S&P Global Ratings upgraded Carnival’s credit rating two notches to “BB-” on Friday (Dec 22), a day after the cruise operator posted better-than-expected results, helped by relatively strong bookings and higher prices.

The upgrade is a step towards the company returning to investment-grade status, which it lost in 2020, during the early part of the pandemic. On Thursday, Carnival posted a more than 40 per cent jump in quarterly revenue, and operating income of US$384 million compared with an operating loss of US$1.1 billion in the same quarter last year. 

“The company reported that it booked approximately two-thirds of its 2024 occupancy at considerably higher prices than in 2023, providing good revenue visibility,” S&P credit analysts Melissa A Long and Dan Daley wrote. “Recovery in occupancy, increased capacity, and higher prices should support significant Ebitda (earnings before interest, taxes, depreciation and amortisation) growth and additional leverage improvement in 2024.”

Moody’s Investors Service downgraded Carnival to “B2” in August 2022, which is the equivalent of two notches below S&P’s current level.  

Although S&P’s two-notch upgrade now puts Carnival on par with its competitor Royal Caribbean Cruises, which is also rated “BB-” by S&P, “Carnival is a few quarters behind Royal in its turnaround story”, Jody Lurie, senior credit analyst at Bloomberg Intelligence, wrote in a Friday note. 

Carnival had about US$30.6 billion of debt as of Nov 30, down from US$34.5 billion in the same period last year.  

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The company expects revenue growth to drive increases in its adjusted free cash flow, “which will be the primary driver for paying down our debt balances on our path back to investment grade”, said David Bernstein, Carnival’s chief financial officer, in a statement when it released its results. The business is “bouncing back” and there is a “real possibility” that they will tap the debt markets next year, he said in a phone interview on Friday.  

“It looks like there will be some opportunity to refinance and save on some interest costs,” he said. “Things have started to look better.”

S&P forecasts that the company’s adjusted ratio of debt to a measure of earnings, known as leverage, will improve to about five times by the end of fiscal 2024, after finishing the latest fiscal year at about 6.5 times. BLOOMBERG