TEXT - S&P rates Carnival Corp notes 'BBB+'

Thu Nov 29, 2012 12:35pm EST

Related Topics

Overview
     -- Carnival Corp. plans to issue $500 million in notes due 2017 and
use the proceeds for general corporate purposes.
     -- We are assigning our 'BBB+' issue-level rating to the proposed notes.
     -- The stable rating outlook reflects our belief Carnival should be able 
to drive a modest improvement in leverage in fiscal 2013 following a leverage 
increase this fiscal year.
 
Rating Action
On Nov. 29, 2012, Standard & Poor's Ratings Services assigned its 'BBB+' 
issue-level rating to Miami, Fla.-based Carnival Corp.'s proposed $500 million 
notes due 2017. Carnival plans to use proceeds from the proposed notes for 
general corporate purposes. All other ratings are unchanged, and the rating 
outlook is stable.

Rationale
Our corporate credit rating on Carnival reflects our assessment of the 
company's business risk profile as "strong" and our assessment of the 
company's financial risk profile as "intermediate," according to our criteria. 
Carnival Corp. and Carnival plc are part of a dual-listed company (DLC) 
structure. Through the contracts governing the DLC relationship, Carnival 
combines the management and organization of both companies such that they 
operate as a single economic enterprise. Therefore, we look at the 
consolidated operating performance of both companies and of their subsidiaries.

Our assessment of Carnival's business risk profile as strong is based on its 
position as the largest cruise operator in the world with a global market 
share of around 50%, a solid operating track record and an experienced 
management team. The capital-intensive nature of the cruise industry, the 
travel and leisure sector's sensitivity to economic cycles, and long lead 
times for new ships somewhat temper these factors.

Our assessment of Carnival's financial risk profile as intermediate reflects 
our expectation that, by the end of fiscal 2012 (ending November), total lease 
and port commitment adjusted debt to EBITDA will increase to 3x and funds from 
operations to total adjusted debt will decline to 30%. These measures are weak 
compared to our thresholds of 3x, and 30% to 35%, respectively, at the current 
'BBB+' rating. However, we believe that the company will likely maintain its 
strong liquidity position and that leverage will improve to below 3x and funds 
from operations to total adjusted debt will increase above 30% in fiscal 2013.

We believe the cruise sector has, to a large extent, recovered from the impact 
of the Costa Concordia grounding and should experience low-single digit net 
yield growth in 2013, although the Eurozone recession remains a key risk 
factor. Royal Caribbean Cruises Ltd. and NCL Corporation Ltd. have reported 
that 2013 fleet-wide bookings are pricing higher compared to this year's 
bookings, and pricing remains strong across the industry for Caribbean 
itineraries, where a significant amount of global cruise capacity is deployed 
over the near term. Also, while Carnival Corp. has indicated that pricing and 
occupancy have been lower for 2013 bookings, recent booking performance at its 
North American brands has been encouraging, with booking and pricing for the 
six weeks ended Sept. 25 comparing favorably with the prior-year period 
according to management. While European itineraries are pricing lower compared 
to same time last year and are more at risk due to the Eurozone recession, 
once past the anniversary of the Costa Concordia grounding, booking trends 
should benefit from a favorable comparison. Additionally, we anticipate that 
cruise operators will redeploy a moderate amount of capacity in 2013 from 
Europe to emerging markets. We also believe that moderate industry-wide 
capacity growth in the low-single digits is likely over the next few years 
given current ship orders. 

Our rating incorporates our expectation that net revenue yield in fiscal 2012 
on a constant-dollar basis will decline in the low-single-digit area. We 
believe net cruise costs per capacity day will likely be flat to slightly down 
factoring in a high-single-digit percentage increase in fuel prices in fiscal 
2012. This, along with a 3.0% capacity increase, would result in 2012 EBITDA 
declining around 15%. In fiscal 2013, we have incorporated into the rating 
that net revenue yield increases in the low single digits, capacity increases 
around 3% and EBITDA improves around 10%. Downside risks to our performance 
expectation for Carnival stem from a more severe negative impact to booking 
and pricing trends related to the recession and sovereign debt issues in 
Europe.

