Industry Giant in Merger Downgraded


In a press release, Moody’s Japan K.K. has downgraded Nippon Yusen Kabushiki Kaisha's (NYK) issuer rating to Baa3 from Baa2 and announced that the outlook is negative.

This news comes after PTI announced NYK would be joining a mega-alliance with K-Line and Mitsui O.S.K Lines, which gave them 7% of the world shipping market and placed them as the third biggest container company.

Mariko Semetko, Vice President and Senior Analyst at Moody’s said: “The downgrade to Baa3 from Baa2 reflects our view that low freight rates will keep NYK's cash flow low and leverage high in the near to medium term.”

Consequently, the company's earnings recovery has been and will likely remain much slower than Moody's had previously anticipated.

Weakness in the Bulk Shipping business — which for NYK encompasses dry bulk, car carriers and tankers — is the primary driver of the lower earnings guidance. In particular, the company cited the continued weak demand in car carriers and low rates in tankers as the main drivers of the lower guidance.

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In addition, the company has lowered its freight rates estimates for its Capesize and Panamax class dry bulk vessels, highlighting that the market recovery has been much slower than the company had previously anticipated.

NYK's Baa3 rating reflects the company's weak financial profile including its very high debt leverage and low earnings and cash flow expectations caused by continued industrywide overcapacity and depressed freight rates. These factors are offset by its limited refinancing risk, its position as one of the world's largest shipping companies, and our expectations for on-going cost reductions.

The outlook is negative, reflecting Moody's expectation that earnings and cash flow will remain low and leverage will remain elevated over the coming 12-18 months.

The shipping industry as a whole is struggling in a worldwide slump, and many companies such as NYK are merging in an attempt to avoid going under in the volatile environment, much like Hanjin Shipping did.

Another merger involving some shipping industry giants is awaiting approval by the EU to begin combining assets; German shipping line Hapag-Lloyd and Kuwaiti United Arab Shipping Company (UASC) planned merger is one step closer to completion.

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