Moody's Investors Service assigned to Hapag-Lloyd AG. (Hapag-Lloyd) a B2 corporate family rating and the B2-PD probability of default rating.
At the same time, the rating agency has withdrawn the B2 corporate family rating (CFR) and the B2-PD probability of default rating (PDR) of Hapag-Lloyd Holding AG for reorganization reasons. The withdrawals follow the downstream merger of Hapag-Lloyd Holding AG into Hapag-Lloyd AG. The outlook on the ratings is negative.
Ratings Rationale
"The rating assignment is prompted by the downstream merger of Hapag-Lloyd Holding AG into Hapag-Lloyd AG that now are one single entity, whereas the B2 CFR reflects the good operating performance in the first half of 2013, but also takes into account our expectation that the freight rate environment will remain constrained over the next 12 months," says Marco Vetulli, a Moody's Vice President - Senior Credit Officer and lead analyst for Hapag-Lloyd.
Despite the weak operating environment, characterised by decreasing freight rates since August 2012, Hapag-Lloyd recorded an adequate operating performance in the first half of 2013. This was a result of some efficiency gains in terms of costs that have enabled the company to become one of the most efficient operators in the industry and achieve improvements in terms of profitability.
Nonetheless, Hapag-Lloyd's B2 CFR is constrained by two main factors.
Firstly, the environment in which the company operates, characterised by (1) high competition, which limits the operators' ability to recover operating costs; and (2) the overreliance of this shipping segment on short-term contracts, which limits market visibility. These market characteristics have credit-negative implications for container shipping companies' ratings, on account of their high operating leverage and sensitivity to operating cash-flow shifts.
Secondly, the company has high adjusted debt. We would expect this to be very weak for the rating category at the end of the current year, with Moody's forecast of debt/EBITDA ratio exceeding 7.0x on adjusted basis.Hapag-Lloyd was affected in the past couple of years by the combined effect of low freight rates, which constrained the company's profitability, and capital expenditure, which increased its debt level.Moody's expects the company to improve its credit profile by continuing to reduce costs through its cost-saving programme and record further progress in its operating performance, and hence to improve its credit metrics, though this is premised on freight rates remaining supportive with bunker costs not increasing materially.
However, the rating remains supported by (1) the company's good business profile, which is due to its leading market position as a result of its successful commercial operations; (2) the flexibility of its fleet (due to the high amount of chartered vessels that could be redelivered in the next 12 months); (3) Hapag-Lloyd's stable financial position, given not only its adequate liquidity, but also the acceptable headroom under the company's bank covenants.
The senior unsecured Caa1 rating assigned to the USD 250 million and EUR 480 million senior unsecured notes is two notches lower than Hapag-Lloyd's CFR and PDR of B2 and remains unchanged. This reflects the contractual subordination of the notes to Hapag-Lloyd's secured debt.
Rationale for Negative Outlook
The negative rating outlook reflects our negative appraisal of the global container shipping market over the next 12 months, in combination with Hapag-Lloyd's relatively weak credit metrics for the rating category. Any progress Hapag-Lloyd makes in strengthening of its credit metrics will depend on the future evolution of the container market and the global level of demand, especially in Europe. Freight rates in the next few quarters dipping sustainably below current levels and/or bunker costs increasing beyond 2013 levels would put additional pressure on the ratings.
What could change the rating up/down
Moody's considers it unlikely that any upward pressure could be exerted on Hapag-Lloyd's rating in the short term. However, longer term, positive rating pressure could arise if the company were to demonstrate progress towards (1) a reduction in financial leverage approaching 6.0x on a sustainable basis; and (2) an increase in its (funds from operations (FFO) + interest expense)/interest expense of above 2.5x on sustainable basis.
The ratings presently incorporate Moody's expectation that Hapag-Lloyd's currently weak credit metrics for the rating category will recover in 2014. Moody's could downgrade the rating if Hapag-Lloyd is unable to demonstrate a path to a stronger credit metrics profile during 2014.
Headquartered in Hamburg, Germany, Hapag-Lloyd AG is the largest container liner shipping company in Germany and one of the biggest worldwide based on global market coverage. As of June 2013, Hapag-Lloyd operated a fleet comprising 154 ships including 63 owned, 84 chartered-in and seven leased vessels, and recorded a turnover of EUR 6.8 billion on a last-12-months basis.
Hapag-Lloyd Group was established in 1970 as a result of the merger of Hapag (1847) and North German Lloyd (1857). Hamburgische Seefahrtsbeteiligung "Albert Ballin" GmbH & Co. KG is the company's largest shareholder, with a 78% stake.
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