Ocean carrier sees debt upgrade thanks to hitting cost synergy targets and fleet’s better fuel efficiency will help save operating expenses.
Hapag-Lloyd (XETRA: HLAG) is on track to meet one of the major goals set out in its 2016 merger with United Arab Shipping Company, according to credit rating agency Moody’s, with the result being a strong outlook for the company’s debt securities. While high fuel prices still challenge the company’s results, Moody’s sees advantages for Hapag-Lloyd going into what is expected to be a turbulent period for the ocean shipping market in 2020.
Moody’s on Monday upgraded its outlook on the ocean carrier’s $1.03 billion in bonds, saying they just have “high credit risk” as opposed to carrying a “very high credit risk” label they earlier did. Likewise, the company’s ability to service $5.96 billion in outstanding bank loans and other financial debt also saw a slight upgrade.
Moody’s largely credits the company’s ability to remain on track with targets set out in its $14 billion mega-merger with UASC that was completed 2017, Hapag-Lloyd said it would save $435 million in overhead costs by this year, with almost 90 percent of those savings expected to be achieved by 2018. Indeed, the company’s operating margins improved sharply from before the merger’s completion reaching 12.9 percent in the third quarter of 2018, a 300-basis point improvement over the level seen in 2016. That put the operating margins at the fifth largest container ship on par with those of Maersk. Hapag-Lloyd saw personnel and other expenses for the first nine-months of last year drop 3 percent as landside employee headcount largely stayed the same from a year earlier and one-off expenses from the integration of UASC’s business were reduced.
But even with the improved operational efficiencies of running a larger fleet, Hapag-Lloyd still faces the random shock of oil prices. Overall transport costs were up 25 percent for the first nine months of last year, reaching $8.2 billion. A 41 percent rise in raw materials costs, chiefly fuel, was the main reason for the increased transportation costs.
Still, Moody’s says Hapag-Lloyd’s fleet advantage in terms of using newer, more fuel efficient ships could help mitigate those costs, which are expected to rise sharply next year due to the mandate that ships burn more expense low-sulfur fuel. Hapag-Lloyd’s fleet is on average 7.5 years old, versus the fleet of Maersk which is closer to nine years old and MSC, the bulk of whose fleet was built before 2012, according to shipping research firm VesselsValue.
Moody’s says Hapag-Lloyd “was able to reduce operating costs per twenty-foot equivalent to $926 from $938 for the first nine months of 2018 compared to the prior year period” thanks to having a newer fleet. This reduction was accomplished despite an increase in marine fuel costs of 30.5 percent for the period.
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U.S.-China trade talks shift back to D.C.
The threat of 25 percent tariffs on $200 billion in Chinese goods drove the pull-forward seen in container import volumes seen moving through U.S. ports last year. Now the orchestrators of those tariffs are seeking a push-back on when they can be implemented, writes FreightWaves John Gallagher. The trade negotiations that took place in Beijing last week now move to Washington D.C. With a deadline of March 2 before the higher tariffs kick in, U.S. President Donald Trump appears eager to make a deal as many in the president’s base are experiencing the hardships of slower trade with the world’s second largest economy.
Important meetings and calls on China Trade Deal, and more, today with my staff. Big progress being made on soooo many different fronts! Our Country has such fantastic potential for future growth and greatness on an even higher level!
— Donald J. Trump (@realDonaldTrump) February 17, 2019
One potential scenario involves Trump potentially putting off tariffs for another month or more in order to keep negotiations going. deal could come in the form of another delay on the implementation of higher tariffs. That may allow more shippers to bring in more goods, but as Ben Hackett of container research service Hackett Associates points out shippers are likely hitting their limits on the amount that can be brought in due to increasingly low vacancy at U.S. warehouses.