Credit Opinion: Hapag-Lloyd AG

Transcription

1 Credit Opinion: Hapag-Lloyd AG Global Credit Research - 29 Sep 2015 Hamburg, Germany Ratings Category Outlook Corporate Family Rating Senior Unsecured -Dom Curr Moody's Rating Positive B2 Caa1/LGD5 Contacts Analyst Phone Marie Fischer-Sabatie/Paris Knut Slatten/Paris Sandra Veseli/London Key Indicators [1]Hapag-Lloyd AG 6/30/2015(L) 12/31/ /31/ /31/ /31/2011 Revenues (USD Billion) $9.9 $9.0 $8.7 $8.8 $8.5 Size of Fleet EBIT Margin 1.0% -4.2% 1.4% -0.7% 3.5% ROA (NPATBUI / Total Assets) -2.5% -5.8% -1.6% -2.8% -0.7% Debt / EBITDA 5.7x 9.6x 5.5x 5.7x 4.1x RCF / Net Debt 11.0% 8.0% 14.3% 12.3% 20.7% (FFO + Interest) / Interest Expense 2.6x 2.2x 3.2x 2.6x 3.5x [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. Source: Moody's Financial Metrics Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - Container ship freight rates remain under pressure because of oversupply - After a challenging 2014, Hapag-Lloyd's performance improved strongly in H Business profile strengthened and cost structure enhanced by the integration of CSAV's container shipping activities and cost optimisation programme - Further improvement in financial profile expected from improved performance and from expected IPO - Strong group of committed majority shareholders with a solid track record of support

2 Corporate Profile Hapag-Lloyd AG is the largest container liner shipping company in Germany and one of the largest worldwide based on global market coverage. As of 30 June 2015, it operated a fleet comprising 188 ships, including 66 owned, 117 chartered-in and five leased vessels. The company operates a global service network with 349 offices, managed through regional operating offices in Singapore, Hamburg, Valparaíso and Piscataway. It reported EUR8.3 billion in revenue in the last 12 months to June 2015 (LTM June 2015). Hapag-Lloyd was established in 1970 as a result of the merger of Hapag (1847) and North German Lloyd (1857). On 2 December 2014, it merged with the Chilean shipping company Compania Sud Americana de Vapores (CSAV). As at 30 June 2015, the main shareholders of Hapag-Lloyd AG were CSAV Germany Container Holding GmbH with 34.0%, HGV Hamburger Gesellschaft fur Vermogens- und Beteiligungsmanagement mbh with 23.2%, Kuehne Maritime GmbH (Kuehne) with 20.8% and TUI-Hapag Beteiligungs GmbH with 13.9%. SUMMARY RATING RATIONALE Hapag-Lloyd's B2 corporate family rating is constrained by two main factors. Firstly, the container shipping market is highly cyclical, which is exacerbated by (1) historically tough competition between the main players, which limits Hapag-Lloyd's ability to recover operating costs; and (2) overreliance 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, although leverage (i.e. debt/ebitda, including Moody's adjustments) has recently reduced and amounted to 5.7x as at June 2015, down from 9.6x at the end of December Hapag-Lloyd was negatively affected in the past few years by the combined effect of low freight rates, which constrained the company's profitability, and large capital expenditure, which increased its debt level. We expect the company to continue to improve its credit profile through the merger with CSAV and by simultaneously continuing to actively reduce costs. More positively, Hapag-Lloyd's B2 rating also takes into account (1) the company's good business profile, with some leading market positions; (2) the flexibility of its fleet, owing to the high number of chartered vessels that could be redelivered in the next 12 months; (3) an adequate liquidity profile; and (4) the support the company has received from its shareholders. DETAILED RATING CONSIDERATIONS CONTAINER SHIP FREIGHT RATES REMAIN UNDER PRESSURE BECAUSE OF OVERSUPPLY The container shipping industry continues to be characterised by strong competition and imbalance between supply and demand. Freight rates have been very volatile over the past years and have faced a downward trend since the peak reached in June Freight rates have continued to decline in past months, particularly on Asia-Europe routes, and container shipping companies have only been able to implement general rate increases to a very limited extent. The decline in freight rates is partly a result of lower bunker costs being passed on to customers, as well as a significant increase in the supply of new, very large vessels operating on east-west trades (e.g., Asia-Europe or Asia-US trade lanes) in We expect this, combined with lower volumes, to weigh on container shipping companies' revenues in H2. In addition, as the benefits from the lower bunker price have already been passed on to customers to a large extent, performance and profitability in H2 are likely to be softer. AFTER A CHALLENGING 2014, HAPAG-LLOYD'S PERFORMANCE IMPROVED STRONGLY IN H was a challenging year for Hapag-Lloyd, which posted weaker results than its main peers, namely Maersk Line (owned by A.P. Møller-Mærsk A/S, Baa1 positive) and CMA CGM S.A. (B1 positive), with a negative EBIT. Helped by the falling bunker price, Hapag-Lloyd reported in H an EBIT margin of 5.7% (vs. -3.2% in H1 2014), and guided towards a "clearly positive number" for the full year. For LTM June 2015, the company's debt/ebitda ratio was 5.7x, after having reached a level of 9.6x at the end of These figures include the material reduction resulting from our change in the debt adjustment related to operating leases; we now capitalise operating leases 3x for shipping companies vs. 8x previously. The profitability improvement seen in H resulted to a large degree from the sharp decline in bunker fuel

