A.P. Moller-Maersk A/S

Transcription

1 CREDIT OPINION A.P. Moller-Maersk A/S Update following review for downgrade Update Summary The main drivers of Maersk's Baa2 rating are: (1) its leadership in the global container shipping sector and its solid market position in container terminals; (2) its strong liquidity and moderate leverage; (3) a focused and disciplined management team with a good track record; (4) stable and supportive shareholders; and (5) commitment to investment grade ratings. RATINGS A.P. Moller-Maersk A/S Domicile Denmark Long Term Rating Baa2, Possible Downgrade Type LT Issuer Rating - Dom Curr Outlook Rating(s) Under Review Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Maria Maslovsky VP-Senior Analyst maria.maslovsky@moodys.com Joao De Almeida Associate Analyst joao.dealmeidamarques@moodys.com Mario Santangelo Associate Managing Director mario.santangelo@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA However, Maersk's rating is constrained by: (1) the execution risk related to the separation of the remaining energy businesses and the uncertainty associated with resulting level of debt, specifically with respect to the use of the Total S.A. (Aa3 stable) shares; (2) the low and volatile return from container shipping; (3) the weakness in some of its end markets (drilling), although this business is slated for sale. On 29 August 2017, we placed Maersk's rating on review for downgrade following its announcement that it agreed to dispose of its Maersk Oil division to Total S.A. for an enterprise value of $7.45 billion. Maersk was to receive $2.5 billion in cash, which will be used by Maersk to repay debt, and $4.95 billion (97.5 million shares) in equity; the shares have since appreciated by approximately 10%. The transaction is expected to close in the first quarter of The divestment is in line with Maersk's previously announced strategy of separating its energy assets from the Transport and Logistics (T&L) business. The review for downgrade reflects our expectation that leverage could increase to a level not commensurate with the Baa2 rating if a significant portion of the Total S.A. shares is distributed to shareholders. Whilst we take comfort from Maersk's publicly stated commitment to maintain investment grade ratings, the company has not yet announced a detailed plan with respect to the use of the Total S.A. shares. Therefore, on 8 December 2017, we continued our review of Maersk's rating and would expect to conclude it once Maersk has decided on the use of proceeds from the Total S.A. shares. Credit strengths» Leadership in the global container shipping sector and solid market position in container terminals along with strategic links with smaller T&L businesses (Damco, Svitzer, MCI)» Container shipping recovering from the cyclical trough in 2016 but freight rates still below historical levels» Stable shareholding and disciplined management albeit some recent shareholder-friendly actions; public commitment to investment grade» Strong liquidity

