Hapag-Lloyd losses mount but aid on the way
Hapag-Lloyd lost $618 million in the first half of 2009, TUI AG, the former owner and current 43 percent shareholder of German container line, said Thursday.
That's a precipitous drop from the roughly $190 million the line made in the corresponding period in 2008. Revenue fell 24 percent to $3.1 billion, as container volume fell 16 percent and freight rates 20 percent in the first half.
TUI, the German tourism giant, sold a 57 percent stake in Hapag-Lloyd last fall to a consortium of Hamburg investors, dubbed the Albert Ballin group, for nearly $3.5 billion, a move which helped bolster its bottom line as tourism revenue shrank in the first half. Even as profits from its now core business grew in the first half, TUI's sizable stake in Hapag-Lloyd was a drag on operating profits. The container line is now listed as an asset rather than within its consolidated financial reports.
'Negative profit contributions resulting from an equity measurement will arise in the framework of the Hapag-Lloyd AG stake,' the line said. 'An additional adverse impact is expected from interest rate effects on the loans granted to the shipping company. On the other hand, the group will post the book profit from the sale of the majority stake in container shipping.'
Because of the tough environment, Hapag-Lloyd shareholders have been embroiled in talks for weeks to meet the line's long-term liquidity needs. TUI Chief Financial Officer Rainer Feuerhake confirmed in a conference call Thursday that shareholders are committed to the aid package and are unified in their desire to seek an emergency line of credit from the German government.
Feuerhake said an agreement needed to be reached between shareholders in order to apply for the state aid, and that it was likely the application would be submitted Thursday.
Reports in the German and shipping press have suggested that some members of the Albert Ballin consortium, including Kuehne + Nagel Chairman Klaus-Michael Kuehne, were not interested in contributing to the rescue package. But Feuerhake disputed the notion that shareholders, including TUI, were fighting amongst themselves.
'We are talking about guarding our investments, but we are not shouting,' he said. 'What we are doing with Hapag-Lloyd is safeguarding our investment. There is a very serious situation. If we do not give them a very stable financial framework, Hapag-Lloyd could be in immediate danger. If we take the position that the situation will become better in the summer of 2010 and it doesn't, we will have lost this opportunity (to get state backing). We want to make sure Hapag-Lloyd is in a liquidity and cash position to survive this weather.'
Feuerhake said the state aid would only be tapped if necessary. Hapag-Lloyd's shareholders have, according to TUI, largely committed to provide 750 million euros ($1.06 billion) to the carrier, with the state being asked for a credit facility of 1.2 billion euros ($1.7 billion).
'If the industry recovers in summer 2010, it might mean Hapag-Lloyd doesn't have to draw a penny from this credit facility,' he said. 'If it comes in 2011, Hapag-Lloyd might need to use the facility.'
He said the timeframe for the shareholder and state cash infusion to be available is September, with Hapag-Lloyd's short-term liquidity not a problem until October.
In the last month, the German line sold its profitable Hamburg container terminal to its shareholders for 315 million euros $446 million), of which TUI paid 215 million euros ($305 million). In all TUI will inject about 350 million euros ($496 million) into Hapag-Lloyd (which includes its portion of the container terminal purchase).
As for the shipping line's first half performance, Feuerhake said TUI was expecting Hapag-Lloyd's to perform better in the second quarter than in the first, but instead rates and volume plummeted further. In the first half, rates between Asia and Europe tumbled 38.8 percent.
'The expected positive change in the second quarter did not materialize,' he said. 'There were two reasons. First, the volume in market was smaller than anticipated. And second, there was clearly behavior of some major shipping lines to fight for volume with attractive prices. Hapag-Lloyd increased rates in April, but lost volume because there was no appetite in the market for those rates. Additional liquidity has to be provided to (overcome) the temporary difficulties in the market. We are far away from substantial improvement.'
TUI is expecting to recoup the money it has injected into Hapag-Lloyd, both from loans attached to the sale of the line in 2008 and through the container terminal purchase it helped fund. Feuerhake did note that once the line applies for state aid, the state loans would have to be brought to zero before TUI can be repaid.
Hapag-Lloyd will be expected to repurchase the Hamburg terminal when economic conditions have eased. One analyst on the conference call Tuesday asked Feuerhake why the terminal wasn't offered back to the Hamburg port authority, instead of shareholders, as a way to boost liquidity without asking for shareholder help. Feuerhake responded that Hapag-Lloyd and its Grand Alliance partners wanted to retain the terminal to preserve lucrative dividend rights, rights that have now been passed to the shareholders who bought it but would return when the terminal is sold back to the shipping line.
When questioned about whether the injection of cash through the terminal purchase could be considered safe, he replied: 'This is safe money.'
In the meantime, TUI also had to note on its balance sheet a 371 million euro ($526 million) book loss on its loans to Hapag-Lloyd because of the financially precarious state of the carrier. Feuerhake said this number was a 'moving target' and would change quarter to quarter based on the risk profile of Hapag-Lloyd. The book loss had to be noted due to Europe's Internal Audit Service requirements.
'They want to see today's market value,' Feuerhake said. 'If risk in a business goes up and you have invested in this business, you have to charge it against the valuation. The result is you carry a lower value of your lending facilities than your nominal value, but you haven't given it a different nominal value. The underlying risk in the operations has to be reflected.' ' Eric Johnson