Moller-Maersk A/S (Maersk) will likely reach 2.4x our October 2020 EBITDA forecast in 2021, mainly because of freight rates staying at record highs due to strong demand for tangible goods and limited containership capacity amid infrastructure bottlenecks.
oWe expect elevated, albeit somewhat lower, EBITDA in 2022, underpinned by our assumption of moderating freight rates from the second half of next year.
oStrong earnings will result in S&P Global Ratings-adjusted funds from operations (FFO) to debt continuing to exceed 50%, which is our threshold for a ‘BBB+’ rating, while strong free operating cash flow (FOCF) will increase Maersk’s financial flexibility for discretionary spending.
oWe therefore raised our long-term issuer credit rating on Maersk and issue rating on the company’s senior unsecured debt to ‘BBB+’ from ‘BBB’.
oThe stable outlook reflects our view that Maersk’s EBITDA will start moderating from second-half 2022 to a more sustainable annual run rate of about $8.0 billion by 2023, allowing the company to maintain adjusted FFO to debt above 50%, underpinned by a consistent and prudent financial policy.
FRANKFURT (S&P Global Ratings) –S&P Global Ratings today took the rating actions listed above.
Freight rates are unlikely to moderate in second-half 2021, contrary to our previous expectations.
Uninterrupted strong demand for tangible goods, accompanied by prolonged congestion in major maritime ports and disruption of logistical supply chains, are tying up containership capacity and boosting freight rates. In particular, freight rates on the main container liner trades–Transpacific and Asia-Europe–remain at record highs. According to Clarksons Research, the Shanghai Containerized Freight Index (SCFI) reached a new high at Aug. 31, 2021, of 4,500 points, more than 3x the elevated average in 2020 and more than 4x the prepandemic 10-year average of 950 points.
Short-to-medium-term freight rate conditions should be supportive and underpin Maersk’s cash flow.
The movement of essential goods, strong pickup in e-commerce, and shift in consumer spending to tangible goods from services have supported shipping volume recovery and container-liner freight rates since June 2020. Trade momentum remained solid in first-half 2021, despite the usual seasonal slowdown. As a result, we forecast a rebound in shipped volumes largely consistent with global GDP growth of 5%-6% in 2021, particularly fueled by flourishing Transpacific trade, following a 1%-2% contraction in 2020 compared with 2019. Despite the spike in new ship orders in first-half 2021 (lifting the containership order book to slightly above 20% of the total global fleet at Aug. 31, 2021, from a historical low of about 8% in October 2020), containership supply growth is unlikely to surpass demand growth in the coming quarters, propping up freight rates. We believe that increasingly stringent regulation on sulfur emissions and broader considerations about greenhouse gas emissions in general–particularly in the context of decarbonization–will likely result in uncertainties over the costs and benefits of various technologies and fuel, and should constrain orders to some extent in the short term. We also note that lead times between placing orders for ships and the ability for shipyards to deliver currently stands at 18 months-24 months. We now forecast that freight rates could start normalizing only from year-end 2021 at the earliest, as the pandemic’s impact on container shipping eases.
We anticipate the container liner industry will remain disciplined in deploying capacity, as demonstrated since the pandemic began.
Soon after the initial COVID-19 outbreak last year, there was a withdrawal of sailings from China, and container liner operators continued to adjust capacity to demand trends in a timely manner throughout 2020. These measures demonstrate industry players’ reactive supply management, which we consider normal in a sector that has been through several rounds of consolidation in recent years. The five largest container shipping companies now have a combined market share of about 65%, up from 30% about 15 years ago.
Fueled by continuously strong freight rates in the Ocean segment, Maersk’s EBITDA should significantly outperform our October 2020 base case.
We now expect Maersk to raise its average freight rate per 40-foot equivalent unit (FEU) in the largest Ocean segment 35%-40% in 2021, compared with our previous forecast of a low-single-digit decline. This, supported by robust trade volume growth and strong trading in the Terminals and Logistics and Services segments, should translate into S&P Global Ratings-adjusted EBITDA (including recurring dividends from equity investments and after restructuring and integration costs) of about $19 billion, which is 2.4x our previous forecast, and follows $9.2 billion achieved in first-half 2021. We believe the slower normalization of freight rates than we previously expected will not only boost Maersk’s EBITDA in 2021, but also strongly support its 2022 earnings.
