Stockholm, June 22, 2022 -- Moody's Investors Service (Moody's) has today affirmed the Ba2 corporate family rating (CFR) and the Ba2-PD probability of default rating (PDR) of Hapag-Lloyd AG ("Hapag-Lloyd"). The senior unsecured rating was upgraded to Ba3 from B1. The outlook on all ratings changed to positive from stable.
A full list of debt can be found in the end of the press release.
"The change in outlook to positive from stable follows continued profitability improvements and reduction in financial leverage as well as an increase in unencumbered assets, supported by more favourable industry conditions as well as management's performance improvement measures and more prudent financial policy" says Daniel Harlid, the lead analyst for Hapag-Lloyd. "While we expect freight rates to normalise over the next quarters, we expect that Hapag-Lloyd's strong balance sheet provides for a good cushion for a weaker market in 2023 and 2024, even considering substantial dividend payouts", Mr. Harlid continues.
A continued robustness of Hapag-Lloyd's operating performance and sustained credit metrics improvements in a more challenging market environment are key drivers for further positive rating pressure.
RATINGS RATIONALE
The Ba2 CFR rating with a positive outlook reflects Hapag-Lloyd's continued focus on reducing leverage, showcased by paying down EUR 818 million of debt over the last 12 months that ended March 31, 2022. This has increased its unencumbered assets ratio to 47% from 29% during the same time period. While some of the prepayments have been a result of a very strong market environment, the rating action also incorporates Hapag-Lloyd's commitment to maintain a conservative financial policy which incorporates a net debt / EBITDA target of below 3.0x. As a reference, the Moody's-adjusted gross and net debt / EBITDA stood at 0.4x and negative 0.4x (the company had a net cash position) respectively as of 31 March 2022.
We note that the next two years (2023-24) could potentially prove to be two challenging years for the industry as the global fleet is poised to grow by around 8% annually and the macroeconomic environment is likely to weaken. The capacity growth is considerably higher than market projections for demand growth of around 3%-4%. Such demand supply / gap has historically put negative pressure on freight rates and carrier profitability. Nevertheless, the Ba2 rating is well positioned to defend these downside risks, as the current capital structure provides cushion for a weaker market environment. The positive outlook indicates that a higher rating is possible should such a weakening in the environment be less severe than what the industry has experienced in the past. It also assumes that Hapag-Lloyd maintains its prudent financial policy, including a dividend policy in balance with its free cash flow generation ability, supporting sustained credit metrics in line with the requirements for the Ba1 rating category.
The upgrade of the senior unsecured bond rating to Ba3 from B1 reflects the improved asset coverage, considering the higher proportion of unencumbered assets on Hapag-Lloyd's balance sheet.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects the potential for further positive rating pressure, assuming that recent performance improvements in the industry and Hapag-Lloyd's disciplined actions to improve its capital structure will be sustained, leading to a Moody's-adjusted debt / EBITDA of 1.9x - 2.0x and an EBIT margin of 9-10% for the next 12-18 months.
STRUCTURAL CONSIDERATIONS
Hapag-Lloyd's bond rating is one notch below its CFR, reflecting the contractual subordination to the secured debt existing within the group (primarily vessel and container financing). The upgrade to Ba3 from B1 reflects: (1) an increased proportion of unencumbered assets; (2) a higher rating level; (3) a reduction of secured debt vs unsecured debt and (4) the expectation that the trend in lower recourse to secured debt is likely to continue.
LIQUIDITY PROFILE
We view Hapag-Lloyd's liquidity as good. The company had $12.9 billion of cash and access to $723 million in revolving credit facilities, all undrawn as of 31 March 2022. Given the high volatility typical for container shipping, the company's covenants include minimum equity and minimum liquidity, but no leverage or coverage ratios. Hapag-Lloyd has a number of unencumbered vessels and containers that could be pledged to raise additional liquidity if needed. Although maintenance capex needs are limited, the company has outstanding orders of 17 new vessels with a total capacity of 350,000 TEUs which Moody's assumes will be financed with a combination of cash and debt. For the next 12 months (starting from June 31 this year) , the company has around $560 million in debt coming due.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade requires sustained leverage and profitability improvements, reflected in (1) Moody's-adjusted debt/EBITDA remaining comfortably below 3.0x, (2) sustained EBIT-Margin in the high single digit in percentage terms and (3) sustaining RCF / net debt at least in the high twenties in percentage terms. In addition, a prerequisite for positive ratings pressure is that the company maintains the good liquidity profile at all times.
Negative ratings pressure could arise if credit metrics weaken on a sustained basis: (1) if the company's debt/EBITDA exceeds 3.0x for a prolonged period, (2) EBIT-margin falls below 5% over the cycle and (3) retained cash flow (RCF)/net debt falling toward 15%. Additionally, negative free cash flow and a weakened liquidity profile would cause negative pressure on ratings.
LIST OF AFFECTED RATINGS:
..Issuer: Hapag-Lloyd AG
Affirmations:
.... LT Corporate Family Rating, Affirmed Ba2
.... Probability of Default Rating, Affirmed Ba2-PD
Upgrades:
....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba3 from B1
Outlook Actions:
....Outlook, Changed To Positive From Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Shipping published in June 2021 and available at https://ratings.moodys.com/api/rmc-documents/72792. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
COMPANY PROFILE
Hapag-Lloyd AG, headquartered in Hamburg, Germany, is the fifth-largest container liner globally based on market share by volume. As of March 31, 2022, it operated a fleet comprising 248 ships, including 116 owned and 132 chartered-in vessels. For the last twelve months that ended March 31 this year, the company reported revenue of EUR 26.2 billion and EBIT of EUR 12.4 billion. Hapag-Lloyd was established in 1970 as a result of the merger of Hapag (1847) and North German Lloyd (1857).
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
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Daniel Harlid
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm, 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm, 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
