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    Forecasting Credit Risk for the Cruise Industry: Can It Get Worse in the Asia-Pacific?

    June 2022

    Forecasting Credit Risk for the Cruise Industry: Can It Get Worse in the Asia-Pacific?

    Over the past two years, the cruise industry in the Asia-Pacific has seen a surge in corporate credit risk, pushing several companies to default. Dream Cruises, Star Cruises, and Crystal Cruises’ parent company, Genting Hong Kong (Genting HK), became the latest high-profile default victims of the COVID pandemic. Could such defaults have been accurately predicted with a high degree of advance warning? How bad could the cruise industry’s corporate credit risk become? We combine analytics for early warning default detection and alternative scenario forecasts to answer these questions.

    Like most cruise companies, Genting HK has struggled since the pandemic began, severely hit by Hong Kong’s strict zero-COVID policy. Genting HK filed for liquidation in January 2022. Moody’s Analytics industry-leading EDF™ (Expected Default Frequency) model and Early Warning System captured the company’s surging default risk and provided a 20-month advance warning prior to its default.

    Although the pandemic has become less disruptive, Russia’s military invasion of Ukraine has caused further surges in commodity prices and heightened supply chain risks. The cruise industry is not out of the woods. We analyze how these economic shocks and operations have affected the industry’s credit risk and forecast future risks under alternative macroeconomic scenarios.


    The cruise industry’s highly volatile and uncertain environment highlights the need to adopt timely and forward-looking analytics to help quantify and understand corporate credit risk. Designing such analytics and translating them into actionable insights is a challenging task. In this article, we demonstrate two leading analytics in action: early warning signals to understand deteriorating credit risks and alternative scenario projections of credit risks to help understand future trouble spots.

    Looking for credible early warning signals is a complex exercise, as potential distress can come from an array of sources. These include company financials and market information, as well as news media signals and the environment in which a company operates. With so many potential distress signals, especially during economic downturns, accurately predicting defaults with a high degree of advance warning is an essential task.

    While it is important to understand longitudinal and real-time corporate credit risk and flag companies that may default, it is also important to capture future macroeconomic uncertainty through a range of alternative scenarios. For this, we must carefully design plausible scenarios and forecast the corporate credit risk conditional on the scenarios. We must also ask: Should the economic conditions worsen in stressed scenarios; how bad can the default risk get?


    The COVID pandemic revealed the cruise industry’s high vulnerability and sensitivity to global macroeconomic changes. In early 2020, Genting HK’s EDF measure, which predicts forward-looking probability of default, surged, breaching the default trigger threshold that identifies the riskiest firms. This occurred 20 months before Genting HK filed for liquidation amid serious liquidity shortages and poor financial results. The recorded jump in the firm’s EDF measure was driven by increases in business and financial risks, fuelled by pandemic shocks, restricted travel, cancelled ship sailings, and government ship docking bans.

    The uncertainty caused by the Russia-Ukraine military conflict—and the still uncertain regulatory environments toward COVID management in some Asia-Pacific countries—are driving up corporate credit risk to the highest levels since 2008, as indicated by the cruise industry’s EDF levels in the region. The recent surge in oil prices, the largest fixed cost for cruise lines, threatens to result in a significant increase in corporate defaults—if the credit environment further deteriorates due to more uncertainties in the path of economic recovery.

    As economic volatility is likely to persist, we need to estimate the potential impact of a range of potential economic scenarios on credit risk. Moody’s Analytics Stressed EDF model allows us to perform this analysis under baseline and stressed scenarios. The results show that although a credit crisis has not yet materialized to drive up the cruise industry’s default risk to levels seen during the Global Financial Crisis, should the stressed scenarios realize, defaults for Asia-Pacific corporates would likely rise to levels surpassing the 2007–2008 economic crisis.

    Early Warning Signals for Asia’s Latest Pandemic Victim

    During the first quarter of 2022, Genting HK (HK: 678) became the industry’s latest high-profile victim of the pandemic. Using forward-looking credit risk signals from the public firm EDF model and our actionable Early Warning System, we capture the earliest signs of credit deterioration for Genting HK.

