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Rating Action:

Moody's assigns Caa1 rating to Hapag-Lloyd's EUR150 million notes

16 Jan 2017

London, 16 January 2017 -- Moody's Investors Service today assigned Caa1 rating to the proposed EUR150 million senior unsecured notes due 2022 issued by Hapag-Lloyd AG (Hapag-Lloyd). Hapag-Lloyd's corporate family rating (CFR) of B2 and Probability of Default Rating (PDR) of B2-PD are unchanged. The outlook is stable.

Hapag-Lloyd plans to use the proceeds from the proposed issuance to partially refinance its existing USD125 million senior unsecured notes due 2017.

RATINGS RATIONALE

Today's assignment of a Caa1 rating to Hapag-Lloyd's proposed senior unsecured notes due 2022, which is two notches lower than the company's B2 CFR, reflects not only their pari passu ranking with all other unsecured indebtedness issued by Hapag-Lloyd, but also their contractual subordination to the secured debt existing within the group. The combination with United Arab Shipping Company (UASC) adds both senior secured (vessel financing) and senior unsecured (corporate financing) debt, which maintains the two-notch differential between the B2 CFR and the Caa1 rating of the notes.

Hapag-Lloyd's B2 CFR also continues to reflect (1) the environment in which the company operates, characterised by high competition, which limits operators' ability to recover operating costs, and the reliance of the container shipping segment on short-term contracts, which limits market visibility; (2) historically low freight rates (excluding bunker costs) which have been in decline for several years due to overcapacity until showing a slight improvement recently and leading to persistently low single digit EBIT margin and (3) adjusted gross debt/EBITDA of approximately 6.6x pro-forma for UASC for the twelve months ending 30 September 2016 including standard Moody's adjustments.

The rating also takes account of (1) the company's good business profile, thanks to its top five market position across different routes globally and significant scale with $7.3 billion in revenues (pro-forma for UASC for the nine months ending 30 September 2016); (2) the flexibility of its fleet (due to the high number of chartered vessels that could be redelivered in the next 12 months); and (3) Hapag-Lloyd's adequate liquidity and good headroom under the company's financial covenants.

On 18 July 2016, Hapag-Lloyd and UASC announced that they had signed a Business Combination Agreement (BCA) to merge the operations of both companies, subject to the necessary regulatory and contractual approvals. The agreement is such that Hapag-Lloyd's current shareholders will have a 72% stake in the combined entity while UASC's shareholders (which include Qatar Holding and the Public Investment Fund of Saudi Arabia) will have a 28% stake. UASC's container shipping activities will be integrated into the Hapag-Lloyd organization, which will remain headquartered in Hamburg.

The transaction will create a bigger player in the container shipping segment with a capacity of 1.5 million TEU. Hapag-Lloyd will benefit from UASC's younger fleet and, on average, larger, more efficient vessels which include fifteen owned vessels with capacity between 15,000 and 19,000 TEU (as of 30 September 2016) which are complementary to the company's existing fleet. The combination would, in particular, strengthen Hapag-Lloyd's position in the Middle East and Far East, where UASC has a stronger presence, allow for cost synergies estimated by the company of at least $435 million and substantially reduce the company's future capital expenditure.

However, the combination entails some integration risks. In particular, the improvement in EBITDA of the combined entity is premised primarily on $435 million pro-forma run rate network and overhead synergies from 2019 onwards, of which only one third will be achieved in 2017 after one-off costs of approximately $150 million.

Whilst UASC brings a complementary and young fleet to the group, it will also result in the consolidation of approximately $4.0 billion of debt incurred by the company to build its fleet. As a result, the rating agency estimates Moody's-adjusted debt/EBITDA at around 6.7x as of 31 December 2016 from 4.3x as of 31 March 2016. This ratio is high for the B2 category although the rating agency expects it to reduce over time through synergies. In addition the company has a stated financial policy of reducing the reported net leverage to around 3.5x which, in Moody's view, will also be dependent on the evolution of market conditions in the container shipping segment which remain challenging.

Moody's positively notes that Hapag-Lloyd has recently successfully integrated another company, CSAV, the results of which saw the company outperform initially targeted synergies by $100 million to total of $400 million p.a. In addition, certain key shareholders of Hapag-Lloyd and UASC have committed to backstopping a $400 million rights offering, which will strengthen the liquidity of the combined entity.

Moody's expects that the merged company will have a satisfactory liquidity profile underpinned by (1) cash balances in excess of $1 billion; (2) access to over $460 million of revolving credit facilities (approximately $135 million undrawn as of 30 November 2016); (3) comfortable leeway under the financial covenants; and (4) proceeds of the $400 million rights offering backstopped by the shareholders.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook mainly reflects Moody's expectations of increased leverage immediately following the UASC transaction combined with still weak freight rate environment. The rating agency views Hapag-Lloyd as weakly-positioned within the B2 rating category as the firm will need at least several quarters to strengthen its credit profile and bring leverage below 6.0x once the UASC fleet is integrated.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive rating pressure could arise if Hapag-Lloyd were to demonstrate (1) a reduction in Moody's-adjusted 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.

Negative rating pressure could arise if Hapag-Lloyd's leverage increases above 6x for a prolonged period of time or (FFO + interest expense)/interest expense declines below 2x. A rating downgrade could follow if the business environment continues to deteriorate, if the company does not proceed with the planned $400 million rights offering, or if there is any pressure on Hapag-Lloyd's liquidity profile.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Global Shipping Industry published in February 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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. At 30 September 2016, Hapag-Lloyd operated a fleet comprising 166 container ships with a capacity of 0.9 million TEU, and recorded a turnover of EUR7.7 billion on a last-12-months basis.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maria Maslovsky
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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