Moody’s Downgrades Heavily Indebted MOL
Rating agency Moody’s Japan K.K. downgraded Japanese shipping company Mitsui O.S.K. Lines’ (MOL) issuer rating from Baa3 to Ba1 on the ground of the company’s indebtedness and weak market conditions for container shipping and bulkers.
“The rating action reflects our expectation that the company will not be able to deleverage fast enough to maintain its investment grade rating,” said Mariko Semetko, a Moody’s Vice President and Senior Analyst.
For the year ended 31 March 2015, the company’s ordinary profit declined by 7% to JPY 51.3 billion compared to a year ago. MOL’s debt stood at JPY1.183 trillion, up from JPY1.094 trillion for the financial year that ended on 31 March 2014.
Based on MOL’s preliminary earnings release and Moody’s estimates for adjustments, adjusted debt/EBITDA for the fiscal year ended 31 March, 2015 of about 7.8x would be about 8.4x without the change in the standard adjustment for operating leases.
“The Ba1 rating reflects Moody’s view that MOL’s weak earnings and operating performance amid continued difficult conditions in the commodity shipping markets are more important ongoing credit considerations than this one-time change in leverage from the change in the standard adjustment. Consequently we expect debt/EBITDA will remain above 7x as of 31 March 2016 even with the reduced operating lease adjustment,” the rating agency said.
Moody’s said that MOL’s Ba1 rating reflects the company’s very high debt leverage, continued weakness in the bulk ship segment, and persistent industry-wide overcapacity that limits the company’s ability to raise freight rates. The company’s consistently weak financial metrics including persistently high leverage (as measured by debt/EBITDA) are partially offset by its well-established presence among the Japanese shipping companies, its limited refinancing risk, and its large scale.
MOL’s strong relationships with lenders and group companies result in a two-notch uplift to the ratings from its fundamental credit worthiness.
As a whole, the company budgets for a 17% and a 67% year-over-year ordinary profit increase in fiscal year 31 March 2016 and 31 March 2017, respectively.
“Looking ahead, we expect the bulk ship segment will remain very weak, with the ongoing weak dry bulk market conditions to more than offset any positive momentum in the tankers. The company expects the segment will see a 30% decline in ordinary profit,” Moody’s said.
In the year ending on 31 March 2016, MOL plans for its container ship segment to turn very modestly profitable for the first time in four years, with ordinary profit of JPY 5 billion. With JPY 833.0 billion in sales, profit margins will be very small at close to break-even. With the US terminal automation behind the company, and with the lower bunker fuel prices, Moody’s expects the segment will see profit improvements in the coming year.
The stable outlook reflects Moody’s expectations for modest earnings growth, including from bunker fuel cost savings, will lead to very gradual deleveraging.
Moody’s said they would consider an upgrade if the company demonstrates a clear path towards a significant reduction in debt leverage. Further improvements in liquidity will also be credit positive.
Separately, Moody’s changed to stable from negative the outlook on the B2 corporate family rating (CFR), the B2-PD probability of default rating (PDR) and the Caa1 senior unsecured rating of Hapag-Lloyd AG.
The change in outlook to stable from negative reflects the reduction in adjusted debt due to changes in Moody’s approach for capitalizing operating leases. Moody’s changed to positive from stable the outlook on the Baa1 issuer rating and Baa1 senior unsecured ratings of A.P. Møller – Mærsk A/S (APMM).
The change in outlook reflects the reduction in adjusted debt due to changes in Moody’s approach for capitalizing operating leases.