Carnival Corp’s (CCL) credit rating was cut to non-investment grade or junk status at Standard & Poor’s (S&P) as the rating agency expects the cruise industry to grapple with an extended period of weak demand through at least 2021.
S&P downgraded the cruise operator’s secured bonds to BB+ from BBB-, and its unsecured bonds to BB- from BBB-. The overall issuer credit rating was cut to BB- from BBB-. Shares dropped 2.2% to $17.61 in after-market trading on Tuesday.
“We forecast that the company’s credit measures will remain very weak through 2021 and anticipate that its adjusted leverage may potentially exceed 10x in 2021 following a significant deterioration in its performance in 2020,” S&P credit analyst Ariel Silverberg said in a statement.
The credit rating agency expects Carnival’s EBITDA to be significantly more negative in 2020 due to higher-than-anticipated expenses to repatriate its guests and crew and the incremental expenses associated with its need to keep more ships out of service for longer.
The cruise operator is likely to begin to bring its capacity back online in a phased manner as early as September, S&P said. However, initial itineraries are poised to be limited due to continued port closures and local government and health authority requirements. Additionally, it may take Carnival multiple months to bring all of its ships back into service, the rating agency said.
As a result, S&P now estimates that debt levels will be “materially higher” in 2021 amounting to about $25 billion, compared with a prior forecast of about $20 billion. As of May 31, Carnival had $7.6 billion of available liquidity.
“We believe this liquidity, in conjunction with the proceeds from its proposed $1.5 billion term loan and committed ship financing, should be sufficient to cover the company’s cash needs for the remainder of the current fiscal year and into 2021,” Silverberg said.
Carnival shares have shed as much as 65% of their value following major coronavirus outbreaks on a number of cruise ships, including its Diamond Princess. The stock has seen some relief earlier this month as the cruise operator reported a surge in bookings amid prospects that that it may restart some cruises in August.
Deutsche Bank analyst Chris Woronka yesterday raised the firm’s price target to $13 from $11, saying that although cruise stocks have come off their June 8 highs, a “curiously healthy dose of optimism” about the out-years remains.
Woronka believes that the industry’s key players are undertaking actions that will ultimately allow them to emerge from the COVID-19 downturn in the best possible position to restore profitability.
However, the analyst still maintains a Hold rating on the stock as he says the company “has come too far, too fast” and he’s wary of certain Street forecasts that indicate a V-shaped recovery in cruise earnings.
Overall the Wall Street analyst outlook is in line with Woronka’s stance. The Hold consensus shows 12 Hold ratings and 4 Sell ratings versus 3 Buy ratings. The average price target stands at $16.13, reflecting 6.1% downside potential over the coming year. (See CCL’s stock analysis on TipRanks).
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