Euromol B.V. -- Moody's downgrades Mitsui O.S.K. Lines to Baa3; outlook negative
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.
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%).
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