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CORPORATES
CREDIT OPINION6 April 2020
Update
RATINGS
Hapag-Lloyd AGDomicile Germany
Long Term Rating B1
Type LT Corporate FamilyRatings
Outlook Negative
Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.
Contacts
Daniel Harlid +46. 8.5179.1271VP-Senior [email protected]
Christian Hendker,CFA
+49.69.70730.735
Associate Managing [email protected]
Svitlana Ukrayinets [email protected]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
Hapag-Lloyd AGUpdate following change in outlook to negative
SummaryOn March 31, we changed the outlook for Hapag-Lloyd AG (B1 Negative) and A.P. Moeller-Maersk A/S (Baa3 Negative) to negative from stable. On April 1, we placed the ratings ofCMA CGM S.A. (B2 RUR-Down) on review for downgrade. The actions follows anticipation ofmaterial impact on operations for the global container industry from the coronavirus, whichwas also the driver of our change in outlook for the Global Shipping Industry from stable tonegative in March.
The negative outlook balances Hapag Lloyd's solid business profile, combined with a goodtrack record of management through volatile industry environments with an adequateliquidity - $574 million in cash and $585 million in unused credit lines - with the challengesthe industry will face during at least Q2 and Q3 2020, when the effects of the crisis willimpact operating performance and credit metrics negatively. The negative effects could bemitigated with very tight capacity as a result of a high number of blanked sailings, thus actingas a stabilizer for freight rates. The rating affirmation reflects that Hapag Lloyd is confrontedto this crisis, at its starting point, with very solid credit metrics for the B1 category.
At this point in time, a stabilization of the outlook requires higher visibility regarding theimpact on credit ratios from the coronavirus outbreak, such as forward booking, freightrates and realized volumes combined with offsetting operational and financial measuresimplemented by the company.
Exhibit 1
Hapag-Lloyd has deleveraged since its merger with UASC
5.5x
9.4x
4.1x
4.9x
5.4x
4.6x
3.5x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
2013 2014 2015 2016 2017 2018 2019 12-18mForward View
Debt/EBITDA Debt/EBITDA fw
[1] 2019 ratios include the impact of the IFRS16 adoption[2] This represents Moody's forward view; not the view of the issuer; and includes the impact of the IFRS16 adoption.Source: Moody's Financial Metrics™
MOODY'S INVESTORS SERVICE CORPORATES
Credit strengths
» Fifth-largest company in the global container shipping industry
» Commitment of deleveraging its balance sheet, backed by a solid track record
» Young fleet, with an average fleet age of only 8.9 years
» Strong group of committed majority shareholders with a solid track record of support
Credit challenges
» Transformational year in 2020, with the introduction of IMO 2020, new large vessels entering the Asia-Europe trade lane andcoronavirus effects
» Industry reliance on short-term contracts, leading to low revenue visibility
» History of an EBIT margin in the low-single digits in percentage terms, although it improved in 2019
Rating outlookThe negative outlook balances Hapag Lloyd's solid business profile, combined with a good track record of management through volatileindustry environments with an adequate liquidity - $574 million in cash and $585 million in unused credit lines - with the challengesthe industry will face during at least Q2 and Q3 2020, when the effects of the crisis will impact operating performance and creditmetrics negatively. The negative effects could be mitigated with very tight capacity as a result of a high number of blanked sailings,thus acting as a stabilizer for freight rates. The rating affirmation reflects that Hapag Lloyd is confronted to this crisis, at its startingpoint, with very solid credit metrics for the B1 category.
As it currently stands, Moody's base case is attached with an unusual high degree of uncertainty which yields an EBITDA forecast of$1.8 billion - $2.0 billion for 2020. The forecast is very sensitive to assumptions for the base freight rate as well as cost savings fromcapacity reduction. This uncertainty as well as limited visibility is reflected in the negative outlook.
