Continued from previous page“The downgrade reflects our expectation that Maersk will face increased market and execution risks and, as a result, operate at a higher leverage than is commensurate with a Baa2 rating for a company in such a volatile and cyclical business as container shipping,” said Maria Maslovsky, Moody’s vice president and senior analyst.
“However, we acknowledge Maersk’s leadership position as a liner and container terminal operator, as well as its strategy to integrate vertically into the logistics business and offer superior value to its customers,” she said.
“In addition, we view positively the significant financial flexibility offered by the Total S.A. shares worth approximately $5 billion, which allows Maersk to continue with its transformation while at the same time protecting its balance sheet,” added Maslovsky. Maersk sold its oil and gas operation to France’s Total earlier this year for about $7.45 billion.
Moody’s said the downgrade reflects its “expectation that Maersk will operate with a leverage of 3.0x — 3.5x measured as gross debt/EBITDA which is higher than Moody’s expectations for a Baa2 rating (where Moody’s expects gross debt/EBITDA below 3.0x).”
It added it expects Maersk will be able to remain in that range given its “leadership position in container shipping and terminals, as well as its successful integration efforts with respect to Hamburg Sud. Maersk indicated that it expects to exceed its guidance for synergies from the Hamburg Sud acquisition by at least $100 million to $150 million compared to initial guidance. In addition, Maersk made good progress toward integrating its different businesses lines toward achieving 2 percent ROIC (return on invested capital) improvement as previously outlined. The company views these integration efforts as the cornerstone of a compelling customer offer and the driver of diversifying its cash flows into less volatile businesses, such as supply chain management.”
Moody’s said it “further anticipates that Maersk will prudently balance the use of the proceeds of Total S.A. shares between strengthening its balance sheet and providing a return to shareholders.”
In a statement, Maersk said that it has “stated several times we remains committed to maintaining our investment grade rating. We will continue to focus on our capital discipline and are working actively on improving our free cash flow and lower our net debt.”
Moody’s also expressed concern about “significant downside risks facing the container shipping industry.”
“As the broad economic growth globally is expected to be less robust in 2019 as compared with 2018 (2.9 percent versus 3.3 percent according to Moody’s estimates), global trade, the key demand driver for container shipping, is also likely to come under pressure. This trend is further exacerbated by the overhang of the U.S./China trade tensions, although there have been recent signs that a trade war may be avoided. While the supply of new vessels in 2019 is expected to be low owing to a multiyear trough of the orderbook (3.5 percent effective supply growth in 2019 according to Drewry Maritime Research), weak demand could pressure freight rates and earnings. In addition, the container shipping industry struggled with the lag in passing through increasing bunker costs in 2018 and will need to pass through additional increased fuel costs associated with IMO 2020, a new regulation coming into effect in January 2020.”