2 Credit challenges» Uncertainty with respect to the utilization of the Total S.A. shares and the separation of the remaining energy businesses, although Maersk had made progress with the announcement for Maersk Oil and the sale of Maersk Tankers» Increased exposure to cyclical activities resulting from reduced business diversification following the planned separation of the transportation and the energy businesses Rating outlook The review for downgrade will focus on Maersk's approach to allocating the 97.5 million ($5.5 billion) of Total S.A. shares between debt repayment and shareholder distribution. The review for downgrade also reflects the uncertainty in executing on the transactions related to the separation of the remaining energy assets and the level of debt that Maersk will carry as a result. Moody s would expect to conclude this review once Maersk has decided on the use of proceeds from the Total S.A. shares. Factors that could lead to an upgrade For the rating outlook to be revised to stable:» Debt/EBITDA below 3.0x at all points in the cycle pro-forma for the sale of the energy businesses» Achievement of greater stability in the container shipping freight rates and, consequently, profitability, as measured by consistently positive EBIT margin Factors that could lead to a downgrade The rating would likely be downgraded if:» Maersk's Debt/EBITDA ranges between 3.0x and 3.5x pro forma for the separation of the energy businesses whilst not exceeding 3.5x at all points in the cycle» Consistent negative free cash flow (after capex and after dividends) Key indicators Exhibit 1 A.P. Moller-Maersk A/S US Millions Dec-13 Dec-14 Dec-15 Dec-16 47, , , , % 15.4% 14.1% 11.4% 3.5% 4.0% 3.9% 2.6% Debt / EBITDA (3 Year Avg) 1.8x 1.6x 1.7x 1.9x RCF / Net Debt (3 Year Avg) 47.3% 50.2% 50.8% 46.5% 12.0x 12.9x 13.5x 12.9x Revenue Size of fleet (number of ships) EBIT Margin (3 Year Avg) ROA (NPATBUI / Total Assets) (3 year Avg) (FFO + Interest) / Interest Expense (3 Year Avg) All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-financial Corporations Source: Moody's Financial Metrics This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Corporate profile Headquartered in Copenhagen, Denmark, A.P. Møller-Mærsk A/S is a diversified conglomerate whose main business areas encompass container shipping, oil and gas, drilling, port terminals and other shipping-related activities. The group reported revenues of $23.0 billion and EBITDA (before impairment losses) of $2.7 billion in the first nine months of Maersk is in the process of separating its energy-related businesses and will focus on the transportation and logistics sector going forward. In 1904 the Møller family founded the group, which has now become one of the largest Danish companies listed on the Nasdaq-OMX Copenhagen, with a current market capitalisation of around $34 billion. Most of the company shares (41.5% of the share capital and 51.2% of voting rights) are owned by A.P. Møller Holding A/S, a subsidiary established by the foundation which is known as A.P. Møller og Hustru Chastine Mc-Kinney Møllers Fond til almene Formaal (the Foundation), which together with the family foundation, the A.P. Møller og Hustru Chastine Mc-Kinney Møllers Familiefond, own 50.4% of the group's share capital and 64.3% of the voting rights. Recent developments On 21 August 2017, Maersk announced that it agreed to dispose of its Maersk Oil division to Total S.A. for an enterprise value of $7.45 billion. Maersk is to receive $2.5 billion in cash, which will be used by Maersk to repay debt, and 97.5m shares representing 3.76% of Total S.A. share capital ( Total S.A. shares ); the shares have appreciated by approximately 10% since the announcement. Total S.A. will take over all decommissioning obligations currently amounting to $2.9 billion. The divestment is in line with Maersk's previously announced strategy of separating its energy assets from the Transport and Logistics business. On 29 August 2017, we placed Maersk's rating on review for downgrade due to significant uncertainty regarding how much, if any, of its outstanding debt it will repay using the value of the Total S.A. shares. On 20 September 2017, Maersk announced an agreement to sell the shares in Maersk Tankers to APMH Invest A/S (APMHI), a wholly owned subsidiary of its controlling shareholder, for $1.2 billion. The proceeds are expected to be used for debt reduction. This transaction closed on 10 October On 30 November 2017, Maersk closed on the acquisition of Hamburg Sud which was first announced on 1 December The enterprise value totalled 3.7 billion. On 8 December 2017, we continued the review of Maersks's rating reflecting the continued uncertainty with respect to the application of proceeds of the Total S.A. shares, as well as the fact that the Maersk Oil sale is not closed yet and the separation of Maersk Drilling is still pending. We expect to conclude this review once Maersk has decided on the use of proceeds from the Total S.A. shares. Detailed credit considerations Leadership in the global container shipping sector and solid market position in container terminals along with strategic links with smaller T&L businesses Maersk Line, the largest segment of the T&L business (76.1% of first nine months of 2017 EBITDA), possesses the world's largest fleet capacity (approximately 19.2% market share including Hamburg Sud, according to Alphaliner), followed by Mediterranean Shipping Company (MSC, unrated), COSCO (including OOCL, unrated) and by CMA CGM (B1 stable). Maersk Line's fleet consisted of 285 owned and 383 chartered ships at 30 September 2017 with an average size of 5,292 TEUs. The company had further 20 new vessels comprising 7.4% of its current fleet on order to be delivered in 2018 and no further plans for new orders. On 30 November 2017 Maersk closed its acquisition of Hamburg Sud, a complementary container liner. Hamburg Sud is the ninth largest container shipping company in the world with 103 vessels, according to Alphaliner, which represents circa 16% of Maersk's current fleet. APM Terminals is the second largest segment in the T&L division (18.3% of first nine months of 2017 EBITDA before impairment) and a top five terminal operator globally. We view the terminals business as less cyclical in comparison to the liner since its major driver is freight volume, independent of the freight rate. The terminal business is also more profitable generating EBIT margins in the teens as compared to single digit margins for the liner. This is a differentiating factor in comparison to some of the other container shipping companies that we rate, and adds some diversification and vertical integration, although the terminal business is to some extent exposed to similar cycles. 3

