Maersk’s separation of energy companies from its core business might drive its rating downgrade, according to Moody’s Investors Service, which has continued its review of the Baa2 issuer rating and senior unsecured rating of Denmark-based shipping and energy company.
Moody’s review also includes Maersk’s senior unsecured medium-term note (MTN) programme’s (P) Baa2 rating.
“The continuation of the rating review reflects ongoing uncertainty with respect to the application of proceeds of the Total S.A. shares,” said Maria Maslovsky, Moody’s Vice President and the lead analyst for Maersk.
“Also, the Maersk Oil sale is not closed yet and the separation of Maersk Drilling and Maersk Supply Service is still pending,” added Maslovsky.
Maersk is pursuing a focus switch of its business strategy and plans to concentrate the group’s future activities on transport and logistics.
The move was ascribed to recent years’ downfall of the oil and gas industry markets, among other things.
The strategy change saw Maersk Oil sold off to Total S.A in August for USD 7.45 billion in a combined share and debt transaction. In addition, Maersk Tankers was sold to one of the group’s subsidiaries APMH Invest A/S in October for USD 1.17 billion in an all-cash transaction.
The proceeds of the sale of the two businesses, including that of the Dansk Supermarked disposition (USD 0.9 billion), are slated for cutting of debt.
Buyers for Maersk Drilling and Maersk Supply Service are expected to be found before the end of 2018.
“Today’s (December 8) rating action reflects Moody’s understanding that Maersk has not yet determined the exact use of the proceeds of 97.5 million of Total S.A. (Aa3) stable shares it is due to receive as part of the sale of Maersk Oil,” the rating agency said, adding that it would conclude the review once the use of proceeds is determined.
Maersk said earlier that it would return a significant portion of the shares to the APMM shareholders during 2018-2019, however, the exact amount depends upon the company’s performance and the solutions found for the Maersk Drilling business, Moody’s added.
As indicated, Maersk is expected to gain a high degree of flexibility in terms of managing its leverage levels from the Total deal. However, the conglomerate will need to pay some of its debt soon, especially given the volatile nature of the ocean shipping industry, which is not anticipated to abate in the near term.
Maersk has a liquidity reserve of USD 10.6 billion as of September 30, 2017, excluding committed financing for the Hamburg Sud acquisition. The group has a little over USD 1 billion of debt maturities in Q4 2017 and less than USD 2 billion in 2018 which are expected to be refinanced in due course, the rating agency said.
Moody’s estimates adjusted Gross Debt to EBITDA of around 3x for the Transportation & Logistics businesses only in 2018, which is high for the Baa2 rating given that the industry has recovered from a low point in the cycle in 2016.
In order to keep its strong Baa2 rating grade Maersk will need to maintain its debt/EBITDA below 3.0x at all points in the cycle and demonstrate greater stability in achieving a positive EBIT margin at Maersk Line on a consistent basis.
In addition, a debt/EBITDA leverage of below 3.5x would need to be sustained through the shipping cycle for an investment grade credit profile.
If the said preconditions are met, Maersk’s rating could be stabilized.
However, the rating is likely to be downgraded if the company’s debt/EBITDA ranges between 3.0x and 3.5x pro forma for the separation of the energy businesses whilst not exceeding 3.5x at all points in the cycle. Consistent negative free cash flow (after capex and dividends) would also create pressure on the rating, Moody’s said.