We expect EBITDA will also be inflated in 2022, but less than in 2021.
Our 2022 base case incorporates likely persistently strong freight rates, benefiting from the elevated base we expect at year-end 2021. In view of ongoing supply chain disruptions, customers will be keen to secure containership space for longer durations than usual, which should also support Maersk’s earnings next year. That said, as infrastructure bottlenecks start loosening, we expect freight rates to normalize but remain profitable, with the industry’s prudent capacity deployment continuing. According to our base case, we expect Maersk’s EBITDA to normalize from second-half 2022 to a more sustainable annual run rate of about $8.0 billion by 2023, which compares with $8.4 billion in 2020. In our view, Maersk’s consistent strategy, aimed at becoming a container logistics integrator by 2025, should lead to improved stickiness with its top customers, increased share of contracted business, more cross-selling opportunities, and a positive effect on earnings overall. Moreover, the expanding Logistics and Services segment will contribute to lower earnings volatility over time.
Stronger FOCF than expected, combined with reduced debt, should increase room under the improved credit metrics for discretionary spending and unforeseen operational setbacks.
According to our base case, Maersk will generate strong discretionary cash flow (after leases, capital expenditure [capex], dividends, and share buybacks) of up to $8.5 billion in 2021. This performance should provide ample financial leeway for future external growth in the Logistics and Services segment, shareholder remuneration (including the $5 billion share buyback program starting in autumn 2021), and likely moderation of EBITDA, while allowing the company to operate in line our adjusted FFO-to-debt threshold for a ‘BBB+’ rating of more than 50% over the next two years. In 2021, we expect adjusted debt to decrease to $3 billion-$4 billion from $10.5 billion at Dec. 31, 2020, and $12.9 billion a year earlier, supported by strong excess cash flows. This translates into adjusted FFO to debt of well above 60%, compared with about 68% in 2020, and falls within the range for the minimal financial risk profile category (versus modest previously).
Maersk lacks a track record of operating with the lower financial leverage we forecast in our base case.
We apply a negative financial policy modifier to our ‘a-‘ anchor for Maersk, resulting in an overall rating of ‘BBB+’, because we note that the strongly improved credit ratios we forecast in 2021 and 2022 would be a new achievement for the company. This means that there is no track record of Maersk operating at such a leverage level or commitment to maintain this degree of financial risk, which weighs on the rating. At the same time, we note Maersk’s sizeable shareholder returns in the past. We also capture a lower degree of credit ratio predictability, beyond what can be reasonably built into our forecasts, and the risk that adjusted leverage could be materially higher than our base case, given Maersk’s strategy to expand its logistics footprint and potential large cash outflows, which are impossible to forecast at this time. That said, we believe if the company pursued cash/debt-funded mergers or acquisitions, it would adjust its shareholder remuneration to limit a potential deterioration in financial risk profile to one category lower.
The stable outlook reflects our view that Maersk’s EBITDA will start moderating from second-half 2022 to a more sustainable annual run rate of about $8.0 billion by 2023, allowing the company to maintain adjusted FFO to debt above 50%. We think this will be underpinned by the sustained supply discipline of industry players and Maersk’s balanced financial policy.
We could raise the rating if Maersk expands its logistics business, resulting in an enlarged and less volatile earnings base and an upward revision of our business risk profile assessment. We could also upgrade Maersk if adjusted FFO to debt stays above 60% once freight rates normalize, and the company commits to a financial policy to ensure this ratio level is sustainable.
We could downgrade Maersk if we expect adjusted FFO to debt to fall below 50%, with limited prospects for recovery, for example, due to a significant plunge in trade volumes along with industry players’ unexpected shift to aggressive capacity management depressing freight rates. A large cash/debt-funded acquisition, resulting in credit measures falling short of our guidelines on a sustainable basis, would also pressure the rating.
Related Criteria
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oCriteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
oContainer Liner A.P. Moller – Maersk A/S Outlook Revised To Positive On Stronger Financials; Affirmed At ‘BBB’, Oct. 30, 2020
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Source: A.P. Moller – Maersk