S&P revises Germany's Hapag-Lloyd Holding outlook to negative
Container ship operator Hapag-Lloyd Holding reported a significantly lower EBITDA margin than we anticipated in the first half of 2011, Reuters reports.
-- We now believe that Hapag-Lloyd will report weaker operating results for the full year 2011 than we originally expected, leading to a further deterioration in cash flow protection measures.
-- We are therefore revising our outlook on Hapag-Lloyd to negative and affirming our 'BB-' rating.
Standard & Poor's Ratings Services said today it revised its outlook on Germany-based container ship operator Hapag-Lloyd Holding AG (Hapag-Lloyd) to negative from stable. At the same time, we affirmed the 'BB-' long-term issuer credit rating and the 'B' issue rating on the EUR480 million senior unsecured notes due 2015 and the $250 million senior unsecured notes due 2017 issued by Hapag-Lloyd AG . The recovery rating on these notes is unchanged at '6', indicating our expectation of negligible (0%-10%) recovery for noteholders in the event of a payment default.
"The outlook revision reflects Hapag-Lloyd's significantly lower profitability in the first half of this year than we previously anticipated," said Standard & Poor's credit analyst Izabela Listowska. "Given the persisting difficult industry conditions, we believe the company's cash flow protection measures may now fall short of the levels we view as rating-commensurate."
Similar to industry peers, Hapag-Lloyd's earnings have suffered this year on account of elevated costs of bunker fuel and depressed tariffs resulting from overcapacity, most importantly on Asia-Europe trades, which account for about 20% of Hapag-Lloyd's trade volumes. Hapag-Lloyd was able to increase volumes by 3% and freight rates by 4% in the first half of 2011. Nevertheless, its profitability came under pressure because of the significant rise in bunker costs, up 23% year on year, which it could only partly counterbalance by hedging contracts.
We now forecast that Hapag-Lloyd's EBITDA margin will be somewhat below 5% for the full year ending Dec. 31, 2011, which is well below our original forecasts of about 10%. We note that any turnaround in profitability measures could be vulnerable to weak industry prospects, given structural overcapacity and the slowing pace of expansion in the global economy--particularly in U.S. and European consumption--and aggravated by persistently high bunker fuel prices.
Our revised base-case forecasts estimate that Hapag-Lloyd's adjusted FFO to debt will continue to deteriorate in 2011 and might fall short of the 16%-20% we view as rating-commensurate. We believe that any improvement will depend on Hapag-Lloyd's ability to continue to increase freight tariffs to recover bunker cost inflation, which we view as uncertain. Furthermore, we understand that Hapag-Lloyd intends to accelerate capital spending for vessels on order in 2012 and 2013, which will put additional strain on cash flow measures.
"We could consider a downgrade, for example if the company continued to face sustained competitive pressure on freight tariffs and/or bunker fuel cost increases, which would hinder an expected profitability improvement and turnaround in cash flow measures," said Ms. Listowska. "We believe that the ratings on Hapag-Lloyd could also come under pressure if confronted with a substantial weakening in liquidity."
-- We now believe that Hapag-Lloyd will report weaker operating results for the full year 2011 than we originally expected, leading to a further deterioration in cash flow protection measures.
-- We are therefore revising our outlook on Hapag-Lloyd to negative and affirming our 'BB-' rating.
Standard & Poor's Ratings Services said today it revised its outlook on Germany-based container ship operator Hapag-Lloyd Holding AG (Hapag-Lloyd) to negative from stable. At the same time, we affirmed the 'BB-' long-term issuer credit rating and the 'B' issue rating on the EUR480 million senior unsecured notes due 2015 and the $250 million senior unsecured notes due 2017 issued by Hapag-Lloyd AG . The recovery rating on these notes is unchanged at '6', indicating our expectation of negligible (0%-10%) recovery for noteholders in the event of a payment default.
"The outlook revision reflects Hapag-Lloyd's significantly lower profitability in the first half of this year than we previously anticipated," said Standard & Poor's credit analyst Izabela Listowska. "Given the persisting difficult industry conditions, we believe the company's cash flow protection measures may now fall short of the levels we view as rating-commensurate."
Similar to industry peers, Hapag-Lloyd's earnings have suffered this year on account of elevated costs of bunker fuel and depressed tariffs resulting from overcapacity, most importantly on Asia-Europe trades, which account for about 20% of Hapag-Lloyd's trade volumes. Hapag-Lloyd was able to increase volumes by 3% and freight rates by 4% in the first half of 2011. Nevertheless, its profitability came under pressure because of the significant rise in bunker costs, up 23% year on year, which it could only partly counterbalance by hedging contracts.
We now forecast that Hapag-Lloyd's EBITDA margin will be somewhat below 5% for the full year ending Dec. 31, 2011, which is well below our original forecasts of about 10%. We note that any turnaround in profitability measures could be vulnerable to weak industry prospects, given structural overcapacity and the slowing pace of expansion in the global economy--particularly in U.S. and European consumption--and aggravated by persistently high bunker fuel prices.
Our revised base-case forecasts estimate that Hapag-Lloyd's adjusted FFO to debt will continue to deteriorate in 2011 and might fall short of the 16%-20% we view as rating-commensurate. We believe that any improvement will depend on Hapag-Lloyd's ability to continue to increase freight tariffs to recover bunker cost inflation, which we view as uncertain. Furthermore, we understand that Hapag-Lloyd intends to accelerate capital spending for vessels on order in 2012 and 2013, which will put additional strain on cash flow measures.
"We could consider a downgrade, for example if the company continued to face sustained competitive pressure on freight tariffs and/or bunker fuel cost increases, which would hinder an expected profitability improvement and turnaround in cash flow measures," said Ms. Listowska. "We believe that the ratings on Hapag-Lloyd could also come under pressure if confronted with a substantial weakening in liquidity."