Moody’s May Now Raise P&O Princess Rating

Thursday, January 09, 2003
Moody's today has changed the direction of its current review of the Baa3 long-term debt rating for P&O Princess Cruises PLC to possible upgrade from developing. The action was prompted by the announcement of the Board of P&O Princess that it has agreed and recommended Carnival Corporation's ("Carnival"; A2 on review for possible downgrade) proposal to combine with P&O Princess in a dual listed listed company ("DLC") structure. Accordingly, P&O Princess and Carnival have entered into an implementation agreement to effect the DLC transaction. With these agreements, a merger with Royal Caribbean as previously contemplated has become unlikely and the rating pressure resulting from such a scenario has eased. Consequently, the current Baa3 rating for P&O Princess has become the de-facto rating floor for the remaining two scenarios, either a full combination as outlined above (likely) or a failure to complete (less likely).

Moody's expects to conclude the rating review within the first calendar quarter subject to assessment of the business plan of the combined group and clarification about the ranking of various classes of debt in the capital structure of the combined entity. P&O Princess's current ratings reflect the company's established brand name and strong market position in the cruise industry and the modern fleet of ship, the company's sensitivity to consumer spending as well as the requirement to contain unit costs in light of expected further price erosion. However, the company's rating also accounts for the significant investment program funded by additional debt. Due to anticipated over-capacity, a weak economy, and prevailing geo-political risks (such as a war in Iraq), Moody's expects the operating environment of the industry to remain challenging. The possibility of a combination with either Carnival or Royal Carribbean was considered in the rating.

The review of Princess Cruises's rating will assess the financial profile, expected cost savings, integration risks and strategic position of the combined companies as well as the ranking of P&O Princess's existing debt in the DLC capital structure and the strategic and financial support of the group for P&O Princess's financial obligations."

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