Coronavirus could pose threat to cruise ship credit ratings

FILE PHOTO: Cruise ship MS Empress of the Seas, operated by Royal Caribbean International, leaves the bay of Havana, Cuba, June 5, 2019. REUTERS/Fernando Medina

NEW YORK (Reuters) – The impact on cruise companies’ earnings from canceled trips, steep discounts and ships quarantined over coronavirus concerns could pose credit risks, said ratings agencies Moody’s Investors Service and S&P Global Ratings.

Carnival Corp <CCL.N> and Royal Caribbean Cruises <RCL.N> said last week that scrapped itineraries in Asia due to the outbreak would affect their earnings per share more than expected. Norwegian Cruise Line Holdings <NCLH.N> on Thursday forecast an impact of 75 cents per share on full-year adjusted earnings, citing virus-linked fallout.

“It reduces the flexibility that these companies have in their rating categories,” said Moody’s analyst Peter Trombetta. “It removes some of their cushion.”

The earnings impact on both Carnival and Royal Caribbean were deemed “credit negative” by Moody’s although neither company’s credit ratings were immediately affected.

In a note published on Wednesday, S&P Global analysts wrote that the impact on Carnival’s cash flow from the coronavirus outbreak is expected to drive leverage above the 2.5 debt to EBITDA ratio in 2020, the threshold that would normally warrant a downgrade if breached. However, if the analysts believe the impact on Carnival to be temporary and that leverage could be lowered within a year or two, they do not expect to downgrade the rating.

Financially, “Carnival would be impacted the most. They also have the most capacity in China. So they would probably see the biggest hit to earnings,” said Trombetta.

In response to a request for comment, a Carnival spokesman said, “The primary impact on the cruise industry is focused mostly on China, which is an emerging market for the cruise industry, so the impact is relatively small.” Neither Royal Caribbean nor Norwegian responded to a request for comment.

While the outbreak casts a shadow on the cruise industry in the short-term, credit analysts said they did not expect the effect to be lasting.

“We have very short memories,” said Trombetta, citing disasters like the wreck of the Costa Concordia ship in 2012, which killed 32 people. “People want to go on cruises. Once some time passes, that demand – so far – seems to keep coming back.”

Fitch Ratings, the third of the three largest credit ratings agencies does not publicly rate the cruise companies, but analyst Colin Mansfield, who covers the gaming, lodging and leisure sectors, said he expected the consequences of the epidemic to be temporary.

And yet, Norwegian Cruise Line Chief Executive Frank Del Rio noted on a call with investors on Thursday that the coronavirus in particular “has caused near panic in the traveling public.”

“The decrease in bookings is similar to what we see – we have seen in past similar events, whether they be geopolitical during the financial crisis, et cetera. What’s a little bit different about this one is the increase in cancellations.”

That bias could create longer-term problems for the industry. There is some potential for “a softer demand picture in general if cruise gets some bad PR from this that sticks in peoples’ minds for any period of time,” said Paul Golding, analyst at Macquarie Capital.

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