TRIS Rating Co., Ltd. has affirmed the company rating of Regional Container Lines PLC (RCL) at “BBB+” and has also affirmed the rating of RCL’s senior debentures at “BBB”. The rating outlook remains “negative”. The ratings reflect the operating performance of the company, which improves in tandem with the global trade recovery plus RCL’s strong market position among regional feeders resulting from the fleet size, frequency of service, and the young age of the fleet. The ratings also reflect RCL’s capable and experienced management team. However, these strengths are partially offset by the cyclical and highly competitive nature of the shipping industry. In addition, the rising bunker price, the fragility of the global economic recovery and an excess supply of vessels are expected to continue to pressure the company’s profitability in the short to medium term.
The “negative” outlook reflects RCL’s financial performance that is improving but remains weak. RCL will be challenged to improve operating profitability amid an industry- wide increase in capacity and higher bunker prices. The outlook could be revised back to “stable” should the company successfully improve its profit margins and generate sufficient operating cash flow to repay debt and avoid breaches of any financial covenants. On the other hand, the ratings could be downgraded if the operating margin fails to recover and liquidity deteriorates.
TRIS Rating reported that RCL is the largest feeder operator among ASEAN shippers. According to the Port of Singapore Authority (PSA) and statistics compiled by RCL’s local agencies, the company has the highest feeder market share among Singapore, the Philippines, Malaysia, and Thailand. RCL’s large market share stems from the high number of trips it operates per week multiplied by its large fleet size. RCL is also one of the top 30 container shippers in the world, based on fleet size. At the end of November 2010, RCL’s fleet was composed of its own 34 vessels and nine chartered vessels, with a total capacity of 54,570 twenty-foot equivalent units (TEU). The capacity has increased slightly during the past year, rising 2% from the 2009 level. The utilization rate in the first nine months of 2010 also improved to 115% compared with only 101% in the same period last year. The rise reflects a revival in demand for container shipments as a result of the global economic recovery. RCL’s fleet is young with an average vessel age of 11 years. Therefore, the company has benefited from more efficient use of fuel and lower maintenance expense. Due to its relatively large fleet size, RCL can offer more frequent voyages and operate on more flexible schedules than competitors which operate smaller fleets. However, as it owns a relatively large portion of its vessels, the company did not benefit from a relatively low rate of chartered vessels during 2009-2010.
TRIS Rating said, the container shipping industry is highly cyclical. Each cycle has a traditional span of five-six years. Demand for shipping is closely linked to economic and trading activities. The health of the global economy has a profound impact on the company’s feeder business (shipper-owned container or SOC), whereas the health of the intra- Asia economy directly impacts the liner business (carrier-owned container or COC). The impact of the global economic slowdown was graphically illustrated in 2009 as RCL’s total lifting volume declined by 18%. The plunge in lifting volume was mainly due to a sharp drop in the lifting volume of the SOC business, declining by 27% in 2009. Since economies in Asia remained healthier than in the United States (US) and the European Union (EU), the lifting volume of the COC business declined by only 9% in 2009. However, in the first nine months of 2010, RCL’s lifting volume revived, rising by 8% year-on-year (y-o-y) due to the pick up in the global trade and the continued strong growth for the economies of many Asian nations. For RCL, revenue per TEU dropped sharply from US$201 per TEU in 2008 to US$176 per TEU in 2009, before recovering to US$190 per TEU for the first nine months of 2010. The rate rose because container demand revived and excess capacity across the industry was rationalized. However, freight rates are still under pressure as the recovery of the global economy is still vulnerable and capacity is expected to increase by approximately 9% per annum during 2011-2012.
Due to the slump in lifting volume and freight rates, RCL’s total revenue in 2009 declined drastically, falling to Bt14,321 million, a drop of 27% compared with 2008. Despite a significant increase of the average freight rate and lifting volume in the first nine months of 2010, the company’s total revenue in baht rose by only 8% y-o-y to Bt11,588 million due to the appreciation of the Thai currency. However, the adjusted operating margin in the first nine months of 2010 improved significantly to 8.4% from -9.0% in 2009. The improvement was due to the cost saving and rises in both lifting volumes and freight rates. RCL’s financial leverage as measured by the total debt to capitalization ratio, decreased from 54.6% in 2009 to 49.5% at the end of September 2010. Leverage fell as the company repaid debt and raised new equity capital of Bt1,556 million in June 2010. The adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio picked up from -2.3 times in 2009 to 2.4 times in the first nine months of 2010. Most of RCL’s credit facilities contain several financial covenants relating to leverage and operating performance. Although operating performance is improving, the company is still susceptible to breaches of some of its financial ratio covenants. However, due to its relatively good track record, the company is expected to receive a waiver from the lenders. Currently, the company received a waiver until 31 December 2010 from four banks and until 31 March 2011 for two banks, said TRIS Rating. -- End
Company Rating: Affirmed at BBB+ Issue Rating: RCL12OA: Bt2,500 million senior debentures due 2012 Affirmed at BBB Rating Outlook: Negative
? Copyright 2010, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.