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Carnival Outlook Lowered to 'Negative'

On Oct. 29, 2003, Standard & Poor's Ratings Services revised its outlook for Carnival Corp. (CCL) to negative from stable. Concurrently, Standard & Poor's affirmed its 'A-' corporate credit rating and other ratings on the company. About $6.9 billion of debt was outstanding as of Carnival's fiscal third quarter ended Aug. 31, 2003.

The outlook revision follows Carnival's announcement that it will increase its dividend by 2 cents per share per quarter or about $60 million to $65 million per year. While this does not represent a substantial increase, it occurs at a point in which Carnival's credit measures are somewhat weaker than Standard & Poor's previous expectation. Moreover, Carnival is accepting delivery of eight ships between Aug. 31, 2003, and its fiscal year ending Nov. 30, 2004. In conjunction with maintenance capital spending and anticipated dividends, Standard & Poor's expects that $300 million to $400 million in additional external financing will be required during this period despite Carnival's substantial cash balances of $1.05 billion as of Aug. 31, 2003.

The ratings for Carnival reflect its position as the world's largest cruise company, owning more than a dozen brands including three of the largest five in the global cruise industry when measured by available lower berths: Carnival Cruise Lines, Holland America Line, and Princess Cruises. When all brands are considered, Carnival holds the leading market share in almost every major cruise region, and has long established itself as the most efficient operator in the industry. The ratings on Carnival are also based on the company's solid operating track record, experienced management team, and sizable cash flow base. These factors are offset by higher financial leverage due to the April 2003 combination of Carnival and P&O Princess Cruises, and substantial industry capacity growth in 2004 driven by Carnival's significant capital spending program. Carnival is scheduled to accept delivery of 13 ships through mid-2006.

Standard & Poor's expects the operating environment in the cruise industry to improve in 2004, driven by further recovery in the overall economy. However, industry capacity will be up substantially, and this is likely to continue to put pressure on pricing in the near term. Carnival's capacity is expected to increase by about 18% in fiscal 2004. Given this level of capacity growth and assuming that Carnival achieves additional cost synergies associated with the combination with P&O Princess Cruises, EBITDA is expected to grow meaningfully above the pro forma fiscal 2003 level. However, pricing power remains uncertain at this time and Standard & Poor's has not factored into its ratings EBITDA growth above capacity growth.

Beyond 2004, Carnival is expected to generate significant discretionary cash flow and will be in position to reduce debt leverage more meaningfully. As a result, credit measures are expected to be more in line with the ratings beginning in 2005. Based on its current business analysis, over time, Standard & Poor's is looking for Carnival to maintain debt to EBITDA at 2.5 times or better at the current ratings level. When calculated pro forma for the P&O Princess combination, it is expected that Carnival's debt to EBITDA will be in the high-2 to low-3 times range as of the fiscal year ending Nov. 30, 2003.

Liquidity: Carnival's liquidity position is expected to be adequate during the intermediate term. As of Aug. 31, 2003, Carnival had liquidity of $3.69 billion including $1.05 billion of cash, $1.9 billion available under its revolving credit facilities of $2.39 billion, and $736 million available under committed ship-financing arrangements. In addition, Standard & Poor's expects that cash from operating activities will exceed $2.5 billion per year beginning in fiscal 2004.

As previously stated, capital spending associated with ship deliveries is significant at $6.4 billion during the next three years, of which nearly $3 billion is due in the next 12 months. Debt maturities are modest at $259 million in fiscal 2004, but increase to $1.6 billion in 2005, and nearly $1.5 billion in 2006. Fiscal 2005 and 2006 maturities include $600 million and $536 million, respectively, of convertible notes associated with put options. Standard & Poor's believes that Carnival is adequately positioned to meet intermediate-term spending requirements with existing sources of liquidity, but may opportunistically access the capital markets.

Outlook: The negative outlook reflects credit measures that are somewhat weak for the current ratings and are expected to remain this way until fiscal 2005. The outlook further incorporates a period of significant capacity growth for Carnival in 2004, and a gradually improving operating environment. Ratings could be lowered if operating conditions are more challenging than anticipated in 2004, resulting credit measures weakening further. From Standard & Poor's RatingsDirect

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