Factors that could lead to an upgrade
» Moody’s-adjusted debt/EBITDA declining below 4x on a sustained basis
» Achievement of greater profitability, as measured by its consistently positive EBIT margin
» Funds from operations (FFO) + interest expense/interest expense rising above 4x on a sustained basis
» Good liquidity at all times
Factors that could lead to a downgrade
» Leverage remaining above 5x debt/EBITDA for a prolonged period
» FFO + interest expense/interest expense falling below 3x
» Deterioration in the business environment for container shipping and in particular a longer impact of the coronavirus crisis thancurrently considered in our base case scenarios
» Negative free cash flow generation and pressure on the company's liquidity profile
2 6 April 2020 Hapag-Lloyd AG: Update following change in outlook to negative
MOODY'S INVESTORS SERVICE CORPORATES
Key indicators
Exhibit 2
Hapag-Lloyd AG
12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12-18 months forward view
Revenues (USD Billion) $9.8 $8.6 $11.3 $13.6 $14.1 $11 - $12
Size of Fleet 177 166 219 227 239 239
EBIT Margin 5.6% 3.3% 4.3% 4.9% 6.2% 3% - 5%
ROA (NPATBUI / Total Assets) 0.6% -0.8% 0.1% -0.1% 2.0% 0.0%
Debt / EBITDA 4.1x 4.9x 5.3x 4.6x 3.5x 3.5x - 4.0x
RCF / Net Debt 16.4% 14.4% 15.0% 15.3% 24.4% 16% - 20%
(FFO + Interest) / Interest
Expense
3.4x 3.4x 3.8x 3.3x 4.7x 4x - 4.5x
This represents Moody's forward view; not the view of the issuer.Source: Moody's Financial Metrics™
ProfileHapag-Lloyd AG , headquartered in Hamburg, Germany, is the fifth-largest container liner globally based on market share by volume.As of December 2019, it operated a fleet comprising 239 ships, including 112 owned/leased and 127 chartered-in vessels. For 2019, thecompany reported revenue of $14.1 billion and EBIT of $908 million. Hapag-Lloyd was established in 1970 as a result of the merger ofHapag (1847) and North German Lloyd (1857).
On 2 December 2014, Hapag-Lloyd merged with the Chilean shipping company Compania Sud Americana de Vapores (CSAV). On 24May 2017, Hapag-Lloyd completed a business combination with United Arab Shipping Company (UASC), whereby the merger of thetwo entities was accomplished via an in-kind contribution.
Exhibit 3
Revenue per trade lane2019
Exhibit 4
Volume per trade lane2019
Atlantic19%
Transpacific18%
Far East15%
Middle East7%
Intra-Asia4%
Latin America23%
EMA5%
Other9%
Source: Company Annual Report 2019
Atlantic16%
Transpacific16%
Far East20%
Middle East11%
Intra-Asia7%
Latin America24%
EMA6%
Source: Company Annual report 2019
Detailed credit considerationsThe fifth-largest company in the global container shipping industryHapag-Lloyd is the fifth-largest container shipping company in the world in terms of capacity, with a market share of 7.4% as ofFebruary 2020 according to Alphaliner. Although the five largest companies control 64% of global capacity, compared with 44% in2013, the market remains regionally fragmented with many small operators. Nevertheless, over the past couple of years, the industryexperienced a consolidation wave, increasing the market share of the five largest companies to 64% in 2018 from 44% in 2013. Thisincludes Hapag-Lloyd's acquisition of UASC in 2017, CMA CGM S.A.'s (B2 negative) acquisition of Neptune Orient Lines in 2016, A.P.Møller – Mærsk A/S' (Baa3 stable) acquisition of Hamburg Süd in 2017, Cosco's acquisition of OOCL in 2018 and the launch of a
3 6 April 2020 Hapag-Lloyd AG: Update following change in outlook to negative
MOODY'S INVESTORS SERVICE CORPORATES
container shipping joint venture by the Japanese shipping conglomerates Mitsui O.S.K. Lines, LTD. (Ba2 stable), Nippon Yusen KabushikiKaisha (Ba1 stable) and K-Line in 2018. We expect this consolidation to direct the shipping industry toward a more rational approach topricing and vessel ordering, which could lead to a more stable performance of the sector.
