World’s biggest shipping firm at risk of downgrade, says Danske

A.P. Moller-Maersk A/S gave its shareholders some relief last week when it announced a separate listing of its drilling unit. But bondholders have less to celebrate. According to Danske Bank A/S, Denmark’s biggest bank, Maersk’s planned spin-off may have brought the world’s biggest shipping company closer to a junk rating. Brian Borsting, an analyst at Danske in Copenhagen, is warning clients that some of Maersk’s longest-running bonds have now started pricing in a downgrade. S&P Global Ratings, which rates Maersk two steps above junk with a negative outlook, didn’t respond to calls seeking comment. Maersk says every decision that management takes is with a view to protecting the investment-grade rating.

 

But the risk of a downgrade is growing as Maersk’s exit from the energy industry brings it closer to ending the conglomerate structure that bondholders tend to prefer. Danske points out that the planned separate listing of Maersk’s oil drilling unit is essentially the same as giving shareholders a dividend, at the expense of rewarding bondholders. Maersk also says it wants stock investors to get a “material” part of the proceeds from the sale of its oil exploration company. All in all, the latest news is “credit negative” for bondholders, Borsting said. “In our view, the risk of a rating downgrade from the current BBB rating has increased,” he said. If S&P cuts Maersk to BBB-, “investors are looking into a company that is close to high yield with significant container industry exposure, which is very volatile, earnings and cash flow wise,” he said.

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Shipping containers sit on a cargo vessel operated by AP Moeller-Maersk (left) on the dockside at the Eurogate Container Terminal in the Port of Hamburg (file). According to Danske Bank, Denmark’s biggest bank, Maersk’s planned spin-off may have brought the world’s biggest shipping company closer to a junk rating.

Moody’s Investors Service gives Maersk a Baa2 rating, which is also two steps above junk, with a negative outlook. In an e-mailed comment, senior analyst Maria Maslovsky said, “The financing of Maersk Drilling will generate proceeds of approximately $1.2bn for Maersk that will be available for debt reduction,” in an e-mailed response to questions. With regard to the proceeds of its sale of oil and gas assets to Total SA last year, “We note that Maersk has stated that, subject to meeting its investment-grade objective, it expects to return a material portion of the value” to shareholders, Maslovsky also said.

“Still, we acknowledge that the significant value of the Total SA shares will provide Maersk with a high degree of flexibility in terms of managing its leverage levels.” Meanwhile, shareholders are reaping the spoils of the latest divestments. Maersk’s dividend for 2019 may be as high as 2,500 kroner a share, when including proceeds from the spin-off of the drilling assets and the sale of Total stock, according to an estimate published by Frode Morkedal, managing director of equity research at Clarksons. For context, a single Maersk share traded at around 9,000 kroner this month.

Borsting says Maersk is unlikely to be cut all the way to junk, given its repeated pledge that all shareholder payouts are subject to keeping an investment grade. So he expects that the company “will scale the balance sheet conservatively.” Maersk has secured a $1.5bn bank loan for the drilling arm, of which $1.2bn will go to the parent company as cash proceeds in connection with the 2019 listing. Maersk said it failed to find a buyer for the unit because no companies in the drilling industry could afford to buy it, as the industry struggles to recover from the 2014 slump in oil prices.

Maersk may be able to avoid a one-step downgrade if the shipping company, which handles about a fifth of the world’s containerised freight, can increase 2019 earnings by roughly 25% from this year’s level, Danske said. “However, with the risk of a global trade war looming, uncertainty is high,” Borsting said.

Sources and photo-credits: Gulf Times, Bloomberg