Investing.com -- Moody’s Ratings has upgraded the senior unsecured ratings of Carrier Global (NYSE: CARR ) Corporation (Carrier) from Baa2 to Baa1, while maintaining a positive outlook. Carrier’s commercial paper rating of P-2 has also been confirmed by Moody’s.

The upgrade in ratings is largely due to Carrier’s successful strategy to streamline its business into a focused heating, air conditioning (HVAC), and transport refrigeration company. The company has been integrating Viessmann Group GmbH & Co. KG, acquired in January 2024, and has sold its building security, fire suppression, and commercial refrigeration businesses in four separate transactions throughout 2024.

Carrier’s efforts have resulted in a high teens EBITDA margin and a reduction of its debt/EBITDA to 2.7x at the end of 2024. Moody’s expects this high EBITDA margin and lower financial leverage to continue. The positive outlook is also based on the anticipation of strong demand for Carrier’s HVAC products and services over a multi-year period.

The Baa1 senior unsecured rating reflects Carrier’s strong brand recognition and leading market positions in the global HVAC and transport refrigeration product and services markets. It is expected that Carrier will continue to leverage its large installed base to grow its more profitable aftermarket and services revenue.

The acquisition of Viessmann’s climate solutions business has also strengthened Carrier’s position in the European heat pump and energy transition end markets. Moody’s expects continued strength in commercial HVAC and normalization in the residential HVAC market to counteract softer demand for transport refrigeration through at least the first half of 2025.

However, the ratings also take into account the cyclical nature of Carrier’s businesses, especially its transport refrigeration business. There is also a near-term softness in the residential and light commercial markets in Europe and China. Current and potential tariffs are a credit risk that could temper margin growth in 2025.

Despite these challenges, Moody’s believes that positive pricing actions, productivity initiatives, greater output by Carrier’s US-based facilities, and synergy realization will help the company manage inflationary pressure and tariff-related costs.

The positive outlook is based on the expectation that top-line growth will continue to benefit from positive demand in the HVAC industry, contributing to some margin expansion and modestly declining leverage. The outlook also reflects the expectation that the execution and integration risk related to the Viessmann acquisition will remain manageable, as will the potential impact of tariffs.

The ratings could be upgraded if Carrier sustains a debt/EBITDA ratio below 2.5x and an EBITDA margin above 15%. Conversely, a downgrade could occur if the company’s operating performance weakens, leading to an EBITDA margin sustained below 15%, or if the debt to EBITDA ratio remains above 3.0x.

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