Exhibit 5
Market shares of leading container liners in 2013Exhibit 6
Market shares of leading container liners in 2020
14%13%
8%
4% 4% 4% 4%3% 3% 3% 3% 3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Source: Hapag-Lloyd
18%
16%
12%11%
7%7%
5%
3%2% 2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Source: Alphaliner
Hapag-Lloyd's fleet is made of up of 239 vessels, of which 112 are owned and 127 are leased. This fleet size is substantially smaller thanthe fleets of Maersk (689 vessels) and CMA CGM (489 vessels). Nevertheless, the company has large presence on the high-volumeroutes of Asia-Europe and Asia-North America, as well as a high market share on Europe-United States (trans-Atlantic) and LatinAmerica. It has, in 2019, been scaling back its intra-Asian shipping as the company views the market as difficult to generate attractivereturns.
Track record of de-risking its balance sheet exerts positive pressure on ratingsSince its merger with UASC in 2017, Hapag-Lloyd has been paying down debt to strengthen its balance sheet — €563 million in 2018and another €809 million in 2019 (the 12 months ended Q3 2019). Together with extracted synergies from the merger and its variousinitiatives to trim costs, its Moody's-adjusted debt/EBITDA decreased to 3.5x in 2019 from 5.3x in 2017. When the underlying marketstabilizes from the effects of the coronavirus outbreak, we believe the company will progress toward a level close to 3.0x within thenext 12-18 months. Our previous base case incorporated the possibility of increased capex because of the company ordering newvessels, still leaving room for additional debt repayments. Our revised projections points more toward liquidity preservation and thusscaled back capex and no debt prepayments.
Exhibit 7
Hapag-Lloyd has used positive FCF generation to repay debtHistorical Moody's-adjusted cash flow evolution
2016 2017 2018 2019
CFO 898 1,203 1,487 1,661
Dividends -6 -3 -116 -40
Capex -996 -999 -1,026 -883
FCF -104 201 345 738
Change in financial debt 106 -834 -563 -809
In Moody's-adjusted numbers, capital spending includes payments for operational leases.Source: Moody's Financial Metrics
Notwithstanding the fact that Hapag-Lloyd was experiencing positive momentum before the coronavirus outbreak, with strengthenedcredit ratios, 2020 will be quite a transformational year for the container shipping industry. This includes; (1) the introduction ofIMO 2020, with increased bunker costs; (2) the introduction of 19 new ultra large vessels1 with a total capacity of 440k twenty foot
4 6 April 2020 Hapag-Lloyd AG: Update following change in outlook to negative
MOODY'S INVESTORS SERVICE CORPORATES
equivalent units (TEUs) coming onto the market, which will most likely end up on Asia-Europe trade lane and (3) still limited visibilityon the effects of the coronavirus, although clearly a credit negative event for the industry.
Merger with UASC created scale and a more cost-efficient fleetIn May 2017, Hapag-Lloyd finalized its merger with UASC. The effect of this merger on its operating conditions was significant,increasing Hapag-Lloyd's capacity by 60% and the number of vessels by over 30% (172 to 230 vessels). It also secured the company'sfuture in terms of vessel size composition, giving it access to UASC's younger fleet with a larger average vessel size. Similar to that ofits peers, Hapag-Lloyd's increasing average vessel size has increased economies of scale and brought down its operating costs per TEU.This has been essential for the industry's survival as spot freight rates have decreased by almost 20% during 2014-20. For Hapag-Lloyd,as illustrated in Exhibit 8, the realized freight rates less bunker costs have decreased by 13% since 2015, while the company's operatingexpenses have decreased by 21% over the same period, all measured on a TEU basis.
Exhibit 8
Along with freight rates, operating costs have also gone downRevenue and costs on a per-TEU basis
1,326
1,1251,151
1,156 1,173
1,079
954914 897 891
160 100 137 158 151
0
20
40
60
80
100
120
140
0
200
400
600
800
1,000
1,200
1,400
2015 2016 2017 2018 2019
$ p
er
TE
U
$ p
er
TE
U
Revenue Operating expenses Bunker cost Net (RHS)
Source: Company reports
Strong group of committed majority shareholders, with a solid track record of supportHapag-Lloyd's largest equity owners comprise shareholders CSAV Germany Container Holding GmbH (CSAV, 30%), Kühne MaritimeGmbH and Kühne Holding AG (30%), HGV Hamburger Gesellschaft für Vermögens-und Beteiligungsmanagement mbH (13.9%),Qatar Investment Authority through its subsidiary Qatar Holding LLC (12.3%) and The Public Investment Fund of the Kingdom of SaudiArabia (PIF, 10.2%).
