Moody’s Downgrades NYK Line, Outlook Negative

The issuer rating of one of Japan’s Big Three shipping companies, Nippon Yusen Kabushiki Kaisha (NYK Line), has been downgraded to Baa3 from Baa2 with negative outlook, according to ratings agency Moody’s Japan K.K.

Consequently, the company’s earnings recovery has been and will likely remain much slower than Moody’s had previously anticipated.

“The downgrade to Baa3 from Baa2 reflects our view that low freight rates will keep NYK’s cash flow low and leverage high in the near to medium term,” Mariko Semetko, a Moody’s Vice President and Senior Analyst, said.

Earlier this week the company said that it lowered its full year guidance for the fiscal year ending March 31, 2017. NYK Line now expects an ordinary loss of JPY 26 billion for the year, compared to its previous guidance of a JPY 5 billion ordinary profit.

Weakness in the bulk shipping business is the primary driver of the lower earnings guidance. In particular, the company cited the continued weak demand in car carriers and low rates in tankers as the main drivers of the lower guidance.

In addition, the company has lowered its freight rates estimates for its Capesize and Panamax class dry bulk vessels, highlighting that the market recovery has been much slower than the company had previously anticipated.

The company continues to expect its liner trade business will report an ordinary loss of JPY 17 billion for the year.

NYK’s Baa3 rating reflects the company’s weak financial profile including its very high debt leverage and low earnings and cash flow expectations caused by continued industry-wide overcapacity and depressed freight rates.

The outlook is negative, reflecting Moody’s expectation that earnings and cash flow will remain low and leverage will remain elevated over the coming 12-18 months.