BW Group's 1H Performance Better than Expected

Moody's Investors Service says that operating results of BW Group (Ba2 negative) in 1H 2012 were better than expected, largely because of the higher charter rates achieved by the company for its vessels.
"We had expected BW Group's performance to weaken, as many of its vessels were coming off profitable time-charters in 1H and it was increasingly exposed to deteriorating spot-market rates. However, spot rates, especially in the gas carrier segments, either held up or improved," says Vikas Halan, a Moody's Vice President and Senior Analyst.
The average time charter equivalent or TCE income per day for BW Group's very large gas carriers and large gas carriers rose over 40% from a year ago. The average TCE for very large crude carriers grew about 5%. These positives were somewhat offset by the 31% decline in the average TCE income per day in the product tanker segment.
"Nonetheless, the company's exposure to spot-charter rates will continue to increase. Almost its entire fleet of product tankers and very large crude carriers will be exposed to spot-charter rates in the next 12--18 months," adds Halan, who is also the Lead Analyst for the company.
In 1H, revenues rose 9% from a year ago and EBITDA margins improved to 34% from 30%. The performance in 2Q was also marginally better than 1Q, with revenue increasing by 9% and EBITDA margin improving slightly to 34.3% from 33.7%.
Despite the strong operating performance, the company reported net loss of USD57 million for the period because it recognized certain non-cash losses, including vessel impairment of USD84 million. It had already recognized impairment of USD183 million in 2011.
The decline in vessel values required a top up of the company's collateral pool for its bondholders with two large gas carriers. BW estimates that 34% of fleet was unencumbered as of 30 June. Of this, vessels worth about USD235 million remain readily available for further collateral top ups, as needed.
"The value of the readily available unencumbered vessels will be sufficient to meet the minimum collateral required under the company's debt facilities even if the value of the vessels in the collateral pool declines by a further 10%-12%. Given the improvement in charter rates experienced by the company in last six months, we do not expect such decline in vessel values over at least next 12 months" Halan says.
The company needs to maintain collateral of 125% of the debt amount outstanding.
The corporate family rating of Ba2 continues to reflect the company's long track record of prudent management, strong market position, and fair customer & geographic diversity. The rating is also constrained by BW's declining fixed-contract coverage and high consolidated financial leverage.
The negative rating outlook could return to stable if BW can demonstrate good liquidity. Indicators that Moody's would consider for a change in  outlook include cash plus committed and available undrawn bank facilities of more than USD300 million and improvement in profit margin, such that adjusted combined debt/EBITDA (including BW Offshore) falls below 6.0x and combined EBIT/interest is 1.5x-2.0x on a sustainable basis.
The rating could come under pressure if BW: (1) experiences deterioration in its profit margins; (2) takes on debt-funded expansion/acquisitions; or (3) faces further declines in unencumbered assets, which are an important buffer for meeting the loan-to-value test for its bank credit facilities and secured bonds. Credit metrics indicating downgrade pressure include debt/EBITDA exceeding 6.0x-6.5x and or EBIT/interest falling below 1.5x-1.0x.
BW, domicile in Bermuda, is a diversified shipping group with operations in four key segments: liquefied petroleum gas, tankers, liquefied natural gas, and floating, production, storage and offloading vessels (FPSOs). It currently operates a fleet of 98 vessels, including owned, part-owned and controlled vessels.
BW is a privately-held holding company, of which 93% is owned by the Sohmen family and 7% by HSBC. BW owns 47% stake in BW Offshore Ltd, an Oslo-listed company and the world's second-largest FPSO owner and operator.