08.11.2012 08:34
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Euromol B.V. -- Moody's downgrades Mitsui O.S.K. Lines to Baa3; outlook negative

Tokyo, November 08, 2012 -- Moody's Japan K.K. has downgraded the issuer rating of Mitsui O.S.K Lines Ltd. (MOL) to Baa3 from Baa1.

Moody's has also downgraded the rating of the company's guaranteed subsidiary, Euromol B.V., to (P)Baa3 from (P)Baa1.

The ratings outlook is negative.

These actions conclude the review for downgrade initiated on 4 September 2012.

RATINGS RATIONALE

The rating actions reflect Moody's concern that MOL's earnings and cash flow will remain weak, given the challenging operating environment for the shipping industry and the uncertainty in the global macro-economy. MOL's financial leverage is high and the current industry environment will further delay an improvement in its financial metrics, in Moody's opinion. The downgrade also incorporates MOL's decision to set aside JPY15 billion of committed lines for its equity-method affiliate, Daiichi Chuo Kisen Kaisha.

The ocean shipping businesses, which are one of MOL's core segments, have been facing an adverse operating environment. In particular, MOL's dry bulker and tanker segments face weak charter conditions for both their non-long-term and spot charter contracts. This relatively large exposure to some of weakest segments of spot market, such as dry bulkers and tankers, compared to other shipping competitors has contributed to earnings weakness. We do not expect near term recovery of charter rates for those segments, because of the oversupply in freight capacity and weakening shipping volumes against the backdrop of the uncertainty in the global economy.

In this environment, the volatility of MOL's earnings and cash flow has also been increasing. Moody's believes that the industry's business risk is rising, while its overall financial tolerance for such risk is weakening.

On 1 October 2012, MOL set aside JPY15 billion of committed lines for Daiichi Chuo Kisen until 31 March 2013. Daiichi Chuo Kisen has posted ordinary losses in FYE03/2012 because of the persistently weak operating conditions in the bulk ships industry. Moody's is concerned that MOL may need to provide additional and medium-term support to its affiliate at a time when its own credit profile is weakening.

Although MOL's containership business posted ordinary losses of about JPY30 billion in FYE03/2012, the loss narrowed in the 1st half in FYE03/2013 compared to a year ago because of an increase in freight rates. In addition, the car carrier and LNG carrier segments continue to strongly support the company's earnings base. Moreover, MOL is trying to improve the efficiency of its fleet structure by accelerating the laying-up and/or scrapping of vessels and slowing vessel speeds. However, these factors and operational measures are insufficient to compensate for the decline in the dry bulker and tanker segments, or to offset the overall impact of the current negative conditions.

MOL's financial metrics will remain weak for its current rating for an extended time. For example, adjusted debt/EBITDA increased to 10.7x at end-September 2012 from 4.5x in FYE03/2011 as a result of several one-time negative events such as the March 11 earthquake.

On the other hand, MOL's rating also incorporates its continued areas of strength, such as: 1) its diversified business portfolio, which includes non-shipping businesses, 2) the large size of its shipping operation and the flexibility of its fleet structure, 3) its strong relationships with customers, and 4) its access to liquidity on the back of its strong relationships with Japanese financial institutions including Development Bank of Japan, regional banks, and insurance compaies.

The ratings also consider MOL's stable and strong relationships with its major banks and customers. This provides a rating uplift of two notches from the company's fundamental level of creditworthiness. MOL expects ordinary lossess for two concective years in FYE3/2013. Moody's will closely monitor the company's banking relationships.

The rating outlook is negative, reflecting Moody's concern that the adverse operating environment will continue, in addition to the uncertainty in the global economy and the potential increase in MOL's exposure to Daiichi Chuo Kisen.

The outlook could return to stable if MOL successfully increases earnings and cash flow. For example, if it can improve its EBITDA margin to about 10% and reduce adjusted debt/EBITDA to below 8x, then the outlook could return to stable.

MOL's rating could come under renewed pressure if its profitability and financial profile deteriorate further. For example, if its EBITDA margin stays below 8% and adjusted debt/EBITDA stays above 10x, and it becomes apparent that these metrics will not improve in FYE03/2014, then the rating would be downgraded.

The principal methodology used in this rating was Moody's "Global Shipping Industry" published on 30 September 2010, and available on www.moodys.co.jp.

Mitsui O.S.K. Lines, Ltd., headquartered in Tokyo, is one of the world's largest shipping companies. Its total revenue for FYE03/2012 was JPY1.44 trillion.

Daiichi Chuo Kisen Kaisha, headquartered in Tokyo, is a Sumitomo Mitsui group company and conducts bulk ships operations. Its total revenue for FYE03/2012 was JPY130 billion. Daiichi Chuo Kisen. The group owns more than 50% of the company. The largest shareholder is MOL (% of share: 26.1%), Sumitomo Metal Industries Ltd. (not rated, 15.02%), Mitsui Sumitomo Insurance Co., Ltd. (A1, stable, 4.95%), and Sumitomo Mitsui Banking Corporation (Aa3 , stable, 2.17%).

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's information.

Measures taken to ensure the quality of this information include use of public information, reviews by a third party and verification by the lead analyst.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Credit ratings are Moody's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. Moody's defines credit risk as the risk that an entity may not meet its contractual, financial obligations as they come due and any estimated financial loss in the event of default. Credit ratings do not address any other risk, including but not limited to: liquidity risk, market value risk, or price volatility. Credit ratings do not constitute investment or financial advice, and credit ratings are not recommendations to purchase, sell, or hold particular securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by Moody's in any form or manner whatsoever. The credit risk of an issuer or its obligations is assessed based on information received from the issuer or from public sources. Moody's may change the rating when it deems necessary. Moody's may also withdraw the rating due to insufficient information, or for other reasons.

Moody's Japan K.K. is a credit rating agency registered with the Japan Financial Services Agency and its registration number is FSA Commissioner (Ratings) No. 2. The Financial Services Agency has not imposed any supervisory measures on Moody's Japan K.K. in the past year.

Please see ratings tab on the issuer/entity page on the Moody's website for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on the Moody's website for further information.

Please see the Credit Policy page on the Moody's website for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Mina SawamuraAsst Vice President - Analyst Corporate Finance Group Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: (03) 5408-4110 SUBSCRIBERS: (03) 5408-4100 Richard C Bittenbender Associate Managing Director Corporate Finance Group JOURNALISTS: (03) 5408-4110 SUBSCRIBERS: (03) 5408-4100 Releasing Office: Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: (03) 5408-4110 SUBSCRIBERS: (03) 5408-4100 Copyright 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ARE MOODY'S JAPAN K. K.'S ("MJKK") CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MJKK DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MJKK ISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information.

The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.

MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of Moody's Corporation(MCO). MJKK is a credit rating agency registered with the Japan Financial Services Agency and its registration number is FSA Commissioner (Ratings) No. 2.

MJKK hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK have, prior to assignment of any rating, agreed to pay to MJKK for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MCO and MJKK also maintain policies and procedures to address the independence of MJKK's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MJKK and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations - Corporate Governance - Director and Shareholder Affiliation Policy."

Any publication into Australia of this document is by MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001.

This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.

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09.08.2011Mitsui OSKLines neutralMacquarie Research
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