Carnival Corporation's ratings upgraded by Moody's, positive outlook forecasted
Investing.com -- Moody's (NYSE: MCO ) Ratings has upgraded its ratings for Carnival Corporation (LON: CCL ), raising its corporate family rating (CFR) to Ba3 from B1. The probability of default rating (PDR) is also upgraded to Ba3-PD from B1-PD. The upgrades apply to Carnival Corporation's backed senior secured notes and backed senior secured bank credit facilities, which have been raised to Baa3 from Ba1, and backed senior unsecured notes, which have been upgraded to B1 from B2.
The ratings for Carnival (NYSE: CCL ) plc, a subsidiary of Carnival Corporation, have also been upgraded. The backed senior secured notes have been raised to Baa3 from Ba1 and the backed senior unsecured notes to B1 from B2. The Not Prime backed commercial paper ratings of both Carnival Corporation and Carnival plc remain affirmed. The rating of the backed taxable revenue bond issued by Long Beach, California, has been upgraded to B1 from B2. The speculative grade liquidity (SGL) rating remains unchanged at SGL-2.
These upgrades and the positive outlook are a reflection of improvements in Carnival's credit metrics up until the end of fiscal 2024 and expectations for further improvements this fiscal year. The company's Debt/EBITDA ratio fell to 4.6x at November 30, 2024 and is projected to approach 4.0x by the end of fiscal 2025 and 3.5x in 2026 due to modest earnings expansion and debt reduction. Moody's anticipates that demand will remain strong through and beyond 2025 and that free cash flow will expand annually through 2026.
The SGL-2 speculative grade liquidity rating is indicative of Carnival's good liquidity position. The company's cash and marketable securities were valued at $1.2 billion at the start of fiscal 2025, with free cash flow of at least $1.6 billion expected in 2025. The company's $2.9 billion revolver remains undrawn.
Carnival's Ba3 corporate family rating balances the company's leading position in the global ocean cruise industry against its still high, but improving financial leverage. Carnival operates nine brands, the most in the industry, and accounts for about 40% of the industry's annual revenue. It operates the most ships, representing 37% of industry capacity in 2024, and boards the most passengers. In 2024, Carnival's passenger count reached 13.5 million, 57% higher than the second largest cruise company, Royal Caribbean (NYSE: RCL ) Cruises Ltd.
Potential risks include cost inflation, including for fuel, demand's exposure to economic cycles, and competitive capacity increases in certain markets, particularly the Caribbean, which could affect pricing.
Moody's projects that Carnival's debt/EBITDA will approach 4.0x at the end of fiscal 2025. This level of leverage aligns with the cross-industry median for the Ba3 rating category. Operating margin in the mid-teens and funds from operations + interest to interest coverage approaching 4.0x at the end of 2025 support the Ba3 rating.
Ratings could be upgraded if Carnival continues to retire debt, resulting in declining financial leverage. Expectations for debt/EBITDA sustained below 4.0x and funds from operations plus interest to interest approaching 5.0x could support a ratings upgrade. Conversely, ratings could be downgraded if free cash flow is no better than breakeven, if funds from operations plus interest to interest sustain below 3.5x, or if debt/EBITDA approaches 4.5x.
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