Moody's Changes Hapag-Lloyd Rating to Stable
Moody's Investors Service has 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. Concurrently, Moody's has affirmed the ratings assigned to the company including its B2 CFR, B2-PD PDR and Caa1 senior unsecured rating.
Headquartered in Hamburg, Germany, Hapag-Lloyd AG is the fourth-largest container shipping company in the world measured in TEU. During 2014, Hapag-Lloyd reported revenues EUR6.8 billion.
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. The updated approach for standard adjustments for operating leases is explained in the cross-sector rating methodology Financial Statement Adjustments in the Analysis of Non-Financial Corporations, published on June 15, 2015.
The change in outlook to stable from negative reflects the improvement in Hapag-Lloyd's financial metrics due to the material reduction in the debt adjustment related to operating leases. Indeed, based on 2014 financial statements, Moody's debt adjustment related to operating leases declines to EUR1.5 billion from EUR3.9 billion. Even though the decline is material, Hapag-Lloyd's leverage at year-end 2014 remains very high for the B2 category at 9.6x (13.8x before the change in operating lease adjustment) due to the company's weak operating performance during the year.
Looking forward, Moody's expects that Hapag-Lloyd will improve its credit profile thanks to (1) its ongoing efforts to boost its operating efficiency (Hapag-Lloyd launched a new cost-cutting programme which it projects will reduce costs by a low three-digit million figure in US dollars in 2015); (2) its increased scale from the integration of the recently-acquired container shipping activities of the Chilean company Compania Sud Americana de Vapores (CSAV, unrated); and (3) cost savings derived from the integration of CSAV (estimated at $300 million).
Overall, Moody's projects that Hapag-Lloyd's leverage will be materially improving and moving towards 5x in the 12-18 months following the acquisition of CSAV, which closed in December 2014. However, the rating agency cautions that market conditions remain challenging in the container shipping market with freight rates continuing to be under pressure and volatile.
Positive rating pressure could arise if Hapag-Lloyd were to demonstrate progress toward (1) a reduction in leverage below 5x on a sustainable basis; and (2) an increase in its (funds from operations (FFO) + interest expense)/interest expense to above 3x on a sustainable basis.
The ratings presently incorporate our expectation that Hapag-Lloyd's currently weak credit metrics for the rating category will improve within the next 12-18 months to levels in line with the B2 rating, helped by the combination with CSAV's container activities. Further weakening in the group's operating performance in the next few quarters or an integration of CSAV's activities which were not as smooth as expected could result in a downgrade of the company's rating. For instance, leverage remaining above 6x on a sustained basis or (FFO + interest expense)/interest expense of below 2x could exert pressure on the ratings. A rating downgrade could also result from any pressure on Hapag-Lloyd's liquidity profile.