TRIS Rating Co., Ltd. has assigned the rating to the proposed issue of up to Bt2,500 million in senior debentures of Regional Container Lines PLC (RCL) at “BBB”. At the same time, TRIS Rating has affirmed the company rating of RCL at “BBB+” with “negative” outlook. The proceeds from the new debentures will be used to repay promissory notes worth Bt1,600 million, maturing in January 2010, and the remainder will be reserved as working capital. The ratings reflect RCL’s capable and experienced management team and strong market position among regional feeders; resulting from the fleet size, frequency of service, and the young age of the fleet. However, these strengths are partially offset by the uncertainty of global economic recovery, the rising price for bunker fuel oil, and an excess supply of vessels. These unfavorable factors are expected to pressure profitability and liquidity in the short to medium term.
The “negative” outlook reflects RCL’s financial performance which is lower than expectation due to the slow industry recovery. RCL will be challenged to improve operating profitability amid low demand, an influx of new vessels, and rising of bunker prices. The rating could be downgraded if the company fails to recover operating margin and strengthen its liquidity profile. On the other hand, the outlook could be revised to “stable” should the company successfully implement a cost saving program with satisfactory profit margins and generate strong internal cash flow to repay debt and fund the required capital expenditures.
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 between 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. However, due to a decline in trade volume, RCL has reduced capacity by returning its chartered vessels. The returns help lower its fixed operating costs and improve the utilization rate. At the end of June 2009, the company had a total capacity of 52,128 TEUs (twenty-foot equivalent units), from 34 company-owned vessels and seven chartered vessels. Capacity has declined by around 8% from the end of 2008. 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. RCL’s fleet is young at an average age of 10 years. Therefore, the company has benefited from more efficient use of fuel and lower maintenance expense.
TRIS Rating said, the container shipping industry is highly cyclical. Each cycle has a traditional span of 5-6 years. Demand for shipping is closely linked to economic activity and trade. 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 will directly impact the liner business (carrier-owned container or COC). The impact of the global economic slowdown became evident in the fourth quarter of 2008 as RCL’s total lifting volume declined by 2% year-on-year (y-o-y). Lifting volume plunged in the first half of 2009, falling by 21% y-o-y, mainly due to a sharp drop in the lifting volume of the SOC business. The lifting volume of the SOC business declined by 4% y-o-y in the fourth quarter of 2008 and 31% y-o-y in the first half of 2009. Since Asian economies remain healthier than the US and the EU, the lifting volume of the COC business grew by 1% y-o-y in the fourth quarter of 2008 and declined by only 10% y-o-y in the first half of 2009.
TRIS Rating said, the average freight rate of RCL also declined, falling from US$208 per TEU in 2007 to US$201 per TEU in 2008. In the first half of 2009, the freight rate declined further to US$180 per TEU as a result of sharply lower shipping volume and excess capacity. The recovery of freight rates is based on the pace of the global economic recovery. To add further pressure on freight rates, capacity is expected to increase by around 10% per annum as new ships are delivered during 2010-2012.
In 2008, RCL’s total revenue declined by 1% y-o-y to Bt19,532 million due to the appreciation of the Thai currency and a slight reduction in the average freight rate. However, total revenue declined drastically by 25% y-o-y to Bt7,212 million in the first half of 2009 due to the slumps in lifting volumes and freight rates. The adjusted operating margin tumbled from 17.0% in 2007 to 4.1% in 2008 due to decreasing freight rates, soaring bunker costs and a loss on bunker hedging. Although the bunker price dropped by more than 43% y-o-y in the first half of 2009, the plunges in both lifting volumes and freight rates, pushed the operating margin to -13.9%.
RCL’s financial leverage jumped from 33.7% in 2007 to 44.7% in 2008 and 44.9% in the first half of 2009 as the company borrowed more long-term debt to acquire new vessels. The adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio dropped from 7.5 times in 2007 to only 0.1 times in the first half of 2009. As most of RCL’s credit facilities contain covenants relating to financial performance and leverage, the company has been in breach of the net interest bearing debt to EBITDA and EBITDA to interest coverage ratio covenants since the end of March 2009. RCL has received waivers from the lenders since 1 January 2009 and will be until 31 March 2010. -- End
Company Rating: Affirmed at BBB+ Issue Rating: Up to Bt2,500 million senior debentures due within 2012 BBB Rating Outlook: Negative
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