Coronavirus: credit negative for European shipping; Maersk faces highest impact

Since the coronavirus outbreak in China in January, the container shipping industry has cancelled — or blanked — sailings on a daily basis as factories remain closed after the Chinese Lunar New Year or run at low capacity, it said in a statement.

Moody’s Investor Services said this is credit negative for the European container shipping companies it rates – AP Moller-Maersk A/S (Baa3 stable), CMA CGM SA (B2 negative) and Hapag-Lloyd (B1 stable) — because lower output means lower volumes for them to ship.

• Coronavirus: impact on container availability
• China vessel calls plunge by 20%

The total number of port calls to Shanghai and Yangshang fell 17% in week seven of 2020 compared with the same time last year. As of 20 February, carriers had blanked 21 sailings on the US-Asia transpacific trade lane as a direct result of reduced demand, with lower demand in China the main driver. This is on top of the 66 cancellations during the Lunar New Year and represents 199,000 TEU units of reduced capacity. On the Asia-Europe trade lane, 10 additional cancelled sailings have been announced on top of 51 New Year-related cancellations, representing a 151,000 TEU capacity reduction.

Moody’s assistant vice president Daniel Harlid said “In terms of impact on individual carriers it will be highest for Maersk given its exposure to container shipping, port terminals and tug operations through its tug business Svitzer. Volumes from China represents around 30% of the company’s annual shipped volume.”

He cited that in a teleconference on its Q4 2019 results, the company guided for EBITDA of around US$5.5Bn for 2020. However, it said what the final figure would be was unclear because the impact of coronavirus will depend on its final severity and duration. “Although the guided EBITDA figure would result in Maersk’s Moody’s-adjusted debt/EBITDA ratio deteriorating to 3.1x in from 2.9x currently, it would still be within the range we expect for the Baa3 rating, also factoring in a very strong liquidity profile,” Mr Harlid added.

Moody’s changed the outlook on CMA CGM’s B2 rating to negative from stable on 4 February because its container shipping and logistics operations’ performance are both” highly sensitive to changing global macroeconomic conditions”.

Mr Harlid said “Because we expect Q1 to be weak, activity will need to rebound strongly in Q2 for CMA CGM to preserve enough liquidity.”

For Hapag Lloyd, shipping related to China represented around 25% of group revenue in 2019. Moody’s said that a weak Q1 will result in lower volumes but thanks to a strong performance in 2019, its liquidity and balance sheet are robust enough that “we do not expect its credit quality to deteriorate”.

Mr Harlid summed up “If the outbreak remains largely contained and disruption is short-lived as we expect, the credit effect will be only modestly negative for the shipping companies we rate. We expect a healthy recovery in shipments in subsequent quarters once supply chain conditions return to normal. However, a very slow recovery which stretches well into Q2, combined with a range of other risks — including ongoing US-China trade tensions, historically low freight rates and muted projected demand growth — would significantly increase the likelihood that credit quality will deteriorate.”