In the first nine months of fiscal 2012, net yield declined 4.2%, while net 
cruise costs per capacity day decreased 0.2% resulting in EBITDA declining 
10%. Consequently as of Aug. 31 2012, our measure of Carnival's total lease 
and port commitment adjusted debt to EBITDA was 2.8x, and our measure of funds 
from operations (FFO) to total adjusted debt was in the low-30% area, in line 
with our current rating. Based on our current expectation for a 15% EBITDA 
decline in 2012, we believe total lease and port commitment adjusted debt to 
EBITDA will be 3x and FFO to total debt will decline to 30% by the end of 
fiscal 2012. We expect EBITDA growth should drive a leverage improvement in 
fiscal 2013.
 
Liquidity
Our short-term rating on Carnival is 'A-2'. Based on its likely sources and 
uses of cash over the next 12 to 18 months and incorporating our performance 
expectations, Carnival has a "strong" liquidity profile, according to our 
criteria. Relevant elements of Carnival's liquidity profile are:
     -- We expect sources of liquidity (including cash and facility 
availability) over the next 12 to 18 months to equal or exceed uses by 1.5x. 
We believe Carnival will be able to refinance $1.6 billion in debt maturing in 
2013, if required.
     -- We expect net sources to be positive, even if EBITDA underperforms our 
forecast by 30% over the next 12 to 18 months.
     -- We believe Carnival has solid relationships with its banks and a high 
standing in the credit markets.
 
As of Aug. 31, 2012, Carnival had $313 million in cash, excluding $255 million 
required for operations. Carnival also had $2.5 billion of availability under 
its revolving credit facilities and had $3.2 billion available under committed 
ship financings. For fiscal 2012, we expect the company to generate around 
$3.0 billion in operating cash flow compared to $3.77 billion in 2011, mostly 
on lower EBITDA. In fiscal 2013, we expect operating cash flow to recover to 
around $3.5 billion. Carnival's liquidity position was supplemented by the May 
2012 receipt of $508 million in insurance proceeds for the total loss of the 
Costa Concordia.

Capital expenditures are expected to be around $2.6 billion in 2012 and $2 
billion in 2013, and Carnival has a stated intent of introducing, on average, 
two to three new ships annually after 2012. We believe ship-build spending in 
conjunction with dividends will not negatively affect Carnival's credit 
quality, as long as spending levels are maintained around or not meaningfully 
above expected operating cash flow. While Carnival recently announced a 
special dividend of $390 million, which is in addition to its quarterly 
dividend of $790 million on an annualized basis, we expect Carnival to 
primarily fund future dividend payments using free cash flow. Given our 
current performance expectations, we would view significant borrowing to 
complete share repurchases or pay dividends as a shift toward a more 
aggressive financial policy that could lead to lower ratings. Debt maturities 
averaging more than $1.5 billion per year are manageable over the next few 
years, in our view, particularly because Carnival has commitments in place for 
government-guaranteed ship financings to fund several new ship deliveries.

Outlook
The stable rating outlook reflects our belief that, despite the impact from 
the Costa Concordia grounding and the negative economic headwinds in Europe, 
Carnival should be able to drive modest improvement in leverage in fiscal 
2013, following a leverage increase this year.

We may consider a negative outlook or a lower rating if we believe there may 
be more severe negative implications to booking and pricing trends in 2013 due 
to recession and sovereign debt issues in Europe. In addition, at this time, 
and given our current performance expectations, we would view significant 
borrowing to complete share repurchases and/or dividends as a shift toward a 
more aggressive financial policy that could lead to a lower rating. A higher 
rating is unlikely over the intermediate term given our expectations for 
credit measures to weaken in fiscal 2012 and only modestly improve in fiscal 
2013.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
 
Ratings List

Carnival Corp.
 Corporate credit rating                BBB+/Stable/A-2

New Rating

Carnival Corp.
 $500M sr unsecd notes due 2017         BBB+
FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article