Moody’s Japan K.K. says that the announcement of the merger of the container shipping businesses of Mitsui O.S.K. Lines, Ltd. (MOL, Ba1 corporate family rating, negative), Nippon Yusen Kabushiki Kaisha (Baa3 negative) and Kawasaki Kisen Kaisha, Ltd. (unrated) has no immediate impact on MOL’s Ba1 rating and negative outlook.
“The move highlights the very negative market conditions that continue to plague the containership industry,” says Mariko Semetko, a Moody’s Vice President and Senior Analyst.
Moody’s expects the integration of the three businesses could prove credit positive over time if it leads to more discipline in managing capacity. However, the potential cash flow synergies and balance sheet impact remain uncertain for now, including (1) whether the companies will transfer their vessels to a new joint venture and (2) the capital structure.
According to the companies’ announcement of 31 October 2016, the combined joint venture will hold a 7% share of the global containership market and will rank sixth in terms of container ship capacity globally. The potential economies of scale resulting from the merger could result in higher profits and cost competitiveness. In Moody’s view, economies of scale in shipping could lead to lower operating costs, discounts on new buildings and on dry-docking expenses, and lower funding costs.
The combined entity’s enlarged size could also enable it to offer more frequent and reliable services, and optimize routes and capacity utilization. In addition, the larger fleet should increase the new entity’s flexibility in reacting to shifts in geographical trade patterns, laddering out scheduled docking, and adapting to changing regulations.
The companies target synergies of JPY110 billion annually, although little detail has been provided on how and when the joint venture will achieve this.
“MOL’s rating remains under significant pressure, and we estimate that debt/EBITDA will materially exceed 9x this year, which will provide it with very little, if any, cushion,” adds Semetko.
MOL will need to materially increase profitability and cash flow and reduce leverage over the coming 12-18 months in order to maintain its rating.
In its 31 October 2016 earnings release, the company once again lowered its earnings guidance for the year ending 31 March 2017. It now expects an ordinary loss of JPY3 billion for the fiscal year, compared to its previous guidance of a JPY10 billion ordinary profit.
Among MOL’s various business segments, the Containerships segment remains the largest laggard in terms of profitability, with the company now expecting the segment to report JPY44 billion in ordinary losses for the fiscal year due to lower freight rates and persistent excess capacity.
This will mark the sixth consecutive year for the segment to report ordinary losses, as significant and prolonged excess supply globally has kept rates low for container shipping companies.
MOL also lowered its profit expectations for its Bulkships segment by JPY6.5 billion to JPY28 billion for the fiscal year, as the combined impact from the supply-demand gap widening in tankers caused by new deliveries and temporary demand decreases (e.g. reductions in vegetable oil trade and Nigeria’s crude exports), and low demand for car carriers in resource-rich countries will offset a modest recovery in dry bulk.
Source: Moody’sPrevious Next