Low Earnings Prompt Rating Downgrades for Japan’s Big Three

Japanese shipping majors Nippon Yusen Kabushiki Kaisha’s (NYK), Mitsui O.S.K. Lines (MOL) and Kawasaki Kisen Kaisha (K-Line) are faced with downgrades by the rating agency Moody’s amid lowered earnings stemming from volatile market conditions.

The worst hit was Tokyo-based NYK whose outlook was revised to negative from stable, but with affirmed Baa2 long-term issuer rating.

“The change in outlook to negative from stable reflects our expectations that NYK’s profitability will remain weak over the near-to-medium term,” says Moody’s Vice President, Senior Analyst, Mariko Semetko.

“Similar to many players in the shipping industry, we expect the company will continue to face low freight rates and volatile demand conditions,” added Semetko.

Based on NYK’s latest guidance released on 28 April, 2016, Moody’s now expects debt/EBITDA will exceed 6x by 31 March 2017, a level Moody’s previously indicated that could lead to downward ratings pressures.

NYK’s Baa2 rating reflects the company’s limited refinancing risk, its ability to reduce costs and debt, and the agency’s view that its diversified business portfolio will support long-term earnings stability. The rating also reflects its high debt leverage, and continued industry-wide overcapacity and depressed freight rates.

Moody’s said that an upgrade is unlikely in the near term, as it would require management’s ability and willingness to maintain debt leverage at a significantly lower level.

Image Courtesy: K-Line
Image Courtesy: K-Line

NYK’s counterpart K-Line also saw its corporate family rating downgraded to Ba3 from Ba2. The outlook, however, is stable.

According to Semetko, the rating action reflects the agency’s expectation that the environment in which K-Line operates will remain challenging, making it difficult for the company to quickly deleverage.

Since Moody’s placed the company’s rating under review in February, the company further lowered its earnings for the fiscal year ending 31 March, 2016, citing very low freight rates in container ships and dry bulk. In addition, K-Line has reduced its ordinary profit target for the fiscal year ending 31 March, 2020 by 47% to JPY45 billion compared to its plans set a year ago. The lower earnings level will reduce the speed at which the company deleverages.

At the same time, Moody’s expects that the company’s restructuring will help turn around its earnings. These cost efficiencies should over time improve the company’s profitability, barring further material declines in freight rates. Moody’s also notes that K-Line has amassed JPY241.1 billion of cash on hand as of 31 March 2016, providing the company with liquidity. These factors combined are reflected in the stable outlook.

Finally, Moody’s Japan K.K. has placed MOL’s Ba1 corporate family rating under review for downgrade.

The review stems from MOL’s anticipated earnings decline for the fiscal year ending on 31 March 2017.

“Similar to many players in the shipping industry, we expect MOL will continue to face low freight rates in the near and medium term,” says Semetko. The company’s earnings recovery has been, and will likely continue to be, much slower than Moody’s previously anticipated.

Based on MOL’s latest guidance, Moody’s now expects debt/EBITDA will remain materially above 7x in the next 12 to 18 months, a level Moody’s previously indicated that could lead to downward ratings pressures. Moody’s also previously cited that MOL’s rating could come under pressure if there are any signs that profitability will not turn around or if leverage does not commence to decrease, which now appears to be the case.

The review will focus on the likelihood of MOL’s containership segment becoming profitable, the speed at which the earnings of the bulk ship segment will recover including the effects of the restructuring, MOL’s financial policies and plans for managing its capital structure, and its ability and willingness to take concrete countermeasures to lower leverage and improve profitability and cash flow on a consistent basis.

If MOL were to be downgraded as a result of this ratings’ review, Moody’s currently expects that the possible outcome will be a downgrade of no more than one notch.

 

 

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