Moody's Investors Service has changed the outlook on the ratings of A.P. Moller-Maersk A/S from negative to positive. Concurrently, Moody's affirmed the Baa3 long-term issuer rating of the company.
A full list of debt can be found in the end of the press release.
"Following a very strong performance amidst the global pandemic by the container shipping industry, Maersk's credit metrics have continued to strengthen during the first half of 2020", says Daniel Harlid, lead analyst for Maersk. A continuation of the recent performance and credit metrics improvements trend could support further positive rating pressure over the next 12 to 18 months.
The container shipping market has performed very strongly amidst the global pandemic, where all carriers have exhibited discipline in terms of adjusting capacity to decreased demand during the first half of 2020. Moody's understands volumes during the third quarter have been stronger than expected, in combination with equipment shortages on some trade lanes, sending up freight rates higher than at the start of the year. Coupled with low bunker prices, carriers have recorded double digit growth rates in EBITDA during this time period compared to the first half of 2019. In light of how the industry is currently behaving, coupled with continued low bunker prices and relatively high freight rates and strong volumes during Q3, Moody's believes the second half will be even better in terms of operating performance.
Notwithstanding currently strong market fundamentals, the rating action is based on Maersk's efforts to continue to focus on becoming an integrated shipping and logistics company and adjust its capital structure thereafter. This has been an ongoing development since the company announced its intention to separate its energy business in 2016 and the subsequent completion of this during 2019. During this period, the company has paid down large amounts of debt while simultaneously increased profitability for the remaining business resulting in continued positive free cash flow generation over the last years. The effect has been a decrease in Moody's-adjusted debt/EBITDA to 2.7x for the last twelve months ending June 30, 2020, from 4.8x end of 2017. With the help of a reduced capex level, which Moody's believes will be sustained going forward, the company's Moody's-adjusted free cash flow to debt level amounted to 15% in Q2 2020 (on a LTM basis). Moody's also notes as positive that the company is currently using these strong cash flows to prepay outstanding bonds as well as bank debt, further strengthening its balance sheet.
The positive outlook balances the aforementioned positives with still present downside risks, such as deterioration in capacity discipline by carriers, the looming threat of additional lockdowns as well as increased trade tension between the US and China. That being said, Maersk's capital structure and credit ratios are strong enough to have some cushion for these type of risks without jeopardizing continued positive rating pressure.
Change to positive outlook
The change from negative to positive outlook is partly reflecting the fact that the envisaged negative ratings pressure on the sector that we anticipated as a consequence of COVID-19 has not materialized. For Maersk, the effect has been sustained strong credit metrics above our set triggers for an upgrade. Incorporating our expectations for stable performance also in 2021, we foresee an EBIT margin of 6% - 7% and debt/EBITDA to hover around 2.2x for the next 12-18 months.
Factors that could lead to an upgrade or downgrade of the ratings
Further positive ratings pressure would require the company to sustain a debt / EBITDA ratio below 3x while maintaining its very strong liquidity profile over the next 12 to 18 months. This also includes generating positive free cash flow after shareholder remuneration over the cycle.
Negative ratings pressure could arise if the company's debt/EBITDA ratio increased above 3.5x at any point over the cycle. Additionally, negative free cash flow after shareholder remuneration and a weakened liquidity profile would cause negative pressure on ratings.