Moody's Downgrades MOL

Maritime Activity Reports, Inc.

December 24, 2018

Image: Mitsui OSK Lines

Image: Mitsui OSK Lines

The rating company Moody's Japan K.K. has downgraded  Japanese shipping company Mitsui O.S.K. Lines, Ltd.'s (MOL) corporate family rating to Ba2 from Ba1. The rating outlook is stable.

"We expect MOL's debt will not decline materially over the next few years and its leverage will likely remain above our downgrade guidance of 7.0x for a Ba1 rating," says Motoki Yanase, a Moody's Vice President and Senior Credit Officer.

Moody's sees only a limited possibility for MOL to materially reduce its debt during the next several years, given the expectation that the company will continue to borrow to invest in its growth segments, such as offshore oil and gas infrastructure and LNG carriers.

Moody's expects a marginal improvement in profitability measured by EBIT margin over the next few years, from its growth segments, the spin-off of its volatile containership business into the Ocean Network Express (ONE) joint venture, and the gradual recovery in the market, mainly in the dry bulk and containership sectors.

ONE so far has not benefited MOL's profitability, and it will take several years to prove out. This fledgling joint venture started off with operating problems, which caused a wide loss in the first half of fiscal 2018.

Moody's believes any earnings improvement will have a limited impact on MOL's ability to lower leverage, given the large size of its debt. Moody's expects that MOL's EBIT margin will remain in the single digits, and that any improvement in EBITDA will not be enough to lower leverage. Moody's estimates MOL's retained cash flow/net debt will remain in the single digits, lower than that of its global peers at the Ba or single-B levels.

Nevertheless, despite its weak credit metrics, MOL's rating continues to be supported by its large scale, relatively diversified shipping segments, and well-established market presence.

MOL owns a variety of ships - including dry bulkers, car carriers, tankers and LNG carriers - which have different business cycles and mitigate business volatility to some extent. These mostly unencumbered assets put the company in a better position than many of its global peers to raise funds by selling or securing assets.

Headquartered in Tokyo, Mitsui O.S.K. Lines, Ltd., is one of the world's largest shipping companies by fleet size with about 850 vessels.

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