As outlined in the merger agreement with UASC, in October 2017, Hapag-Lloyd successfully completed a capital increase, raising grossproceeds of around €352 million ($414 million) from the issuance of 11.7 million new no-par value shares. Most existing shareholders(96.5%) exercised their subscription rights, strengthening the company's capital base and liquidity while reaffirming the commitmentof its equity owners.
Historically, Hapag-Lloyd has benefited from its pool of long-term shareholders that have supported the group in difficult times andduring strategic transactions. During the 2009 financial crisis, Hapag-Lloyd's shareholders injected a large amount of equity. In addition,the acquisition of CSAV's container liner activities was conservatively financed and entailed a €370 million capital increase, withcontribution from CSAV's shareholders (70%) and Hapag-Lloyd's shareholders (30%), which benefited the combined group's financialprofile. In 2015, Hapag-Lloyd completed an initial public offering and raised around €265 million. In connection with the listing, twoexisting shareholders (Kühne and CSAV) increased their stakes in the company, demonstrating, again, the shareholders' long-termsupport.
ESG considerationsIn terms of environmental, governance and social factors, Hapag-Lloyd's rating reflects the elevated environmental risk facing theshipping sector, such as carbon regulation and pollution. More precisely, the IMO2020 regulation which came into force 1 January 2020
5 6 April 2020 Hapag-Lloyd AG: Update following change in outlook to negative
MOODY'S INVESTORS SERVICE CORPORATES
could potentially increase bunker costs for shipping companies should the recent success in passing them through to shippers reverse.Moody's notes as positive that the company already has agreements in place with contracted customers to include a new BunkerAdjustment Factor based on the new low sulfur fuel, as well as an extraordinary surcharge for spot trades (contracts with a tenure ofless than three months).
Liquidity analysisWe view Hapag-Lloyd’s liquidity as adequate. The company had $574 million of cash and access to undrawn $585 million revolvingcredit facilities as of 31 December 2019. Given the high volatility typical for container shipping, the company’s covenants includeminimum equity and minimum liquidity, but no leverage or coverage ratios. Hapag-Lloyd has a number of unencumbered vesselsand containers that could be pledged to raise additional liquidity. Also, Hapag-Lloyd’s headquarters in Hamburg could be refinanced,yielding additional proceeds.
Hapag-Lloyd has only one bond outstanding of €450 million, maturing in July 2024. In 2019, the company prepaid its €450 millionbond maturing in 2022 in two stages. As of December 2019, other debt included €4.3 billion of bank debt and €453 million of otherfinancial debt. In addition, its IFRS16-related debt amounted to €1.2 billion. The company has around €700 million of bank debtcoming due in 2020.
Structural considerationsHapag-Lloyd's bond rating is placed two notches below its CFR, reflecting contractual subordination to the secured debt existing withinthe group (primarily vessel and container financing), as well as its pari passu ranking with all other unsecured indebtedness issued byHapag-Lloyd.
6 6 April 2020 Hapag-Lloyd AG: Update following change in outlook to negative
MOODY'S INVESTORS SERVICE CORPORATES
Methodology and scorecardIn assessing the credit quality of Hapag-Lloyd, we apply our Shipping Industry rating methodology, published in December 2017. On acurrent basis and in our forward view the scorecard-indicated outcome is one notch above the assigned rating. The difference can beexplained by the inherent volatility in the operating performance of container shipping companies.
