Two Major Carriers in Merger Talk!
Standard & Poor’s has placed Hapag-Lloyd on negative credit watch because of uncertainty over the impact of a potential merger with United Arab Shipping Company on the German carrier’s capital structure and financial leverage.
“The potential merger, in our view, might trigger a weakening of Hapag-Lloyd’s financial risk profile, which we currently assess as aggressive,” the U.S. credit ratings agency said.
S&P currently rates Hapag-Lloyd’s long-term corporate credit at B+ and its senior unsecured notes at B-.
Hapag-Lloyd and UASC announced last week that they are in talks over forms of cooperation, including a possible merger of their container operations. A deal “is subject to a mutually satisfactory completion of the negotiations and the mutual due diligence exercise,” the German carrier said.
S&P believes Hapag-Lloyd’s credit ratios — excluding the potential merger — will come under pressure amid very difficult conditions in the container shipping industry, “which is plagued with oversupply and historically low freight rates.”
The company’s risk profile could remain weak following a merger, according to S&P.
“We recognize prospective improvements to the company’s diversity and competitive advantage — for example access to a fairly young, but comparatively small fleet of large containerships of UASC — from the merger and Hapag-Lloyd’s demonstrated ability to integrate new businesses and extract synergies.”
But combining Hapag-Lloyd’s 1 million 20-foot-equivalent units of capacity with UASC’s 450,000 TEUs to 500,000 TEUs is not sufficient to revise S&P’s view of the German carrier’s risk profile, “which remains constrained by the shipping industry’s high risk and fragmentation, and Hapag-Lloyd’s vulnerable profitability,” which depends on cyclical swings, exposure to bunker fuel prices and fairly low short-term flexibility to adjust its operating cost base.