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