The rating agency Moody’s said it has put Japan’s second largest shipping company, Mitsui O.S.K. Lines (MOL), under review for downgrade after MOL lowered its earnings estimate for the current fiscal year.
Mariko Semetko, an analyst at Moody’s, said the change is unlikely to affect MOL’s ability to borrow.
Semetko said Moody's put MOL's Baa3 rating — the lowest of its investment grade ratings — under review on Monday after MOL reported earnings of 8.5 billion yen ($84 million) for the period ending June 30, compared to 12.9 billion yen the previous year, and cut its ordinary income estimate for the full fiscal year ending March 30 from 70 billion yen to 50 billion yen.
Moody’s already had MOL on a “negative outlook” because of high debt leverage, “but even though the leverage was very high, we assumed the company will be able to continue to de-leverage over time,” said Semetko. “And so that assumption was already baked into the rating.
“Now that the company has changed its guidance for the year, we don’t think that they will be able to continue to de-leverage in the near term.”
Announcing the review, Moody’s said, “Continued weakness in the containership segment has contributed to the lower earnings. The company previously expected the segment to turn profitable after reporting three consecutive years of losses. MOL announced that it now expects ordinary losses of 5.5 billion yen for the year ending in March 2015. In addition, the dry bulk segment, which management previously expected to remain the key earnings driver this year, has instead proven sluggish on the back of still tepid market conditions.”
Based on management's revised expectations, Moody's said it expects MOL's debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio will be around 8 by the end of March next year, up from 7.7 on March 31.
"Such a high leverage level is inconsistent with its current Baa3 rating," said Semetko. "That reversal in the de-leveraging trend is what prompted us to place the company under review for downgrade.”
MOL’s public relations office said it had no comment on the Moody’s decision to put its rating under review.
Semetko said if MOL’s rating drops below Baa3, it will no longer be investment grade.
“Having said that, I don’t think that will change much the company’s ability to finance because MOL, as well as a lot of other Japanese companies, has a very strong support system, including from their banks, and so even if the rating falls below Baa3, I don’t think they’ll have any issues in terms of financing going forward," Semetko said.
Shipping, she noted, is important to Japan’s imports and exports, and MOL “plays a significant role. Given their scale and the size and their very long history with their banks as well, I don’t think they’ll have any problems with financing.”
The trends MOL is facing are similar to those faced by others in the shipping industry. She said both of Japan’s other two major shipping companies, NYK and “K” Line, are also highly leveraged.
Moody’s rating on NYK is Baa2, a notch higher than MOL, with a negative outlook, while K Line is rated lower, Ba2 with a stable outlook.
Moody’s ratings are explained in a long document that can downloaded here
, but Moody’s says “obligations rated Baa are judged to be medium-grade and subject to moderate credit risk, and as such, may possess certain speculative characteristics,” while “obligations rated Ba are judged to be speculative and are subject to substantial credit risk.”
Moody’s also supplements those letter ratings with numbers it calls “modifiers,” explaining that the “modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.”
While NYK also lowered its guidance for the current fiscal year, Semetko said “it wasn’t as significant as MOL."
She said last year Japanese companies benefited depreciation of the yen, “but this year, the yen has been pretty stable, and so without the further depreciation, they can’t really count on that to boost their earnings. So they really had to focus on cost reduction in the absence of the yen further depreciating."
Semetko said conditions in the shipping industry have been “tepid. Our view on the global shipping industry is still stable, but it’s stable at a very low level. And so we’re not assuming any material improvements in the shipping market. And the lack of improvement in the shipping market is holding them down.”