Moody’s downgraded Carnival’s issuer rating from B1 to B2, its senior secured credit facilities from Ba2 to Ba3 and its senior unsecured notes from B2 to B3. The rating agency also assigned a negative outlook to the cruise line. The rationale is mainly a weaker than expected recovery in 2022, which is expected to cause Carnival to generate negative EBITDA this year. Increasing cancellations due to the Omicron variant and the Russia-Ukraine war, on top of rising fuel and food costs have adversely impacted the company’s bottom line. In light of uncertainty around Carnival’s ability to generate sufficient free cash flows to service its debt, Moody’s predicts that its debt/EBITDA will be more than 7x in 2023. Rising interest rates and new ship purchase commitments in the next 2 years will also limit Carnival’s financial flexibility and any debt reduction efforts on the cruise line’s part. The company currently has an estimated $8.1bn in cash after adding $1bn from a common stock issuance in July. Moody’s expects that this amount of cash will be able to cover its negative cashflows up to 2023 and fulfill obligations on about $4.4bn of debt due in the next 2 years, ending 2023 with just $2bn in liquidity. Carnival is currently rated B by S&P.
Carnival’s 10.5% 2026s are trading at 102.5, 2.63 points lower to yield 9.62%.
Moody’s also downgraded peer Royal Caribbean from B1 to B2 with a negative outlook. Similar to that of Carnival, the rationale was a weaker than expected recovery this year. The rating agency expects Royal Caribbean to generate less than $1bn of EBITDA this year and anticipates that its debt/EBITDA will exceed 6.5x in 2023. The rating agency’s view is that Royal Caribbean still maintains sufficient liquidity, holding about $2.1bn in cash at the end of June and modest availability under its $3.2bn revolving credit facility that expires in 2024. Moody’s expects that it will be able to repay its remaining maturities even if it is unable to refinance.
Royal Caribbean’s 5.5% 2026s are currently trading at 81.56 cents to the dollar, down by 1.19 points to yield 11.3%.