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Related Issuers
Rating Action:

Moody's upgrades Hapag-Lloyd AG's rating to Ba3; outlook stable

14 Oct 2020

Stockholm, October 14, 2020 -- Moody's Investors Service (Moody's) has today upgraded the corporate family rating (CFR) of Hapag-Lloyd AG ("Hapag-Lloyd") to Ba3 from B1, its probability of default rating (PDR) to Ba3-PD from B1-PD as well as the senior unsecured rating to B2 from B3. The outlook on all ratings changed to stable from negative.

A full list of debt can be found in the end of the press release.

Today's rating action reflects that the negative ratings pressure on the sector and on the company that we anticipated as a consequence of COVID-19 has not materialized. Instead, Hapag-Lloyd's profitability and credit metrics have continued to strengthen during the first half of 2020, supported by a very strong performance amidst the pandemic by the container shipping industry as well as continued efficiency improvements. The rating action also incorporates the company's commitment to a financial policy focused on longer term deleveraging of the capital structure, as evidenced by significant debt reduction efforts over the last years.

RATINGS RATIONALE

The container shipping market has performed very strongly amidst the pandemic, where all carriers have exhibited discipline in terms of adjusting capacity to decreased demand during the first half of 2020. Moody's understands volumes during the third quarter have been strong, sending up freight rates higher than at the start of the year. Coupled with low bunker prices, carriers have recorded double digit growth rates in EBITDA during the first half of 2020 compared to the corresponding period in 2019. Considering how the industry is currently behaving, coupled with continued low bunker prices and relatively high freight rates and strong volumes during Q3, Moody's believes the second half will be even better in terms of operating performance.

Notwithstanding currently strong market fundamentals, the rating action is based on Hapag-Lloyd's efforts to continue to strengthen its balance sheet as well as continuously improving efficiency. This has been a continuous development since the merger with UASC was completed in 2017, from where reported financial debt has been decreased by around €1.0 billion until end of Q2 2020. During the same time period, Moody's-adjusted debt / EBITDA has decreased to 3.5x for the last twelve months ending June 2020 from 5.3x end of 2017. Moody's also notes as positive the fact that free cash flow has been positive and growing every year since 2017; a trend we foresee will continue over the next couple of years absent any larger capex plans.

Today's rating action balances the positives with still present downside risks, such as the looming threat of additional lockdowns, increased trade tension between the US and China as well as a deterioration in capacity discipline by carriers. In addition, there has not been a long track record of the recently improved performance in the container shipping industry, which still needs to prove to be sustainable for the longer term. That being said, Hapag-Lloyd's capital structure and credit ratios are strong enough to have cushion for these types of risks.

RATIONALE FOR STABLE OUTLOOK

The stable outlook assumes that recent performance improvements in the industry and Hapag-Lloyd's disciplined actions to improve its capital structure will be sustained, leading to Moody's-adjusted debt / EBITDA of 2.7x-3.1x and EBIT margin of 6-8% for the next 12-18 months.

LIQUIDITY PROFILE

We view Hapag-Lloyd's liquidity as good. The company had $1.7 billion of cash and access to $585 million in revolving credit facilities, of which $400 had been drawn as of 30 June 2020. In addition, another $290 million is available in committed capex financing. 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. Although maintenance capex needs are limited, we note that the company is contemplating ordering new ultra large container vessels, however nothing has yet been signed and we assume this will be financed with a combination of cash and debt. For the next 12 months, the company has around $870 million in debt coming due, which in Moody's base case could be retired altogether given expectations of strong free cash flow.

ESG Considerations

Moody's understands that Hapag-Lloyd's efforts to deleverage the capital structure following the merger with UASC in 2017 and the continued efforts to do so further, is the result of a strategic decision fully backed by the company's owners. Moody's views this as clearly positive under its corporate governance framework.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade could be possible with debt / EBITDA expected to remain below 3.0x and an FFO Interest Coverage above 4.5x through the cycle. Furthermore, an upgrade would also require a high single digit EBIT-margin 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 the company's debt/EBITDA ratio is expected to exceed 4.0x and FFO interest coverage to decrease below 4.0x on a sustained basis. Additionally, negative free cash flow and a weakened liquidity profile would cause negative pressure on ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Shipping Industry published in December 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1100802. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF AFFECTED RATINGS:

Upgrades:

..Issuer: Hapag-Lloyd AG

.... Probability of Default Rating, Upgraded to Ba3-PD from B1-PD

.... LT Corporate Family Rating, Upgraded to Ba3 from B1

....Senior Unsecured Regular Bond/Debenture, Upgraded to B2 from B3

Outlook Actions:

..Issuer: Hapag-Lloyd AG

....Outlook, Changed To Stable From Negative

COMPANY PROFILE

Hapag-Lloyd AG, headquartered in Hamburg, Germany, is the fifth-largest container liner globally based on market share by volume. As of June 30, 2020, it operated a fleet comprising 239 ships, including 112 owned and 127 chartered-in vessels. For the last twelve months ending June 30, 2020, the company reported revenue of $14.1 billion and EBIT of $1.0 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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 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.

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 www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

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

No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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