Moody’s Investors Service, (“Moody’s”) today continued its review of the Baa2 issuer rating and senior unsecured rating of Denmark-based shipping and energy company A.P. Møller – Mærsk A/S (“APMM” or “Maersk”), as well as Maersk’s senior unsecured medium-term note (MTN) programme’s (P)Baa2 rating.
“The continuation of the rating review reflects ongoing uncertainty with respect to the application of proceeds of the Total S.A. shares,” said Maria Maslovsky, Moody’s Vice President — Senior Analyst and the lead analyst for Maersk. “Also, the Maersk Oil sale is not closed yet and the separation of Maersk Drilling and Maersk Supply Service is still pending,” added Maslovsky.
A full list of affected ratings can be found at the end of this Press Release.
Today’s rating action reflects Moody’s understanding that Maersk has not yet determined the exact use of the proceeds of 97.5 million of Total S.A. (Aa3 stable) shares it is due to receive as part of the sale of Maersk Oil. While the company announced that, subject to meeting its investment grade objective, it plans to return a material portion of the value of the received Total S.A. shares to the APMM shareholders during the course of 2018-2019, the precise amount will depend on the evolution of company’s performance, the solutions found for the Maersk Drilling business, as well as Maersk’s stated commitment to a financial profile that is commensurate with an investment grade rating. Moody’s would expect to conclude this review once Maersk has decided on the use of proceeds from the Total S.A. shares.
Upon announcing on 21 August 2017 the agreement to sell Maersk Oil to Total S.A. for $2.5 billion in cash and 97.5 million shares in Total S.A. (currently valued at around $5.5 billion), Maersk stated that, subject to meeting its investment grade objective, it plans to return a material portion of the value of the received Total S.A. shares to the APMM shareholders during the course of 2018-2019. Moody’s acknowledges that the significant value of Total S.A. shares will provide Maersk with a high degree of flexibility in terms of managing its leverage levels. The agency notes further that given the volatile nature of the ocean shipping industry, which is not anticipated to abate in the near term, Maersk will need to pay down some debt in order to maintain leverage commensurate with the current rating. Moody’s estimates adjusted Gross Debt to EBITDA of around 3x for the Transportation & Logistics businesses only in 2018, which is high for the Baa2 rating given that the industry has recovered from a low point in the cycle in 2016.
As Moody’s stated previously, for a strong investment grade rating, such as Baa2, Maersk will need to maintain its debt/EBITDA below 3.0x at all points in the cycle and to demonstrate greater stability in achieving a positive EBIT margin at Maersk Line on a consistent basis. Absent such consistency, still lower leverage would be needed to maintain a Baa2 rating. Moody’s further indicated that in line with the Global Shipping Industry methodology a debt/EBITDA leverage of below 3.5x would need to be sustained by Maersk through the shipping cycle for an investment grade credit profile. This is the boundary for an investment grade (Baa3) rating in the Global Shipping Industry methodology.
Following its announcement of strategic realignment in September 2016, Maersk has made good progress towards re-focusing itself as a transportation and logistics business and finding solutions for its energy businesses. In addition to the announced sale of Maersk Oil to Total S.A. which is expected to be closed in the first quarter of 2018, Maersk also sold Maersk Tankers to its majority shareholder for $1.2 billion in cash, a transaction that closed in October 2017. In addition, on 7 November 2017, Maersk announced that it agreed to sell its remaining 19% stake in Dansk Supermarked A/S for DKK 5.53 billion (around $861 million). Furthermore, Maersk anticipates finding a solution for Maersk Drilling in the next twelve months, in line with its originally stated guidance of 24-month realignment process. Still, Maersk Supply Service may remain a part of the transportation business for a longer period of time; however, this business is relatively small. The proceeds of the Maersk Tankers sale ($1.2 billion), the Dansk Supermarked disposition ($0.9 billion) and the cash proceeds from the sale of Maersk Oil ($2.5 billion) are slated for debt reduction.
Maersk’s performance in 2017 has demonstrated a good recovery from the cyclical trough of 2016, although the company experienced a cyber-attack in June of 2017 which had a negative $250-$300 million result impact. Building on the market strength in the second quarter of 2017, Maersk Line reported 5% growth in market demand and only 3% growth in market supply in the third quarter of 2017 pointing to favorable industry fundamentals. As a result, Maersk’s freight rates increased 13.9% in the third quarter compared to the year prior. At the same time, the company’s volumes declined by 2.5% in part owing to the cyber-attack. Maersk’s unit cost was higher as a result of lower utilization, less backhaul volumes, exchange rate developments, utilization of five new vessels delivered during the quarter and the effects of cyber-attack. Maersk Line achieved an EBIT margin of 4.3% in the third quarter of 2017 compared to 3.4% for the nine months of 2017 and a strong improvement over (-2.9%) and (-1.7%) for the comparable periods in the prior year.
APM Terminals posted a loss in the third quarter of 2017 driven by a $374 million impairment recorded in the quarter. This division’s results have been challenged by economic weakness in some of the countries where its terminals are located, particularly those dependent on oil exports. Moody’s views APM Terminals as a more stable counterpart to Maersk Line’s more volatile business. The terminals’ cash flow is primarily driven by port throughput which Drewry Maritime Research forecasts to grow by 3.6%–4.2% in 2018–2021. Adjusting for the impairment, APM Terminals generated an EBIT margin of 12.8% in the third quarter of 2017, significantly above that of Maersk Line.
Other Transportation and Logistics businesses, Damco, Svitzer and Maersk Container Industry (MCI) are smaller contributors to the business. Both Svitzer and MCI were profitable in the third quarter while Damco was negatively affected by the cyber-attack.
Maersk’s liquidity is excellent with a liquidity reserve of $10.6 billion as of 30 September 2017 (excluding committed financing for the Hamburg Sud acquisition). Maersk has a little over $1 billion of debt maturities in Q4 2017 and less than $2 billion in 2018 which are expected to be refinanced in due course. The company’s capex commitments include $900 million in Q4 2017 and approximately $2.4 billion in 2018. Maersk reduced its dividend in February 2017.
The rating could be stabilized if Maersk reduces its debt such that debt/EBITDA is below 3.0x at all points in the cycle pro-forma for the sale of the energy businesses and if the company achieves greater stability in the container shipping freight rates and, consequently, profitability, as measured by consistently positive EBIT margin.
The rating is likely to be downgraded if the company’s debt/EBITDA ranges between 3.0x and 3.5x pro forma for the separation of the energy businesses whilst not exceeding 3.5x at all points in the cycle. Consistent negative free cash flow (after capex and dividends) would also create pressure on the rating.
Headquartered in Copenhagen, Denmark, A.P. Møller – Mærsk A/S is a diversified conglomerate whose main business areas encompass container shipping, oil and gas, drilling, port terminals and other shipping-related activities. Maersk is in the process of separating its energy-related businesses and will focus on the transportation and logistics sector going forward. The group generated revenues of $23.0 billion in the first nine months of 2017.
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