TRIS Rating has downgraded the company rating of Regional Container Lines PLC (RCL) to “BB+” from “BBB-”. The outlook remains “negative”. The downgrade reflects the fact that the recovery of RCL’s operating performance is slower than expected, due to the weak industry conditions. RCL still posted a net loss from operations of Bt1,174 million in 2012, compared with a loss of Bt2,051 million in 2011. The company must still confront several challenges to improve its operating performance: a sluggish worldwide economic conditions, high bunker oil prices, intense competition in the Asian region, and the continuing vessel oversupply situation. However, the rating continues to reflect RCL’s capable and experienced management team and its relatively strong market position among regional feeders, resulting from the size and age of its vessel fleet as well as its frequency of service. The “negative” outlook reflects the continuing unfavorable market conditions which are expected to pressure the company’s ability to improve its operating performance and financial position in the near term. In addition, the rating could be downgraded further if the company still incurs significant losses and has liquidity problems in the coming quarters. However, should the company successfully improve its profit margins and generate sufficient operating cash flow to repay its debts, these improvements would be positive factors for the company’s rating and/or outlook.
In 2012, RCL reported that its lifting volume fell by 4% following the company’s strategy to rationalize some uneconomic trade lanes. The sluggish of the worldwide economy continues to hamper the company’s lifting volume. The average freight rate slightly increased, rising by 2.3% to US$195 per twenty-foot equivalent unit (TEU) in 2012. On balance, RCL’s total revenue slightly dropped from Bt13,684 million in 2011 to Bt13,548 million in 2012. However, the freight rate remains under pressure as the vessel oversupply situation continues to intensify the competition and global economic conditions remain fragile. In 2012, the bunker price increased to approximately US$673 per metric ton from around US$638 per metric ton in 2011. However, RCL’s bunker cost slightly declined from US$196.1 million in 2011 to US$184.5 million in 2012 because it used less fuel.
RCL’s operating performance slightly improved in 2012 due to the success of its cost saving implementation. The adjusted operating margin improved from -2.3% in 2011 to 4.5% in 2012. The adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio increased from -0.5 times in 2011 to 1.5 times in 2012. The adjusted funds from operations (FFO) to total debt ratio also picked up, rising from -6.0% in 2011 to 3.7% in 2012. RCL’s financial leverage, as measured by the total debt to capitalization ratio, declined from 45.4% in 2011 to 42.2% in 2012 as RCL repaid debt. However, leverage is expected to increase as the company acquired two new vessels which will be delivered within 2013. The purchases of both vessels are already secured by new loans.
RCL’s liquidity position remained tight, since the company has obligations to repay debts of around Bt1,680 million in 2013. At the end of December 2012, the company had Bt2,101 million of cash on hand. However, the company has to maintain a minimum of US$40 million in cash on hand in order to comply with its loan covenants. Thus, if operations continue to recover slowly, there will be concerns over RCL’s liquidity.
According to research by Alphaliner, industry capacity during 2013-2014 will rise by approximately 3.0 million TEUs or 18% of the existing capacity. In addition, the price of bunker oil will remain high. The average bunker price was approximately US$620 per metric ton in the first three months of 2013. The ability of RCL to lift its freight rates remains under pressure as the growth of global trade is still stagnant and because RCL has weak bargaining power against the main line operators. In order to improve its operating margins, the company plans to keep cutting operating costs, rationalize unprofitable services, and carry high margin goods.
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