S&P Upgrades Carnival Corp. (CCL) to 'A-'; Outlook Stable

S&P Global Ratings today said it raised its corporate credit and senior unsecured ratings on Carnival Corp. (NYSE: CCL) to 'A-' from 'BBB+', and removed the ratings from CreditWatch, where we had placed them with positive implications on June 30, 2016. The outlook is stable. At the same time, we affirmed our 'A-2' commercial paper rating on the company.

"The upgrade reflects Carnival's continued good operating performance and our expectation that cruise demand and pricing will grow in 2017 in a manner that will absorb measured capacity growth, which will allow Carnival to sustain lease and port commitment adjusted debt to EBITDA in the low-2x area and FFO to debt in the high-30% area, while continuing to return capital to shareholders," said S&P Global Ratings credit analyst Melissa Long.

These forecasted credit measures provide some cushion compared to our 2.5x adjusted debt to EBITDA and 35% FFO to debt downgrade thresholds, and provides Carnival flexibility to withstand some degree of revenue and EBITDA volatility in the event of economic weakness or a ship incident. Although Carnival has not articulated a specific leverage policy, we believe in either of these scenarios that Carnival's policy would be to reduce returns to shareholders as it has done in prior years to preserve credit measures inside of our downgrade thresholds. We believe it is most likely that the company would eliminate share repurchases for a period of time to allow credit measures to recover. While less likely, we believe Carnival may reduce its dividend, as it has in the past, if the impact of a future recession or accident is prolonged and severe.

The stable rating outlook reflects our belief that good anticipated cruise demand and pricing will allow Carnival to grow net yields across its portfolio of brands (on a constant currency basis) and that improving EBITDA and cash flow, also partly driven by lower fuel costs, will translate into leverage remaining in the low-2x area and FFO to debt sustained above 35%.

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