Rating agency Standard and Poors said Tuesday it has revised its outlook on German containership operator Hapag-Lloyd to negative from stable.
At the same time, it affirmed the BB- long-term issuer credit rating and the B issue rating on the 480 million-euro senior unsecured notes due 2015 and the $250 million senior unsecured notes due 2017 issued by Hapag-Lloyd AG.
"The outlook revision reflects Hapag-Lloyd's significantly lower profitability in the first half of this year than we previously anticipated," said Standard & Poor's credit analyst Izabela Listowska. "Given the persisting difficult industry conditions, we believe the company's cash flow protection measures may now fall short of the levels we view as rating-commensurate."
S&P said that like its peers, Hapag-Lloyd earnings have suffered this year on account of elevated costs of bunker fuel and depressed tariffs resulting from overcapacity, most importantly on Asia/Europe trades, which account for about 20 percent of Hapag-Lloyd's trade volumes.
"Hapag-Lloyd was able to increase volumes by 3 percent and freight rates by 4 percent in the first half of 2011," S&P said. "Nevertheless, its profitability came under pressure because of the significant rise in bunker costs, up 23 percent year on year, which it could only partly counterbalance by hedging contracts.
"We now forecast that Hapag-Lloyd's EBITDA (earnings before interest, tax, depreciation and amortizaton) margin will be somewhat below 5 percent for the full year ending Dec. 31, which is well below our original forecasts of about 10 percent. We note that any turnaround in profitability measures could be vulnerable to weak industry prospects, given structural overcapacity and the slowing pace of expansion in the global economy -- particularly in U.S. and European consumption -- and aggravated by persistently high bunker fuel prices," S&P added.
S&P said its "revised base-case forecasts estimate that Hapag-Lloyd's adjusted FFO (funds from operations) to debt will continue to deteriorate in 2011 and might fall short of the 16 percent to 20 percent we view as rating-commensurate. We believe that any improvement will depend on Hapag-Lloyd's ability to continue to increase freight tariffs to recover bunker cost inflation, which we view as uncertain. Furthermore, we understand that Hapag-Lloyd intends to accelerate capital spending for vessels on order in 2012 and 2013, which will put additional strain on cash flow measures.
"We could consider a downgrade, for example if the company continued to face sustained competitive pressure on freight tariffs and/or bunker fuel cost increases, which would hinder an expected profitability improvement and turnaround in cash flow measures," Listowska said. "We believe that the ratings on Hapag-Lloyd could also come under pressure if confronted with a substantial weakening in liquidity."
In reaction, Michael Behrendt, chairman of Hapag-Lloyd’s executive board, said, “I see the rating confirmation as the result of our swift response to the challenges our industry is currently facing. Our solid corporate financing was also supporting."
Hapag-Lloyd said in the first half of the year it reported positive operating earnings, putting it "well above the average of the sector," and that it was "not expecting any changes to the terms of its financing as a result of the altered outlook."
It said it had equity of 3.26 billion euros ($4.69 billion), a very strong equity base and a high equity ratio for the industry of 53.3 percent as of June 30. It noted it had reduced net debt by 103 million euros ($184 million) in the first half of the year to 1.023 billion euros ($1.47 billion), and at 31.4 percent its "leverage is below the industry average. Furthermore, Hapag-Lloyd’s access to liquidity, including unused credit lines, is more than sufficient."