Rating factorsHapag-Lloyd AG
Global Shipping Industry Grid [1][2]
Factor 1 : Scale (20%) Measure Score Measure Score
a) Revenues (USD Billion) $14.1 A $11 - $12 A
b) Size of Fleet 239.0 A 239 A
Factor 2 : Profitability (17.5%)
a) EBIT Margin (3 Year Avg) 5.2% B 3% - 5% Caa
b) ROA (NPATBUI / Total Assets)(3 Year Avg) 0.7% Ca 0% Ca
Factor 3 : Leverage and Coverage (30%)
a) Debt / EBITDA (3 Year Avg) 4.4x Ba 3.5x - 4x Ba
b) RCF / Net Debt (3 Year Avg) 17.7% Ba 16% - 20% Ba
c) (FFO + Interest) / Interest Expense (3 Year Avg) 3.9x Ba 4x - 4.5x Ba
Factor 4 : Fleet Characterestics (17.5%)
a) % Revenues from LT Charters Ca Ca Ca Ca
b) Unencumbered Assets Caa Caa Caa Caa
Factor 5 : Financial Policy (15%)
a) Financial Policy Ba Ba Ba Ba
Rating:
a) Indicated Rating from Grid Ba3 Ba3
b) Actual Rating Assigned B1
Current
FY 12/31/2019
Moody's 12-18 Month Forward View
As of 4/2/2020 [3]
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.[2] As of 12/31/2012(L); Source: Moody’s Financial Metrics™.[3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.Source: Moody’s Financial Metrics™
7 6 April 2020 Hapag-Lloyd AG: Update following change in outlook to negative
MOODY'S INVESTORS SERVICE CORPORATES
AppendixExhibit 10
Peer snapshot1 April 2020
(in USD millions)FYE
Dec-17
FYE
Dec-18
FYE
Dec-19
FYE
Dec-17
FYE
Dec-18
FYE
Dec-19
FYE
Dec-17
FYE
Dec-18
FYE
Dec-19
FYE
Mar-18
FYE
Mar-19
LTM
Dec-19
FYE
Mar-18
FYE
Mar-19
LTM
Dec-19
Revenue $30,945 $39,280 $38,890 $21,116 $23,476 $30,254 $11,269 $13,719 $14,115 $19,709 $16,506 $15,578 $14,917 $11,135 $10,635
EBITDA $5,785 $7,119 $5,893 $3,684 $3,033 $3,856 $1,878 $2,313 $2,185 $1,597 $1,599 $1,441 $1,680 $1,745 $1,684
Total Debt $27,962 $21,588 $17,025 $16,319 $16,100 $19,846 $10,494 $10,320 $7,563 $12,294 $12,094 $11,669 $14,088 $13,276 $13,535
Size of fleet (# ships) 781 710 708 504 509 502 219 227 239 830 792 792 857 839 839
EBIT Margin 3.9% 3.9% 4.3% 9.0% 4.9% 3.9% 4.3% 4.9% 6.2% 1.9% 2.6% 2.8% 4.6% 6.5% 6.4%
ROA(NPATBUI)/Avg Assets -0.2% -0.6% 0.8% 2.5% 0.1% -0.8% 0.1% -0.1% 2.0% 0.3% -0.9% 0.5% -0.1% 0.8% 1.8%
FFO + Int Exp / Int Exp 7.8x 6.0x 6.3x 4.0x 2.9x 2.6x 3.8x 3.3x 4.7x 6.7x 4.2x 3.6x 4.8x 4.3x 5.6x
Debt / EBITDA 4.8x 3.0x 2.9x 4.4x 5.3x 5.1x 5.3x 4.6x 3.5x 7.4x 7.6x 8.1x 8.1x 7.6x 8.0x
RCF / Net Debt 24.6% 31.8% 37.0% 17.6% 11.7% 12.4% 15.0% 15.3% 24.4% 11.9% 7.4% 5.3% 9.1% 8.0% 8.9%
Baa3 Negative B2 RUR - Down B1 Negative Ba1 Negative Ba2 Negative
A.P. Moller-Maersk A/S CMA CGM S.A. Hapag-Lloyd AG Nippon Yusen Kabushiki Kaish Mitsui O.S.K. Lines, Ltd.
Source: Moody’s Financial Metrics™
Ratings
Exhibit 11
Category Moody's RatingHAPAG-LLOYD AG
Outlook NegativeCorporate Family Rating B1Senior Unsecured -Dom Curr B3/LGD6
Source: Moody's Investors Service
Endnotes1 Ultra large container vessels are classified as those with a nominal capacity of more than 18,000 twenty foot equivalent units (TEU).
8 6 April 2020 Hapag-Lloyd AG: Update following change in outlook to negative
MOODY'S INVESTORS SERVICE CORPORATES
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9 6 April 2020 Hapag-Lloyd AG: Update following change in outlook to negative
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10 6 April 2020 Hapag-Lloyd AG: Update following change in outlook to negative
