Moody's Declares Negativity at Stena AB

Monday, May 21, 2001
Moody's Investors Service today confirmed the Ba3 rating for senior notes of Stena AB ("Stena") and changed the outlook for its ratings to negative from stable.

The Ba3 rating reflects the company's increased exposure to the European ferry industry and higher financial risk as a result of the acquisition of a 100 percent ownership in Stena Line AB.

At the same time, Moody's confirmed Stena's Ba2 senior implied rating, and also Stena International BV's senior secured bank loan rating of Ba1.

The negative outlook for the ratings reflects Moody's concerns that Stena may not be able to substantially improve the performance of its ferry operations near term.

With that, Moody's concludes the review of Stena's ratings for possible downgrade it initiated on November 1, 2000. Moody's ratings are based on the increased business risk for Stena following the acquisition of the outstanding shares of Stena Line AB.

The ferry company - in terms of revenues larger than Stena AB - has been incurring large losses since the abolition of tax free on-board sales as a result of less sales volume but also declining passenger numbers and increased fuel expenses. Moody's notes that taking over full control of the company will allow Stena to streamline operations and benefit from cost synergies.

It also recognizes the strategy to increase ticket prices, which so far had been subsidized by on-board sales.

The rating is based on the assumption that the ferry business will benefit from cost savings, streamline of operations, closing of unprofitable routes and vessel types as well as ticket price increases.

However, as is reflected in the negative outlook, Moody's believes that a significant turn-around of the ferry business (now accounting for approximately 60 percent of consolidated revenues) may be difficult to achieve even over the medium term due to the increased competition with other ferry operators as well as alternative modes of transportation such as trains, cars and buses over bridges and tunnels.

Therefore, it will only selectively be possible to increase ticket prices without negative impact on passenger volume.

In addition to that, the room for cost reductions on scheduled routes without weakening service quality is limited.

In addition to the increase in business risk, the acquisition of Stena Line AB results in a higher financial risk compared to the company's financial profile before the acquisition because of the ongoing consolidation in the ferry segment in which Stena actively participates.

While the Scandlines AG acquisition pursued last year did not materialize, Moody's believes there is still a potential for debt-financed acquisitions of smaller ferry operators. Moody's acknowledges that the proceeds of the sale of Coflexip in April 2000 of approximately SEK 5.5 billion were partially used to increase equity and repay debt.

Moody's notes that the relatively strong performance of Stena's diversified operations including tankers, drilling-rigs and RoRo vessels accounting for around 70 percent of total EBITDA support the rating as well as the assets in the company's real estate portfolio.

It also acknowledges the well-recognized brand name and reputation Stena has in its businesses, a modern fleet and relatively low capital investment needs for the foreseeable future.

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