Maersk and NYK Receive Negative Credit Reevaluations
The Moody’s rating agency has issued downgrade reviews on two global shipping companies, casting more uncertainty on an industry already struggling with higher costs and declining profits.
The Danish business conglomerate A.P. Moller–Maersk recently announced that over the next 24 months it would split into two separate businesses, a transport and logistics division and an energy division. That triggered a review.
“We have placed the ratings of Maersk on review for downgrade because we believe that its business diversification will reduce significantly with the separation of its energy businesses which represented 62 percent of EBITDA as of the first half of 2016,” said Maria Maslovsky, a Moody’s vice president and senior analyst.
The review is not scheduled for completion until next month, but a downgrade of at least one notch in the company’s Baa1 issuer rating, Baa1 senior unsecured rating, and the (P)Baa1 medium-term note (MTN) program rating would not be unexpected. This may be contingent on the company’s future financial policy, the amount of debt Maersk allocates to the transport and logistics division, and any remaining ownership interests in the energy businesses.
Moody’s also rendered a harsh judgment on the Nippon Yusen Kaisha (NYK) announcement that it would be merging its container business with MOL and K Line. “The outlook is negative,” Moody’s concluded in a summary that downgraded the carrier from Baa3 from Baa2.
NYK’s most recent earnings statement listed a loss of $250 million. “The downgrade…reflects our view that low freight rates will keep NYK’s cash flow low and leverage high in the near to medium term,” said Mariko Semetko, a Moody’s vice president and senior analyst. “Consequently, the company’s earnings recovery has been and will likely remain much slower than Moody’s had previously anticipated.”
This may be a temporary setback, as the NYK merger will not be completed until April 1, 2018. “If the business integration leads to more discipline, the transaction could prove credit positive over time,” said Moody’s. Until then, the company’s high debt leverage and low earnings does not reflect well on one of the world’s largest shipping companies.
Ratings are critical, in their assessment of a company’s ability to meet its financial responsibilities. Companies forced to contend with a downgrade have little recourse, outside of attributing their struggles to industry-wide market condition challenges that have impacted every container carrier.
Kawasaki Kisen Kaisha (K Line), which also received a downgrade to Ba3 from Ba2, opted for an issuer rating withdrawal from Moody’s. K Line reported a fiscal year loss of $457 million, amidst persistent rumors of a forthcoming sale or bankruptcy.
“Although we have continued constructive discussions with Moody’s based on a cyclical nature of shipping industry, it was regretful that downgrade implementation has been taken,” K Line said in a statement. “Based on non-necessity of continuous rating obtainment from business (operation) perspective, today, we have withdrawn issuer rating from Moody’s.”
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