Investing.com -- Fitch Ratings has upgraded the Long-Term Issuer Default Rating (IDR) for Carnival Corporation (LON: CCL ), Carnival (NYSE: CCL ) plc, and Carnival Holdings (Bermuda) II Limited, collectively known as ’Carnival’, to ’BB+’ from ’BB’. Fitch has also confirmed the ratings of the first lien term loans and senior secured notes at ’BBB-’, with a Recovery Rating of RR1. Additionally, the rating agency has elevated the rating on the senior unsecured notes to ’BB+’/RR4, up from ’BB’/RR4.
Fitch has also assigned a ’BB+’/RR4 rating to the proposed issuance of 2031 senior unsecured notes. The Rating Outlook remains Positive. The estimated EBITDA leverage for Carnival in 2025 is 4.1x, which aligns with the ’BB+’ range. The company’s scale, high operating margins, strong liquidity, and anticipated continuous deleveraging are beneficial factors. Potential risks include a possible economic downturn that could reduce leisure demand and increase fuel prices.
The positive outlook is based on Fitch’s expectation that strong booking activity will persist and that management’s dedication to reducing debt will strengthen credit metrics. Carnival, along with Royal Caribbean (NYSE: RCL ) and Norwegian Cruise Lines, has reported record bookings for both 2025 and 2026. The long-term nature of cruise bookings provides strong visibility as cancellations are typically not significant.
Carnival’s debt significantly increased during the Covid-19 pandemic to cover operating costs and fund ship deliveries. Fitch anticipates a decline in debt to $27 billion in 2025, down from $35.6 billion in 2022. The rating agency also expects growth in Free Cash Flow (FCF) and management’s commitment to investment-grade metrics will lead to a swift improvement in credit metrics.
Fitch expects EBITDA growth, lower interest costs from debt reduction, and lower growth capex to result in higher FCF. Fitch estimates FCF will grow to $1.6 billion in 2025 and significantly thereafter. Carnival is also expected to benefit from higher customer deposits due to the continued growth in bookings.
Carnival is the world’s largest cruise operator with multiple brands. The company holds the top market share in the North American and European markets, contributing most of its EBITDA. The company’s scale has historically been a credit positive, but pandemic-related disruptions severely impacted Carnival due to its high fixed-cost structure, resulting in delayed ship deliveries.
Carnival is the largest cruise ship operator in terms of berths and passengers carried compared to Royal Caribbean Inc. and Norwegian Cruise Line (NYSE: NCLH ) Holdings, Ltd. Carnival has significantly greater scale and geographic diversification than its comparable peers, although leverage is higher. Fitch believes Carnival’s scale and FCF generation will result in significantly improved credit metrics that will be more indicative of an investment-grade credit over the forecast horizon.
Factors that could lead to negative rating action or downgrade include EBITDA Leverage sustaining above 4.5x, an economic or geopolitical event that lasts for an extended period and results in a deterioration of the capital structure, and a more aggressive financial policy. Factors that could lead to positive rating action or upgrade include sustainable positive FCF with application to debt payment, EBITDA leverage approaching 4.0x, and a debt structure that does not include secured or guaranteed debt.
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