News / S&P takes Hapag-Lloyd off its watch list, but remains concerned

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Rating agency Standard & Poor’s has taken Hapag-Lloyd off its ‘CreditWatch’ listing.

It has been listed since 26 April, ahead of the completion of its merger with UASC, and S&P warned that the carrier’s profitability “remains vulnerable”.

The agency has re-confirmed Hapag-Lloyd’s pre-UASC corporate credit rating of B+ ‘Outlook Negative’, but remains concerned that the newly merged carrier’s credit measures could be weakened by another rate war.

S&P said: “The negative outlook reflects a one-in-three likelihood that the most recent uptick in freight rates will not hold.”

The merger with UASC was finalised on 24 May, which S&P said had added “significant debt (about $4bn) to Hapag-Lloyd’s capital structure”.

Nevertheless, according to its current base case assumptions of a sustained improvement in rates, S&P said Hapag-Lloyd would “significantly expand its EBITDA to about €1.2bn in 2017 and about €1.3bn in 2018 (from €607m in 2016)”.

Moreover, the agency said, Hapag-Lloyd had “demonstrated its ability to integrate acquired businesses and extract synergies” and its rating action was underpinned by this, giving the example of the takeover of CSAV in 2014.

S&P acknowledged that the merger with UASC offered Hapag-Lloyd “competitive advantages”, which included: increased size and capacity; enhanced network diversity and access to a young fleet.

But in a caveat it warned: “Hapag-Lloyd’s profitability remains vulnerable because of its operating margins and return on capital tied to the industry’s cyclical swings, heavy exposure to fluctuations in bunker fuel prices and its limited short-term flexibility to adjust its operating cost base.”

Welcoming the removal of the credit watch status, Hapag-Lloyd said that although the merger had added debt with the acquired ships and containers from UASC, “no bigger investments are planned in the next few years”.

CFO Nicolas Burr said: “We are proud that our rating has remained unchanged after the merger with UASC, which is an important milestone for Hapag-Lloyd.”

He added that the rating “confirms the strong industrial logic of the merger”.

“Now we are better positioned for this rapidly consolidating industry and still challenging market,” he said.

Hapag-Lloyd plans to achieve annual synergy savings of $435m from 2019 and has announced plans to cut some 1,300 land-based jobs – about 12% of the combined workforce – by the third quarter of this year.

The carrier slumped back into the red in the first quarter of the year, hit by higher bunker prices and alliance restructure costs, posting a net loss of $66m, after having moved back into the black in the final quarter of 2016 with a profit of $46m.

However, commenting on the outlook during the Q1 results presentation last month, chief executive Rolf Habben Jansen indicated that the carrier had secured annual contract rate increases of $450 per 40ft from Asia to North Europe and $300 per 40ft on the transpacific.

As part of the merger conditions, Hapag-Lloyd is calling for a capital cash injection of $400m within six months of the closing of the UASC deal, which is being backstopped by a group of Hapag-Lloyd shareholders.