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