Hapag-Lloyd-UASC merger credit-negative, says Moody’s

The merger of Germany-based Hapag Lloyd and United Arab Shipping Company (UASC) announced earlier this month is credit-negative as it will significantly increase the former’s debt, Moody’s Investors Service said in a note on Monday.

The transaction, announced on July 18, has prompted Moody’s to change Hapag-Lloyd’s rating outlook to stable from positive, the ratings agency said.

Although UASC brings a young fleet to the group, the merger will result in the consolidation of approximately $4 billion of debt the Dubai-based firm incurred to build its fleet, said Mario Santangelo, associate managing director at Moody’s.

As a result, Hapag-Lloyd’s Moody’s-adjusted debt/EBITDA will increase to around 6.7x as of December 31, 2016 from 4.3x as of March 31, 2016, he added.

“This ratio is high and we expect it to decline below 6.0x only gradually in the next two years. Deleveraging will also depend on container freight rates, which are at a cyclical low because of overcapacity and declining trade in emerging markets.”

Under the terms of the merger, Hapag-Lloyd will have a 72 percent stake in the combined company, which will be the world’s fifth-largest liner shipping entity. UASC shareholders, which include Saudi Arabia’s Public Investment Fund and Qatar Holding, will have a 28 percent stake.

Moody’s said it expects Hapag-Lloyd to benefit from UASC’s younger fleet, which will reduce the average fleet age to six years from seven. The combination will also strengthen the German firm’s position in the Middle East and Far East, and reduce future capital expenditure by around $2 billion, the ratings agency added.

The deal, which is subject to regulatory and contractual approvals, is expected to be completed by the end of this year.

Hapag-Lloyd and UASC will continue to operate as independent companies until the merger is finalized, with the alliance likely to start operations in April next year.