TRIS Rating Co., Ltd. has downgraded the company rating of Regional Container Lines PLC (RCL) to “BBB+” from “A-” and has also downgraded the rating of RCL’s senior debentures to “BBB” from “BBB+”. The rating outlook is “stable”. The downgrades reflect RCL’s financial profile which is weaker than expectation. Unfavorable operating factors included the bunker price volatility, sluggish demand for containerized shipping due to the global economic slowdown, and the excess supply of vessels which will negatively impact the freight rate in the coming years. Though the price of bunker is now less of a concern, the expected decline in global trade volume will pressure the growth in containerization demand as well as the ability of the company to increase freight rates and quickly raise profitability back to normal level. However, the ratings continue to reflect RCL’s capable and experienced management team and its strong market position among regional feeders, resulting from fleet size, frequency of service, and the young age of fleet.
The “stable” outlook is based on the expectation of RCL’s ability to sustain its strong market position and improve profitability. The company is also expected to achieve its cost saving plan and manage bunker cost prudently.
TRIS rating reported that RCL’s operating performance in 2008 was adversely affected by the sharp rise in bunker price in the first nine months of 2008. The company could not impose a surcharge to match the price rise. In addition, the company did not benefit from the sharp drop in bunker price in the fourth quarter of 2008 as the company hedged around 65% of its bunker needs covering the fourth quarter of 2008 and 50% of its needs covering the first half of 2009 at around $500 per metric ton. The dramatic drop in bunker price caused a bunker hedging loss of Bt468 million in the fourth quarter of 2008. The company had to record an allowance of Bt1,008 million for the unrealized loss from the remaining bunker hedging volume. The impact of the global economic slowdown became evident in the fourth quarter of 2008 as RCL’s lifting volume started to decline by 2% year-on-year (y-o-y) while the lifting volume in January 2009 continued to decline further by 16% y-o-y. The impact from global economic downturn adversely affected RCL’s lifting volume in shipper-owned-container (SOC) business more than the carrier-owned-container (COC) business. The lifting volume of the SOC business declined by 4% y-o-y in the fourth quarter of 2008 and 26% y-o-y in January 2009. In contrast, the lifting volume of the COC business grew by 1% y-o-y in the fourth quarter of 2008 and declined by 6% y-o-y in January 2009. Due to weaker demand and the excess supply of vessels, the average freight rate also dropped, falling from $208 per TEU (twenty foot-equivalent unit) in 2007 to $201 per TEU in 2008. The average freight rate in the fourth quarter of 2008 dropped by 8.6% y-o-y, or 4.5% quarter-on-quarter (q-o-q) to $192 per TEU.
As RCL’s earnings were below expectation, the cash flow protection and leverage were worse than projection. The adjusted earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio (including the reserve for loss from bunker hedging of Bt1,008 million) dropped from 7.5 times in 2007 to 0.1 times in 2008. If the reserve for bunker hedging loss is excluded, EBITDA interest coverage in 2008 would have been only 2.1 times. The funds from operations to total debt ratio declined drastically from 35.7% in 2007 to 4.6% in 2008. The debt-to-capitalization ratio (adjusted for operating leases) also increased from 33.7% in 2007 to 45.6% in 2008. However, the company’s liquidity position is relatively strong. At the end of December 2008, the company had Bt3,437 million in cash and Bt3,870 million in unused committed credit facilities. Planned capital expenditures in 2009 are $69 million or around Bt2,484 million. The capital will be used to purchase a new ship of 2,732 TEU. The loans due within one year total around Bt2,492 million. Based on its current cash position, the company should have no liquidity problems in the near term. In addition, the company still has ten vessels which can be used as collateral for new financing if needed.
Most of RCL’s credit facilities contain covenants relating to financial performance and leverage. The net interest bearing debt to EBITDA covenant may be breached in the second quarter of 2009 if operating profitability does not recover. However, TRIS Rating believes there is a high possibility that RCL would be granted waivers from all lenders if the financial covenant is breached. -- End
Company Rating: Downgraded to BBB+ from A- Issue Rating: RCL096A: Bt2,500 million senior debentures due 2009 Downgraded to BBB from BBB+ Rating Outlook: Stable
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