    To obtain an accurate warning signal, we define a trigger threshold calibrated by region and industry peer groups. When the EDF measure of the company is below its trigger, there may be no reason to worry. If the trigger threshold is crossed, however, it indicates a default warning for a firm, and the need to monitor if the high risk improves or deteriorates.

    Figure 1 illustrates how the EDF model captured the early signs of credit deterioration for Genting HK. Throughout its history, Genting HK’s EDF measure passed the trigger level twice: during the Global Financial Crisis and the COVID pandemic. The first breach was short-lived, followed by a steep fall, well below the trigger level. Hence, it did not warrant significant concern. In early 2020, Genting HK’s EDF measure again crossed the threshold. This time, the EDF levels stayed well above the trigger, with average values five times higher than after the Global Financial Crisis, indicating a noteworthy default warning. Thus, the Early Warning System signaled important credit deterioration 20 months before Genting HK’s liquidation filing in early 2022.

    Figure 2 displays the factors driving Genting’s EDF measures. These measures are driven by two fundamental risk factors: business risk and financial risk. Business risk is measured by the volatility of a company’s asset value, which includes physical, non-physical, and financial assets. Financial risk is measured by the ratio between a company’s default point and its asset value. In the context of our model, the default point is where creditors lose faith in the firm’s ability to service its current obligation, stop extending credit, and push the firm into default. Theoretically, default occurs when the firm’s asset value falls to the default point level. During the Global Financial Crisis, Genting’s market value of assets dropped abruptly, reducing its spread against the default point and pushing the EDF values up for a short period of time. Between 2008 and 2015, the relationship between these two drivers had a consistent directional movement, maintaining stable EDF levels. However, during the last six years, the default point has been rising, indicating that the firm’s credit risk is reflected in its increased market leverage.

    Forecasting Cruise Industry Credit Risk: How Bad Can It Get?

    For our scenario analysis, we leverage Moody’s Analytics Baseline (BL) and two stressed scenarios: Protracted Slump (S4) and Stagflation (S6), which account for different levels of severity.1 The latest BL scenario assumes: governments transition to treating COVID as endemic, and shocks to energy and food commodity prices caused by the Russia-Ukraine military conflict peak during the second quarter and do not result in major disruptions to supply chains and production.

    Under the stressed scenario S4, the military conflict worsens dramatically, expanding beyond Ukraine and causing commodity prices to rise more sharply than in BL, with major interruptions to supply chains. COVID flares once again before abating in early 2023. The S6 scenario is designed as a stagflation scenario. This scenario assumes infections abate in mid-2022, while supply bottlenecks persist due to exports of components and commodities from Ukraine and Russia being disrupted. This causes oil prices to rise faster than in the baseline in mid-2022, although slower than in S4, and remain higher than the baseline through 2024.

    Figure 3 shows the historical and projected effects on average corporate credit risk in the Asia-Pacific cruise industry under alternative economic scenarios. To obtain forecasted EDF values, we condition our forward-looking corporate default probabilities on firm-specific information as well as on macroeconomic factors like GDP, consumer spending, and unemployment rate, which differ across alternative scenarios.

    As Figure 3 shows, current economic conditions would not cause corporate default probabilities to jump to the levels seen during the Global Financial Crisis. Nevertheless, the pandemic and the resulting downturn caused EDF measures to rise to their highest level since 2008. The peak EDF levels in the stressed scenarios are projected to be higher than during the last 20 years. The EDF forecasts stay well above the pre-pandemic levels throughout the forecast horizon in all scenarios, rivalling the level during the Global Financial Crisis. The BL scenario projects an average EDF measure of 5.2%, while the S4 and S6 stressed scenarios exhibit an increase in credit risk, peaking during the last quarter of 2022 at 7.5% and 11%, respectively. As economic conditions gradually improve, the projected EDF level is falling and remains relatively stable, although above the pre-pandemic years.


    The scenario forecasts are updated monthly; the latest forecasts as of March 2022 are used in this paper.

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