3 prices (by approximately 50% since the peak in 2014). While the gain from lower bunker fuel prices will be shortlived for container shipping companies, as it is passed on to customers within a few months due to the highly competitive nature of the industry, we expect that the integration of CSAV will structurally improve Hapag-Lloyd's profitability. BUSINESS PROFILE STRENGTHENED AND COST STRUCTURE ENHANCED BY INTEGRATION OF CSAV'S CONTAINER SHIPPING ACTIVITIES AND COST OPTIMISATION PROGRAMME With the addition of CSAV's container shipping activities, Hapag-Lloyd has become the fourth largest global operator in terms of capacity worldwide. CSAV brought a younger fleet, which reduced the average fleet age of the combined entity to around 7.3 years as at 30 June 2015 compared with 7.8 years for Hapag-Lloyd pre-combination (as of September 2014) and compared to an industry average of 8.4 years. Moreover, Hapag-Lloyd's business profile is sustained by a balanced geographical presence. With CSAV, Hapag- Lloyd strengthened its service offer, especially in Latin America where it became one of the market leaders and which represented 30.9% of its transport volume in H The company benefits from a diversified customer base, both in terms of goods transported and volumes per customer; its top 50 customers account for less than 50% of volumes. The integration of CSAV's container shipping activities has so far been smooth and we expect it to enhance the group's cost structure. Through the acquisition of CSAV, Hapag-Lloyd now expects cost synergies to reach USD400 million, up from its initial target of USD300 million. At the same time, Hapag-Lloyd is also implementing a cost optimisation programme, called Project Octave, which it projects will reduce costs by an additional USD200 million in 2016 (USD175 million in 2015). FURTHER IMPROVEMENT IN FINANCIAL PROFILE EXPECTED FROM IMPROVED PERFORMANCE AND FROM EXPECTED IPO The good standing of Hapag-Lloyd's business is constrained by the financial profile of the company, which is still highly leveraged: at the end of June 2015, the company reported an adjusted debt/ebitda ratio of 5.7x on a last- 12-months basis. Looking forward, we expect that Hapag-Lloyd will improve its credit profile as a result of (1) its ongoing efforts to boost its operating efficiency; (2) its increased scale from the integration of the recently-acquired container shipping activities of CSAV; and (3) cost savings derived from the integration of CSAV. Although market conditions have remained challenging in 2015 with ongoing pressure on freight rates as well as increased and persistent overcapacity, we expect that 2016 will see somewhat improved market conditions. This is mainly owing to more favourable conditions on the supply side, with a lower number of planned vessel deliveries in 2016 than in Overall, we project that Hapag-Lloyd's leverage could be declining to below 5x in the next months. STRONG GROUP OF COMMITTED MAJORITY SHAREHOLDERS WITH A SOLID TRACK RECORD OF SUPPORT Hapag-Lloyd has benefited from having a pool of long-term shareholders that has supported the group in difficult times and for strategic transactions. During the 2009 financial crisis, Hapag-Lloyd's shareholders injected a large amount of equity (approximately EUR2.2 billion). In addition, the acquisition of CSAV's container liner activities was conservatively financed and entailed a EUR370 million capital increase, with contribution from CSAV's shareholders (70%) and from Hapag-Lloyd's shareholders (30%) which benefited the combined group's financial profile. Hapag-Lloyd recently announced its intention to make an initial public offering (IPO) and raise approximately USD500 million in primary component, including around USD400 million from institutional and retail investors and around USD100 million from two of its existing shareholders (Kuehne and CSAV), showing again the shareholders' long-term support. Proceeds from the IPO will be used to fund investments in vessels and containers. Liquidity Profile We assess the liquidity profile of Hapag-Lloyd as satisfactory, underpinned by (1) increased cash balances, helped by the capital increase of EUR370 million in 2014 (cash amounted to EUR595 million at June 2015); (2) access to approximately USD260 million of revolving credit facilities (undrawn) and approximately USD75 million availability under Hapag Lloyd's securitisation programme, as at 30 June 2015; and (3) satisfactory leeway under its financial covenants.

