Moody's Investors Service says that the US cruise sector is bracing for bleak performance over the next two years, as coronavirus pandemic pressures have cut a deep wake through the sector's performance since February and resulted in a rash of cruise downgrades. Since March 11, 2020, the rating agency has taken 13 rating actions in this sector, including a total of eight downgrades.

"Following recent downgrades of the only two investment grade cruise companies - Carnival and Royal Caribbean - our rated universe for this group is now entirely spec grade, an indication of the sector's growing duress," says Peter Trombetta, a Moody's Assistant Vice-President – Analyst.

"Fallout from the coronavirus, including suspended operations and our expectation of a weak operating environment when cruising eventually resumes, will cause cash flow generation, leverage and coverage to be weak for at least two years," adds Trombetta.

Debt and equity issuance will keep the large public cruise companies afloat through at least 2020. Carnival, Royal Caribbean and NCL Corporation Ltd. have each raised debt and/or equity to bolster their liquidity to help ensure that they can survive this period of suspended operations and significant cash burn.

Our assumption is that cruise operations will continue to be suspended in the US beyond the Centers for Disease Control and Prevention's (CDC) no sail order date of July 24. In fact, without sufficient protocols in place to ensure the health of crew and passengers, the no sail order could be in place through most of 2020. As companies have sufficient liquidity to get through 2020 without generating revenue from cruises, Moody's focus has shifted to demand trends for cruises in 2021.

Cruises will also need to adapt to post-coronavirus norms and work within CDC guidelines to maintain the safety of its crew and passengers, including social distancing requirements. In our view this could mean lower occupancy on board, staggered embarkation to reduce lines in the terminal, and less crowded bars and restaurants which will pressure ship-level profitability.

When operations resume, economic weakness could limit demand. Our current macroeconomic forecast calls for G-20 advanced economies as a group to contract by 5.8% in 2020, with some improvement in 2021 but not back to pre-coronavirus levels. High unemployment, change in consumption of certain activities that require a high degree of human contact, and the possibility that the pandemic is not controlled could mean the recovery is more drawn out in some countries.

Moody's expects companies in this hard-hit sector will eventually be able to deleverage through cost cutting measures and an eventual improvement in demand once operations resume. However it will take a considerable amount of time to return to pre-coronavirus metric levels – perhaps four to five years.