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."