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P&O CreditWatch Implications Revised Due to Postponed Merger

February 19, 2002

Standard & Poor's said that it had revised its CreditWatch implications to developing from negative on U.K.-based cruise operator P&O Princess Cruises PLC (triple-'B' long-term corporate credit rating). This action follows news that the shareholder vote on the proposed merger with Royal Caribbean Cruises Ltd. (RCL) has been postponed indefinitely after an unsolicited bid from Carnival Corp. The ratings on P&O Princess were initially placed on CreditWatch with negative implications on Nov. 20, 2001, to reflect a material increase in financial leverage, which the company is likely to incur if the proposed merger with RCL goes ahead. The revised CreditWatch status reflects the increased chances of P&O Princess' merger with the higher rated Carnival. Standard & Poor's believes the capital structure of the combined entity, based on Carnival's most recent offer, may be sufficiently robust to warrant a higher rating. The vote on the proposed merger with RCL has been delayed in order to allow shareholders to give more consideration to Carnival's latest bid. "The credit quality of the proposed P&O Princess/Carnival business will only be determined once the eventual cash component of Carnival's revised offer is established," said Standard & Poor's credit analyst Anna Overton. "Any potential benefits of an initially stronger financial profile must be weighed against the uncertainty of the industry's ability to stabilize yields after a difficult 2001." Under the terms of Carnival's new offer, P&O Princess shareholders would receive 0.30 Carnival shares per P&O Princess share, with a partial cash alternative of £2.50 ($3.60) per share. This amounts to about £5.50 per P&O Princess share, which would result in Carnival paying about $5.34 billion, of which up to 45% may be in cash if the partial cash alternative is taken up. In addition, Carnival would assume P&O Princess' outstanding debt, which was about $1.4 billion, net of cash balances, at Dec. 31, 2001. Although the eventual capital structure and operating projections for the proposed P&O Princess/Carnival business are not yet available, Standard & Poor's expects that, as ship deliveries are funded over the course of financial 2002, pro forma net debt to EBITDA would increase to more than 3 times (x), and is expected to remain at this level over the medium term. Based on P&O Princess' preliminary results for the year to Dec. 31, 2001, net debt to EBITDA was just less than 3x, with net interest coverage by EBITDA of just less than 6x.


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