4 Rating Outlook The change in outlook to positive from stable mainly reflects Hapag-Lloyd's improved operating performance since the beginning of 2015, driven by the lower bunker fuel price. The change in outlook also reflects improvements in the company's cost structure following a recent acquisition and the implementation of cost optimisation measures, as well as our expectation that this will drive a further strengthening in the company's financial profile, in spite of market conditions which remain challenging. What Could Change the Rating - Up Positive rating pressure could arise if Hapag-Lloyd was to demonstrate (1) a reduction in leverage (i.e., debt/ebitda) below 5x on a sustainable basis; and (2) an increase in its (funds from operations (FFO) + interest expense)/interest expense above 3x on a sustainable basis. Hapag-Lloyd has recently announced its intention to undertake an IPO and raise USD500 million, which we consider credit positive. Should the IPO be successful and Hapag-Lloyd continue to improve its financial profile in the coming quarters, this would lead to upward pressure on its ratings in the course of What Could Change the Rating - Down Negative rating pressure could arise if Hapag-Lloyd's leverage increases above 6x or (FFO + interest expense)/interest expense declines below 2x for a prolonged period of time. A rating downgrade could also result from any pressure on Hapag-Lloyd's liquidity profile. Rating Factors Hapag-Lloyd AG Global Shipping Industry Grid [1][2] Current LTM [3]Moody's Month Forward 6/30/2015 ViewAs of 9/29/2015 Factor 1 : Scale (20%) Measure Score Measure Score a) Revenues (USD Billion) $9.9 Baa $11 A b) Size of Fleet Baa Baa Factor 2 : Profitability (17.5%) a) EBIT Margin (3 Year Avg) 0.4% Ca 4% - 6% B b) ROA (NPATBUI / Total Assets)(3 Year Avg) -2.3% Ca 1% - 1.5% Caa Factor 3 : Leverage and Coverage (30%) a) Debt / EBITDA (3 Year Avg) 5.8x B 4.5x - 5.2x B b) RCF / Net Debt (3 Year Avg) 11.6% B 14% - 15% B c) (FFO + Interest) / Interest 2.7x B 3x - 4x Ba Expense (3 Year Avg) Factor 4 : Fleet Characterestics (17.5%) a) % Revenues from LT Charters Ca Ca Ca Ca b) Unencumbered Assets Caa Caa Caa Caa Factor 5 : Financial Policy (15%) a) Financial Policy Ba Ba Ba Ba Rating: a) Indicated Rating from Grid B2 B1 b) Actual Rating Assigned B2 B2 [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. [2] As of 6/30/2015(L); Source: Moody's Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.

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