4 The other T&L businesses: Svitzer (a towage company), Damco (a freight forwarder), and MCI (a container manufacturer), are smaller contributors to T&L group revenues. Still, successfully merging their operations into the overall group will be important to achieving expected integration synergies (2 percentage point increase in ROIC). Maersk retains its Drilling and Supply businesses as part of its Energy division; however, we expect those to be separated from the T&L business over the next months in line with Maersk's previously outlined strategy. It should be noted that both of these segments are facing challenged market conditions. Container shipping recovering from the cyclical trough in 2016 but freight rates still below historical levels In the third quarter of 2017, the container shipping industry continued to see an improvement in freight rates with Maersk reporting a 13.9% increase in both freight rates and revenues as compared to the third quarter of Maersk Line's third quarter 2017 results (as measured by EBIT) demonstrated a strong improvement to $263 million from negative $153 million in the third quarter of Exhibit 2 Container freight rates are recovering but still below historical levels China Containerized Freight Index (CCFI) USD/TEU Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Source: FactSet The gradual improvement in freight rates since the lows reached in the second quarter of 2016 occurred primarily owing to capacity reduction through scrapping, delivery postponements and diminished ordering. This capacity reduction, in turn, led to improved supply demand balance in the industry and, as a result, strengthening freight rates. Exhibit 3 Moody's expectations for supply demand balance in the shipping sectors Containerships (TEU) Fleet as of 31 December 2016 (million DWT, thousand TEU) Supply growth in 2017 (million DWT, thousand TEU)* Expected supply growth Expected demand growth Supply growth vs. demand growth Segment views 19,919 About to 3.5% About 2.0% 1.0% Stable Deadweight tonnage (DWT) is a measure of a ship s volume, including bunker oil, fresh water and ballast water tanks, and crew and provision stores. Twenty-foot equivalent unit (TEU) is the standard measure of a container ship s capacity. * Newbuildings less postponements, cancellations and scrapping. Source: Drewry Maritime Research and Moody s Investors Service estimates We revised our view of container shipping to stable from negative in May 2017 and expect the supply demand relationship to remain more balanced in the next months. Stable shareholding and disciplined management albeit some recent shareholder-friendly actions; public commitment to investment grade Maersk is indirectly owned (through A.P. Møller Holding A/S) by the Foundation headed by the founder's family. The Foundation is historically attached to the stability and long-term security of Maersk's operations. In addition, Maersk benefits from management's 4

5 good track record, which has adjusted the group's leverage and corporate development to changes in the economic environment. Despite its exposure to cyclical activities, Maersk has demonstrated an ability to operate with limited leverage, even in a challenging environment, particularly in 2010 and Maersk has made share repurchases through the launch of a first $1 billion share buyback programme in September 2014, then renewed for another $1 billion in September When Maersk divested its stake in Danske Bank in 2015, it returned the cash proceeds to shareholders via a special dividend. We have considered as credit negative both actions, which took place when the operating environment of some of the group's business units had started to weaken. Going forward, Maersk noted that if needed it will adjust its dividend policy to deliver on its commitment to maintain investment grade credit profile. Indeed, in February 2017, Maersk cut its dividend by 50%. Uncertainty with respect to the utilization of the Total S.A. shares and the separation of the remaining energy businesses We have continued our review of Maersk's ratings due to significant uncertainty regarding how much, if any, of its outstanding debt it will repay using the value of the Total S.A. shares. We note that Maersk has stated that, subject to meeting its investment grade objective, it expects to return a material portion of the value of the received Total S.A. shares to its shareholders during the course of 2018/19. Still, we acknowledge that significant value of Total S.A. shares will provide Maersk with a high degree of flexibility in terms of managing its leverage levels. We are also mindful that given the volatile nature of the ocean shipping industry, which is not anticipated to abate in the near term, Maersk will need to pay down some debt in order to maintain leverage commensurate with the current rating. On 21 August 2017, Maersk announced that it agreed to divest its Maersk Oil subsidiary to Total for $2.5 billion in cash and 97.5 million shares. The transaction will also involve Total paying 3% of the total enterprise value per annum from 30 June 2017 to closing, as well as reimbursing Maersk for any negative free cash flow incurred during this period, which is a plus as it turns a cash burning operation into a cash generative one during that transition time. There is no lock-up on Total S.A. shares used in this transaction which provides Maersk with a lot of flexibility in allocating this value among its stakeholders. As of 30 September 2017 and pro-forma for the disposal of the oil & gas unit and the acquisition of Hamburg Sud, Maersk had total reported debt of approximately $15.8 billion; therefore, the value of the Total shares is substantial and the application of proceeds from any potential sale of these shares could have a material impact on its debt level and leverage and ultimately on its rating. On 20 September 2017, Maersk also announced that it has entered into an agreement to sell the shares in Maersk Tankers to APMH Invest A/S (APMHI) for $1.2 billion. APMHI is a 100% owned subsidiary of A.P. Møller Holding A/S who is the controlling shareholder of Maersk. This transaction closed on 10 October 2017 with the proceeds applied to debt reduction. Pro forma for the disposals of Maersk Tankers, Maersk Oil and its remaining 19% stake in Dansk Supermarked A/S announced on 7 November, we expect Maersk's leverage measured as debt/ebitda to be at approximately 3.5x in 2017 reducing further to 3.1x in 2018 assuming a separation of Maersk Drilling in that year. These calculations include Moody's standard adjustments and no proceeds from the Total S.A. shares. Reduced business diversification following the planned separation of the transportation and the energy businesses and increased exposure to cyclical activities The T&L business has material exposure to cyclical industries, in particular container shipping, in which operating margins can swing significantly year-on-year. Maersk Line reported an EBIT of $461 million for the 12 months ending 30 September 2017 (2.0% EBIT margin) as compared to negative $396 million in 2016 (negative 1.9% EBIT margin) and $1.4 billion in 2015 (6% EBIT margin). Historically, Maersk mitigated its cyclical exposures with some very profitable activities which have displayed a more stable operating performance over the past years, notably the group's port terminals, drilling business, and to some extent the oil and gas business. With the announcement of the separation strategy, the energy businesses will no longer cushion the container shipping cycle; in addition, some of them have also recently come under pressure, particularly drilling and tankers. Also, the performance of Maersk's port terminals, in addition to being somewhat correlated with that of the liner, has been weaker in recent years due to its exposure to oilexporting countries. 5

