Moody’s: MOL’s Outlook Changed to Negative, K Line Up for Downgrade

Moody’s Japan K.K. has affirmed the Ba1 corporate family rating of Mitsui O.S.K. Lines, Ltd. (MOL) but it has changed the rating outlook to negative from stable.

“The change of outlook to negative primarily reflects our expectation of weaker than previously expected profitability for the fiscal year ending 31 March 2016 (FYE3/2016) due to the currently challenging and volatile operating environment, especially in the containership and dry bulk segments and for this situation to extend out over the coming 12-18 months,” says Kailash Chhaya, a Moody’s Vice President and Senior Analyst.

The weakness in the containership segment has been the primary driver of MOL’s weak level of earnings and the company expects to report an ordinary loss of JPY31 billion in its containership business for FYE3/2016.

“We expect that the container ship segment will remain in oversupply for at least the next 12-18 months, potentially depressing pricing further; and that the bulk shipping segment will also be extremely problematic for MOL. These two segments are key drivers for MOL’s rating and outlook”, says Chhaya.

Based on MOL’s 3Q FYE3/2016 earnings announcement, Moody’s estimates that adjusted debt/EBITDA was about 7.4x as of 31 December 2015 and projects that this could rise above to 8.0x or slightly above in the short to medium term.

At the same time, MOL announced a restructuring plan, which involves the reduction of a number of its container and dry bulk ships, which are not on long-term contracts.

As a result of its restructuring plan MOL will also post a one-time extraordinary loss of about JPY180 billion in 4Q FY2016.

More particularly, further downward rating pressure is likely should the company’s key financial metrics remain at levels inappropriate for the current rating.

In addition, Moody’s Japan K.K. has placed the Ba2 corporate family rating of Kawasaki Kisen Kaisha, Ltd. (K-Line) under review for downgrade also amid weaker than expected profitability for the fiscal year ending March 2016 (FYE3/2016)

“We note the rapid fall in profitability of K-Line’s container segment over recent months, in particular, and remain concerned about K-Line’s ability to turn this around in the near term, amid the current operating environment. Unless this can be achieved in a reasonable time frame — which we think unlikely given current market conditions — it will be difficult for the company to effectively de-lever in the near or medium term”, says Chhaya.

On 29 January 2016, K-Line revised down its ordinary profit guidance for FYE3/2016 to JPY7 billion from JPY20 billion, as announced in October 2015.

Weakness in the containership segment is the primary driver for K-Line’s weak earnings.

The company expects to report an ordinary loss of JPY10 billion in this segment for FYE3/2016.

Based on K-Line’s 3Q FYE3/2016 earnings announcement, Moody’s estimates adjusted debt/EBITDA was about 6.8x as of 31 December 2015 .

Even should the company meet its new ordinary profit target for FYE3/2016 and debt remain at the same level as at 31 December 2015 of about JPY0.5 trillion, then adjusted debt/EBITDA will likely increase to the low-7x range.

Moody’s said that the review will focus predominantly on, K-Line’s ability to deploy effective countermeasures to offset and stem the decline in profitability; and the company’s plans and ability to deleverage to a level more in-line with its current rating.