Carnival Corp. credit rating upgraded to ’BB+’ at S&P due to anticipated credit metrics improvement

Investing.com -- S&P Global Ratings has upgraded the issuer credit rating of global cruise operator Carnival (NYSE:CCL) Corp. from ’BB’ to ’BB+’ due to the company’s better than expected performance in the first quarter of fiscal 2025. Carnival Corp. has also outperformed its guidance due to strong close-in bookings and onboard revenue. The company has booked more than 80% of its 2025 inventory at prices higher than those in 2024, offering a clear visibility of its revenue.

The credit rating agency expects Carnival Corp.’s revenue and EBITDA to grow in fiscal 2025, which ends in November 2025. This, along with recent refinancing activities that will decrease interest expense and debt repayment, is expected to improve funds from operations (FFO) to debt above the 20% upgrade threshold in fiscal 2025. S&P Global Ratings also anticipates that the company’s adjusted debt to EBITDA will decrease to about 3.8x by the end of fiscal 2025, well under the 4.5x upgrade threshold.

In line with the issuer credit upgrade, S&P Global Ratings has also raised its issue-level ratings on Carnival’s unsecured debt by one notch to ‘BB+’ from ‘BB’. However, the ‘BBB-’ issue-level rating on Carnival’s secured debt remains unchanged, as most speculative-grade issuers are capped at ‘BBB-’ regardless of the recovery rating.

The stable outlook for Carnival Corp. reflects expectations that the company’s forward bookings and recently completed refinancings will support FFO to debt improving above 20% in fiscal 2025 and to approximately 25% in fiscal 2026. It also suggests an improvement in S&P Global Ratings adjusted net debt to EBITDA to around 3.8x by the end of fiscal 2025.

Carnival Corp.’s strong booking position for the remainder of fiscal 2025 and robust pricing will support continued improvement in credit measures this year. The company’s first fiscal quarter, which ended on February 28, 2025, outperformed due to strong close-in bookings and onboard revenue, leading the company to raise its net yield guidance for the year. Carnival Corp. now expects net yields on a constant currency basis to increase by 4.7% compared to the previous forecast of 4.2%.

S&P Global Ratings estimates that Carnival Corp.’s revenue will increase around 4% and EBITDA will increase about 8% in 2025. As a result, the company’s fiscal 2025 S&P Global Ratings-adjusted debt to EBITDA is expected to improve to approximately 3.8x by the end of the year from 4.4x in fiscal 2024. This level of leverage is well below the 4.5x upgrade threshold for Carnival Corp.

Recently, Carnival Corp. completed refinancings that will support further interest reduction and increase cash available for debt reduction, improving FFO to debt and leverage. The company recently refinanced its two highest cost bonds--$2.03 billion of 10.375% senior priority notes and $1 billion of 10.5% senior notes. The two new bonds have interest rates that are 425 basis points (bps) and 475 bps lower, respectively. As a result, the company will save approximately $135 million annually in interest expense.

Carnival Corp.’s ship delivery schedule will support debt repayment over the next two years, further improving credit measures. The company will take delivery of only one ship in fiscal 2025 and no ships in fiscal 2026. This follows three large ship deliveries in fiscal 2024. Carnival Corp. resumed ordering ships earlier this year and has one ship scheduled for delivery in each of fiscals 2027, 2028, 2029, 2031, and 2033. These orders align with Carnival Corp.’s plans to target one to two ship deliveries per year.

Despite potential macroeconomic slowdowns, demand for future cruise bookings remains strong. If the global economy unexpectedly slows more than current expectations, the risk of discounting to fill the ships may be lower than in previous economic slowdowns. This is because the price differential between a cruise vacation and comparable land-based vacation remains wider than usual. This gap, along with shorter cruise itineraries, could benefit cruise operators like Carnival Corp.

The stable outlook reflects expectations that Carnival Corp.’s forward bookings and recently completed refinancings will support FFO to debt improving above 20% in fiscal 2025 and to about 25% in fiscal 2026. In addition, Carnival Corp.’s S&P Global Ratings adjusted net debt to EBITDA is expected to improve to around 3.8x by the end of fiscal 2025 from about 4.4 at the end of fiscal 2024.

S&P Global Ratings could lower its rating on Carnival Corp. if it believes FFO to debt will sustain below 20% and S&P Global Ratings adjusted net debt to EBITDA will increase above 4.5x. This could occur if operating performance in 2025 is weaker than expected or bookings for 2026 deteriorate materially. An investment-grade rating for Carnival Corp. is unlikely over the next 12 months due to forecasted credit measures and macroeconomic uncertainty. However, the company could be upgraded to ‘BBB-’ if certain conditions are met.

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