Moody’s Investors Service has today placed on review for downgrade the Baa1 issuer rating, Baa1 senior unsecured rating and the (P)Baa1 medium-term note (MTN) program rating of Denmark-based shipping and oil company A.P. Møller-Mærsk A/S (Maersk). This follows the company’s announcement that it will become an integrated transportation and logistics company while separating the oil and oil related activities over the next 24 months.

“We have placed the ratings of Maersk on review for downgrade because we believe that its business diversification will reduce significantly with the separation of its energy businesses which represented 62% of EBITDA as of the first half of 2016. The review will likely result in a downgrade of at least one notch, although ultimately the rating will depend on the amount of debt that will be allocated to the integrated transport and logistics company, as well as any remaining ownership interests in the energy businesses,” says Maria Maslovsky, a Moody’s Vice President-Senior Analyst and lead analyst for Maersk.

RATINGS RATIONALE

The review will primarily focus on the actions that Maersk intends to take in order to unlock value and create synergies within the newly established transportation and logistics division, the execution risk and timing related to the separation of the energy businesses, as well as the expected impact on financial metrics. The review will also focus on the company’s future financial policy which includes defined key financial ratio targets in line with an investment grade rating. We expect to conclude the review by the end of December 2016.

On 22 September 2016, Maersk announced that it will become an integrated transport and logistics company with oil and oil related businesses, either individually or in combination, to be separated from the company via joint ventures, mergers, listing or other transactions. The new Transport & Logistics business will consist of Maersk Line, APM Terminals, Damco, Svitzer and Maersk Container Industry. These business lines will focus on improving product offerings and developing digital solutions for the industry. Maersk expects to generate up to 2% ROIC improvement over three years and the company envisions investments primarily in acquisitions. Maersk also stated its commitment to capital discipline and investment grade financial profile, although the company did not elaborate on the specific leverage targets.

The energy business will consist of Maersk Oil, Maersk Drilling, Maersk Tankers and Maersk Supply Service. Maersk aims to find solutions for the individual entities within this business within 24 months and will evaluate different solutions including joint ventures, mergers or listing. Further, Maersk anticipates continuing already sanctioned investments in strategic projects, while its goal will be to keep overall exploration expenses at a low level.

Moody’s views all of Maersk’s businesses as currently pressured, with oversupply driving down freight rates in the container shipping business resulting in all major liners, including Maersk Line, reporting negative EBIT in the second quarter of 2016. Low oil prices are negatively impacting E&P businesses while reduced spending by the major oil firms puts negative pressure on the drilling business where, as of 30 June 2016, Maersk’s contract coverage was expected to decline from 73% in the second half of 2016 to 56% in 2017 and 45% in 2018.

While Maersk’s current leverage and coverage metrics are stable at 2.5x Debt/EBITDA and 10.2x Funds From Operations + Interest Expense/Interest Expense, we anticipate both of these metrics to deteriorate further as a result of weakness in the majority of Maersk’s markets. Moody’s acknowledges, however, that the ultimate credit profile of the company will be greatly influenced by the application of proceeds, if any, from the separation of oil and oil related business entities.

The principal methodology used in these ratings was Investment Holding Companies and Conglomerates published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Copenhagen, Denmark, A.P. Møller-Mærsk A/S is a diversified conglomerate whose main business areas encompass container shipping, oil and gas, drilling, port terminals and other shipping-related activities. The group generated revenues of $17.4 billion and EBITDA (before impairment losses) of $3.4 billion in the first half of 2016.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Source: Moody’s