AIG Credit Crisis Poses Risks to Carnival

The tidal wave from the implosion of insurance giant American International Group is spreading far beyond Wall Street. Carnival Corp., the largest cruise ship operator in the world, with a portfolio of cruise brands that includes Carnival Cruise Lines, Princess and Cunard Line, reported in its third-quarter 10-Q filed with the SEC on Friday that AIG is the payment intermediary for some of its estimated $1.06 billion in contingent obligations to participants in certain of its lease-out and lease back type transactions for three of its ships:

In September 2008, the credit ratings of AIG and its subsidiaries involved with two of these transactions were downgraded from AA- to A-. As a result of this downgrade, AIG is required to pledge collateral to support their payment obligations in amounts that will be determined in accordance with the terms of the payment undertaking agreements. Based on the recently announced $85 billion revolving credit facility from the Federal Reserve Bank of New York to AIG, we believe that it is likely that AIG will continue to perform its obligations under the payment undertaking agreements.

Rising spot prices for fuel, sluggish bookings, and lower bunker rates -- and now the cruise ship operator has to steer clear of an iceberg floating down Wall Street, too. In the unlikely event that AIG does not pledge collateral as required, the estimated amount of Carnival's loss could be as high as $170 million.

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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