Moody’s Japan K.K. has downgraded Mitsui O.S.K. Lines’ (MOL) corporate family rating to Ba2 from Ba1 on the grounds of the company’s likely inability to cut debt over the next few years.
The argumentation is based on the expectation that the company will continue to borrow to invest in its growth segments, such as offshore oil and gas infrastructure and LNG carriers. The rating outlook is stable.
“We expect MOL’s debt will not decline materially over the next few years and its leverage will likely remain above our downgrade guidance of 7.0x for a Ba1 rating,” says Motoki Yanase, a Moody’s Vice President and Senior Credit Officer.
Moody’s expects a marginal improvement in profitability measured by EBIT margin over the next few years, from its growth segments, the spin-off of its volatile containership business into the Ocean Network Express (ONE) joint venture, and the gradual recovery in the market, mainly in the dry bulk and containership sectors.
According to the rating agency, ONE hasn’t benefited MOL’s profitability so far, and it will take several years to prove out. Even potential earnings improvement of the JV are likely to have a limited impact on MOL’s ability to lower leverage, given the large size of its debt.
Moody’s expects that MOL’s EBIT margin will remain in the single digits, and that any improvement in EBITDA will not be enough to lower leverage. Moody’s estimates MOL’s retained cash flow/net debt will remain in the single digits, lower than that of its global peers at the Ba or single-B levels.
Despite its weak credit metrics, MOL’s rating continues to be supported by its large scale, relatively diversified shipping segments, and well-established market presence.
The company’s fleet includes about 850 vessels, including dry bulkers, car carriers, tankers and LNG carriers, which have different business cycles and mitigate business volatility to some extent, the rating agency said, adding that these mostly unencumbered assets put the company in a better position than many of its global peers to raise funds by selling or securing assets.