6 Exhibit 4 Maersk Line's EBIT margin has been lower and more volatile compared to the port business Company reported EBIT margin% Maersk Line APM Terminals 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% LTM Sep-17 Note: Data for APM Terminals' YTD September 2017 was adjusted for the USD360 million impairment. Source: Company's reports Maersk Line benefits from high geographic diversification, which helps to mitigate to some extent the high volatility of the freight rates. Along with its strong presence in the high-volume routes such as Asia-Europe and Asia-North America, Maersk has a substantial presence in niche markets such as the Latin America, Oceania, intra-asia and Africa. With the addition of Hamburg Sud, Maersk will extend its network and increase its geographic diversity, providing its customers with a broader offer which should also help cushion the inherent industry volatility. Liquidity analysis Maersk's liquidity is excellent with a $10.6 billion liquidity reserve at 30 September 2017 including unrestricted cash, securities and undrawn committed facilities over 12 months, in addition to committed financing for the Hamburg Sud acquisition which closed on 30 November The company s capex commitments include approximately $2.4 billion in Maersk has less than $2 billion of debt maturities in 2018 which are expected to be refinanced in due course. Maersk reduced its dividend in February Structural considerations We expect Maersk to continue pursuing primarily an unsecured financing strategy which had allowed the company to reduce its secured debt to approximately $2.3 billion at year-end 2016 (15% of total debt) from approximately $5.0 billion (32%) at year-end At year-end 2016, Maersk reported that over 90% of its assets were unencumbered. For this reason, we have also not notched down the issuer rating despite the presence of debt at the subsidiary level leading to a degree of structural subordination for the parent company debt. Still, we expect Maersk to continue utilizing secured debt and financial leases for those asset classes (ports, ships) where the terms are more favourable for the company. Rating methodology and scorecard factors Following Maersk's announcement of the divestment of Maersk Oil and in line with its stated strategy to separate the energy businesses, we have changed the rating methodology we apply to Maersk to Global Shipping Industry published in February 2014 from the Investment Holding Companies and Conglomerates published in December

7 Exhibit 5 Rating Factors A.P. Moller-Maersk A/S Moody's Month Forward View As of 12/11/2017 [3] Global Shipping Industry Grid [1][2] Factor 1 : Scale (20%) Measure Score a) Revenues (USD Billion) $35 - $37 Aaa b) Size of Fleet Aa Factor 2 : Profitability (17.5%) a) EBIT Margin (3 Year Avg) 4.5% - 5.5% B 0% - 1% Ca a) Debt / EBITDA (3 Year Avg) 3x - 3.5x Baa b) RCF / Net Debt (3 Year Avg) 30% - 35% A c) (FFO + Interest) / Interest Expense (3 Year Avg) 7.7x - 8.5x A a) % Revenues from LT Charters Ca Ca b) Unencumbered Assets Aa Aa Baa Baa b) ROA (NPATBUI / Total Assets)(3 Year Avg) Factor 3 : Leverage and Coverage (30%) Factor 4 : Fleet Characterestics (17.5%) Factor 5 : Financial Policy (15%) a) Financial Policy Rating: a) Indicated Rating from Grid Baa2 b) Actual Rating Assigned Baa2 All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. This represents Moody's forward view; not the view of the issuer; and incorporates expected acquisition of Hamburg Sud and divestiture of a substantial part of Maersk's Energy division. Source: Moody s Financial Metrics Ratings Exhibit 6 Category A.P. MOLLER-MAERSK A/S Outlook Issuer Rating -Dom Curr Senior Unsecured Moody's Rating Rating(s) Under Review Baa21 Baa21 [1] Placed under review for possible downgrade on August Source: Moody's Investors Service 7

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9 CLIENT SERVICES 9 Americas Asia Pacific Japan EMEA