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Rating Action:

Moody's assigns provisional (P)B1/B3 ratings to Hapag-Lloyd Group ; outlook stable

23 Sep 2010

First-time ratings; approximately USD500 million of debt rated

Milan, September 23, 2010 -- Moody's Investors Service has today assigned a provisional (P)B1 corporate family rating (CFR) and probability of default rating (PDR) to Albert Ballin Holding Gmbh & Co. KG (AB GMBH, and holding company for Hapag-Lloyd Group, HL). Concurrently, Moody's has also assigned a provisional (P)B3 senior unsecured rating to the proposed USD500 million senior unsecured notes to be issued by Hapag Llyods AG (HL AG) and guaranteed by its parent company, AB GMBH, with maturities from 5 year to 7 years. The rating outlook is stable.

The following ratings were assigned today:

- Provisional CFR of (P) B1 to AB GMBH

- Provisional PDR of (P) B1 to AB GMBH

- Provisional senior Unsecured rating on the proposed USD500 million notes issuance of (P)B3, LGD-5, 85% to be Issued by HL

RATINGS RATIONALE

"Moody's rating is based on its expectation that the extremely weak financial results and credit metrics that HL recorded in 2009 will improve going forward," says Marco Vetulli, a Moody's Vice President and lead analyst for Hapag-Lloyd Group. The rating is predicated on the group's refinancing being successfully achieved according to plan and the company being able to follow a disciplined capital investment policy thereafter.

In addition, Moody's says that the rating is constrained by HL's currently complex (and evolving) capital structure. While Moody's expects a strong financial performance in the current year, helped by a significant industry recovery, there is also the likelihood that the company's performance in 2011 may slightly weaken.

Moreover, as a general factor that affects the industry, Moody's has taken into account the reliance of container shipping operators on short-term contracts, which imply a greater exposure to cyclical trends compared with other types of shipping companies. This represents a negative factor for the ratings of container shipping companies, given their high operating leverage and, therefore, high sensitivity to revenue shifts.

However, on the positive side, the CFR also reflects HL's (i) relatively good market position, given that the company is one of the largest container operators in the world (ranking fourth behind the much larger Maersk, MSC and CMA); (ii) its strong diversification in terms of customers and trade lines; and (iii) its relatively low capex programme (HL has one of the smallest order books in the industry), which will help the company to reduce leverage with positive free cash flow and also (iv) the support received from shareholders, the German government and the City of Hamburg during the economic crisis, which negatively impacted the company's performance during 2009.

In addition, Moody's believes that HL's strong liquidity profile post bond issuance and closing of new USD360 million syndicated revolving credit facility should allow the company to more comfortably weather any potential additional crises in the industry. Moreover, the current value of the fleet (approximately twice the level of the group's debt) also supports the current rating in light of the potentially high recovery rate. The rating agency has also taken into account the positive upturn experienced by container shipping market in 2010.

The assigned ratings are provisional because of the existing standstill agreement with regard to HL's debt. Moody's understands that the company intends to use part of the proceeds of the planned bond issue to repay the amounts due under the standstill agreement in order to cancel it. In addition, the provisional ratings reflect (i) the uncertainties related to the complexity of the proposed transaction; (ii) that the group is expected to avoid in a timely manner any potential breach of covenants following the cancellation of the standstill agreement; and (iii) that Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect the rating agency's preliminary credit opinion regarding the proposed bond issue. Moody's endeavours to assign a definitive CFR and rating on the notes. A definitive rating may differ from a provisional rating.

The proposed USD500 million senior unsecured will be issued by Hapag-Llyods AG and will be guaranteed by its parent company, AB GMBH. The (P)B3 rating and LGD5 - 85% assessment on notes is two notches lower than AB GMBH's CFR and PDR of (P)B1. This differential reflects (i) that the notes will be contractually subordinated to approximately EUR 1.3 billion of existing secured debt; and (ii) the proposed USD360 million revolving credit facility, which the company intends to sign as part of the transaction. The provisional rating on the notes differs from the simple application of the LGD model in light of (i) the significant amount of secured debt that will rank ahead of the bond; and (ii) the fact that unencumbered assets are relatively low, despite the current fleet valuation being well in excess of AB GMBH's total indebtedness, which would suggest a relatively high recovery rate

All existing secured facilities are secured on either vessels or containers and will include Korean Export Insurance Corporation (K Sure) facilities, which are expected to be available to the company as part of the bond issue transaction. Moody's understands that the new USD360 million facility will be secured on AB GMBH's 25% stake in CTA and benefit from a second lien claim on the assets of the group. For further details on the proposed transaction, please refer to the Credit Opinion available on v3.moodys.com.

The stable rating outlook reflects Moody's view that HL's strengthened capital structure and liquidity profile should support the company's ability to withstand potential further crises in the industry. The outlook (and the rating) also reflects the rating agency's expectation that AB GMBH will maintain: (i) financial leverage below 5x (as adjusted by Moody's for operating leases and pension items); (ii) a retained cash flow (RCF)/net debt ratio above 10%; and (iii) positive free cash flow going forward.

A rating downgrade could potentially result from deteriorating market conditions leading to financial leverage increasing towards 6x and/or EBIT interest cover falling below 1.5x, together with prolonged negative free cash flow and deterioration in HL's liquidity profile.

Given that HL's immediate target will be to demonstrate its ability to maintain an adequate financial profile (as described in the "Outlook" section, above), Moody's considers it unlikely that there will be any upward pressure exerted on the company's rating in the short term. However, upward pressure could materialise over time as a result of a reduction in the company's leverage below 4x and an increase in its interest coverage, which is currently weak for the rating category.

The principal methodologies used in rating Albert Ballin Holding Gmbh & Co. KG and Hapag Llyods AG were Global Shipping Industry published in December 2009, Revisions to Moody's Hybrid Tool Kit published in July 2010, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Headquartered in Hamburg, Germany, AB GMBH is the fourth-largest container shipping company in the world (measured in 20-foot equivalent units, or "TEU"). The company generated revenues of around EUR3.3 billion for the last nine months of the year ending on 31 December 2009. HL is its main operating Company.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

However, the credit rating action was based on limited historical data.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Milan
Marco Vetulli
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Telephone:+39-02-9148-1100

London
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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Moody's Italia S.r.l
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Moody's assigns provisional (P)B1/B3 ratings to Hapag-Lloyd Group ; outlook stable
No Related Data.
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