one notch below the corporate family rating – reflects its structural subordination to about $10 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 May 31, 2022 were approximately $4.2 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.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Jessica Gladstone, CFA
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
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
