Fitch Affirms Carnival's Issuer Default Rating at 'A-'; Outlook Stable.

CHICAGO -- Fitch has affirmed Carnival Corp and plc's credit ratings as follows:

--Issuer Default Rating at 'A-';

--Senior unsecured debt at 'A-';

--Short-term debt/commercial paper at 'F2'.

The ratings apply to roughly $6 billion of outstanding debt and the Outlook remains Stable. In addition, Fitch has assigned an 'A-' rating to Carnival's unsecured $2.1 billion multi-currency credit facility expiring in 2010.

Carnival's ratings reflect the company's ample liquidity position, robust cash flow generation ability, market-leading competitive position and favorable industrywide supply/demand outlook for the next few years. Although the company's share repurchase program prevents deleveraging in the short-term, Fitch estimates Carnival should be able to maintain current leverage through 2007 and could delever thereafter. Cash flow coverage measures should also remain stable despite a weaker operating environment relative to the last couple of years.

While cruise demand is decelerating, Fitch notes that it is returning to a more normal level in 2006, rather than above-average years in 2004-2005 that were influenced by a strong economy and recovery from the travel downturn following 9/11 and the 2003 Iraq conflict. Fitch believes that the supply/demand outlook remains favorable over the next 12-18 months. Although economic growth is slowing, the economy is still growing at a healthy level, and cruise ticket yields are just now approaching peak levels from 1999. Furthermore, industry supply growth has moderated to below historic averages through at least 2009.

Key credit concerns center on continuing increases in fuel prices, the potential for a consumer-driven economic slowdown and the continuation of shareholder-friendly capital allocation decisions.

Fuel

Recent forward fuel prices based on the company's guidance reflect a fuel cost per unit increase of 34% in 2006 and 4% in 2007 after a 32% increase in 2005 and an 8% increase in 2004. Capacity units are measured in available lower berth days, or ALBDs. Fuel costs account for roughly 8%-9% of Carnival's revenues in 2006 compared to 5% in 2003. Despite the significant increase, fuel makes up much less of the cost structure relative to the airlines, for example, where fuel can be 25%-30% of revenues. Carnival has resisted a widespread fuel surcharge but has been testing it in Europe with its Costa brand (Southern Europe market), so further fuel price increases could be mitigated if the surcharge is implemented fleetwide. A 10 percentage point swing in the fuel cost increase per ALBD equates to roughly $107 million in 2007 EBITDA.

More concerning than the direct cost of a spike in fuel prices is the impact it could have on the consumer and the economy. Carnival has already seen softness in its North American-sourced Caribbean bookings in 2006, causing it to discount heavily in that market, although more premium itineraries such as Europe and Alaska have seen stronger demand. The short Caribbean product has seen more pressure than the long Caribbean, which indicates that Carnival is feeling the most pressure in its lower end, mass market business, which typically attracts a higher level of first-time cruisers. Carnival's non-North American sourced business has been booking well and has been offsetting the weakness noted above.

As a result, Fitch estimates net yields (net revenue per ALBD) to increase by approximately 1% to 2% in 2006, below the 6.7% increase in 2005 and 9.8% increase in 2004. However, the low single-digit increase is more in line with the industry's long-term trend. So the 2006 revenue growth pattern is more typical of the company's history, while 2004 and 2005 were above-average in light of the demand recovery following softness in 2002-2003. Additional factors to consider for 2007 are the possible implementation of passport requirements for Caribbean cruises (although it is possible that will be pushed back to 2008) and the continued impact of the impaired Cozumel port, which was severely damaged last hurricane season and will not be fully operational again until 2008. As a result, Fitch is conservatively assuming a 1% net yield increase in 2007. A one percentage point swing in the net yield increase equates to roughly $100 million in 2007 EBITDA.

Capital Expenditures

Carnival is likely to spend $2.4 billion in capital expenditures in 2006 and roughly $3 billion-$3.5 billion annually in capital expenditures from 2007-2008. The company's capital expenditure program is highly visible as it currently has 15 ships scheduled for delivery from 2007-2010 with options for another three ships in 2010. Shipyards are mostly full through 2009. The company has a relatively smooth delivery schedule and expects to take delivery of 4-5 ships annually for the next several years.

Capital Allocation

Fitch believes the company will continue to be shareholder-friendly in regards to capital allocation decisions. Carnival has increased its dividend and share repurchase over the past 18-24 months and Fitch believes the company will favor returning cash to shareholders rather than reducing debt. Following the acquisition of P&O Princess in 2003 the Arison family's ownership was diluted, which increased the amount of shares the company is able to buy back. Carnival has bought back $1 billion worth of stock in the past 12 months and recently authorized another $1 billion program that Fitch assumes Carnival will complete in 2007. Carnival has also increased its dividends aggressively since mid-2003, although the pace of increases has slowed in recent quarters and Fitch assumes dividend growth will continue to moderate. Dividends should be roughly $800 million in 2006 and Fitch estimates $930 million-$960 million in 2007 (based on an assumed $0.05 increase in the quarterly dividend per share, which would be the same increase as a year ago.) That compares to dividends of $400 million in 2004 and $566 million in 2005.

Liquidity and Financial Flexibility

A factor in Carnival's 'A-' credit rating is its financial flexibility, including its strong liquidity position. As of May 31, 2006, Carnival's liquidity stood at $3.64 billion, consisting of $583 million of cash and short-term investments, $1.72 billion available under its revolving credit facility and $1.34 billion available under export credit financing facilities for four of its ships currently on order. The revolving credit facility matures in 2010 and is a multi-currency facility with US$1.2 billion, EUR400 million and GBP200 million; the credit facility aggregates to US$2.07 billion as of current exchange rates. Carnival also has multi-currency commercial paper programs supported by the credit facility and had US$347 million outstanding as of May 31, 2006. Based on its recent success negotiating existing export credit facilities at attractive terms, Fitch believes Carnival may be able to tap the export credit market to finance additional ships on its orderbook.

Debt Structure

As of May 31, 2006, Carnival had $7.25 billion in debt, of which $1.31 billion was secured debt and $5.94 billion was unsecured debt (including $767 million short-term debt), compared to $1.38 billion of secured and $5.98 billion of unsecured debt (including $300 million short-term debt) as of fiscal year-end (FYE) 2005. Of the unsecured debt, roughly $399 million is at the subsidiary level as of May 31, 2006, down from $970 million at Nov. 30, 2005. Therefore, roughly 24% of total consolidated debt has structural preference over the senior unsecured debt of Corp and plc, down from 32% at FYE2005. The company has been phasing out its secured debt, which exists primarily as a result of its merger with P&O Princess in 2003. Carnival is not likely to issue any additional secured debt, and based on its principal payment schedule it should work down its secured debt to $1.2 billion by FYE2006, $1 billion by FYE2007 and $890 million by FYE2008. However, some of the subsidiary debt (roughly $300 million) will remain as Carnival has tax and interest deductibility benefits by keeping some debt (mostly short-term) at the subsidiary level. As of the company's last 10K, debt maturities over the next three years are sizeable with $1.04 billion in 2007, $1.67 billion in 2008 and $0.17 billion in 2009. However, roughly $600 million of the amount due in 2008 is from a put-option on a convertible maturity that is not expected to be put back to the company based on current trading levels. Most of the debt coming due in 2007-2008 will be refinanced by export credits.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.