Fitch Revises Rtg Outlook To Neg On Carnival Corp.; P&O Princess Remains On Rtg Outlook Neg; Rtgs Affd.

Business Editors

CHICAGO--(BUSINESS WIRE)--Sept. 28, 2001

Fitch has affirmed the ratings of Carnival Corporation (NYSE:CCL) and revised the Rating Outlook to Negative from Stable following the Sept. 11, 2001 attacks on the World Trade Center and the Pentagon. Fitch currently rates CCL's senior debt `A'. The affirmation also applies to the commercial paper program of CCL currently rated `F1'. The `BBB+'/`F2' ratings for P&O Princess Cruises PLC are affirmed and its Rating Outlook remains Negative.

Fitch expects the terrorist attacks, combined with existing soft conditions facing the industry, to have a negative impact on the cruise industry during the near term. Yields, especially in the luxury segment, were already under pressure as a result of the slowing economy and significant increases in capacity in the industry. As a result of the attacks, Fitch expects further severe declines in the near term in both price and occupancy resulting in a dramatic yield contraction. The drop in yields comes at a time when the industry is expected to take on substantial new capacity. Ten new vessels are scheduled to be delivered to the top three industry participants in the next 15 months. Contracts for the new vessels cannot be cancelled and delivery of new ships cannot be unilaterally deferred.

It is estimated that more than half of all cruise passengers use air travel to join cruises. While CCL is less reliant on air travel than other major industry competitors, a return of consumer confidence in flying and taking cruise vacations is difficult to predict at this time. While fourth quarter 2001 bookings are already known, and are subject to standard cancellation fees, Fitch expects meaningful declines in profitability for the quarter due to cancellations. In addition, first quarter 2002 net bookings (booking less cancellations) could drop substantially as well.

Due to the fixed cost structure inherent in their operations, it will be difficult for operators to prevent substantial declines in operating cash flow in the near term. Individual rating action will depend upon, among other factors, the company's ability to reduce its operating leverage to address potentially lower demand over the intermediate term, prevent further declines in operating cash flow, maintain access to external sources of funds, and fund its ship building programs.

Cruise operators have the ability to partially mitigate the adverse effects of the attacks. Operators have the flexibility to change embarkation/debarkation points to ports perceived to be more secure, change cruise itineraries in regard to destination and length of cruise, and if necessary, 'moth ball' certain ships until demand returns to more normal levels. Fitch will be considering these factors as well as various macroeconomic and industry fundamentals in the near future.

CCL will embark upon an aggressive fleet expansion program over the next several years, which consists of 15 new vessels at an investment of approximately $6.6 billion. Starting in December 2001, CCL will take delivery of the first of four ships scheduled to begin operating in 2002. However, the remaining ship deliveries are more back-end loaded with three ships scheduled to enter service from August through December. Fitch had expected a majority of the fleet program to be funded primarily through internally generated funds with periodic borrowings. Fitch will focus on CCL's cash flow and its ability to internally fund capital expenditures. In addition to the company's projected capacity increases, CCL's major competitors, Royal Caribbean and Princess, are also engaged in aggressive expansion. However, due to the recent bankruptcy filing of Renaissance Cruises and the possibility that smaller cruise operators already in financial distress could face further financial pressure, industry capacity could be reduced over the near term.

CCL's financial position was relatively solid at the time of the terrorist attacks with comparatively low leverage (net debt/EBITDA of approximately one time) and high EBITDA margins (32.5%) for the trailing 12 months ended Aug. 31, 2001. CCL's strong liquidity position includes $1.2 billion cash and short-term investments and full availability under its $1.625 billion revolving credit facilities at Aug. 31, 2001. Debt maturities include $160 million in 2001 and $22 million in 2002.

P&O Princess Cruises PLC is currently rated `BBB+'/`F2' and remains on Rating Outlook Negative. P&O Princess shares comparable operational attributes as CCL in terms of exposure to the U.S. markets (P&O H101 profit split was 77% U.S., 23% European), the degree of reliance on plane journeys to start certain cruises, and the benefit of certain non-cancelable deposit receipts for fourth quarter 2001 bookings. Given P&O Cruises' exposure to sector-wide competition and pressure on yields, combined with this company's new deliveries' potential burden on its fiscal year 2002 and fiscal year 2003 results under this scenario, Fitch had already placed its `BBB+' rating on Rating Outlook Negative (July 2001). Recently, P&O Cruises announced some changes to its 2002 itinerary to cater for hesitance by its customer base to start their holiday by flying and has therefore designated certain ships to round trips or shorter cruises from more convenient locations. P&O Princess has also taken one (aging) ship out of circulation for six months, with minimum impact on profit.

Fitch will continue to closely monitor developments in the industry and will take further rating action as necessary.