Moody’s Investors Service has affirmed BW Group Ltd’s Ba1 corporate family rating and the Ba1 rating on its remaining USD194 million of senior secured notes due June 2017.

The outlook on all ratings is stable.

RATINGS RATIONALE

The ratings affirmation follows BW Group’s 23 March 2017 announcement on the sale of its fleet of very large crude carriers (VLCC) to DHT Holdings Inc (unrated) in exchange for DHT common and preferred shares and cash.

“The transaction is credit positive for BW Group because it will increase the company’s cash balances, lower future capital expenditure requirements, and expand the scale of its VLCC fleet,” says Brian Grieser, a Moody’s Vice President and Senior Analyst.

BW Group’s VLCC fleet comprises 11 vessels including two newbuilds due for delivery in 2018 with a combined value of approximately USD538 million. DHT will finance the acquisition by issuing approximately 32 million common shares and 15,700 preferred shares to BW Group. DHT will also pay BW Group USD177 million in cash and assume approximately USD104 million in remaining capital expenditures for the two new builds.

Upon completion of the transaction, BW Group will become the single largest shareholder in DHT with a 33.5% stake and will be granted the right to appoint two directors to DHT’s board.

Moody’s says this transaction is consistent with BW Group’s strategy to own and invest in a well-diversified maritime group focused on oil and gas transportation.

“In addition to adding BW Group’s VLCC fleet to DHT’s fleet, the transaction will reduce overhead costs associated with managing the combined fleet, expands BW Group’s fleet’s access to capital markets through publicly listed DHT, and reduces BW Group’s need to finance the future growth of its VLCC fleet,” adds Grieser.

Moody’s expects BW Group will receive dividends from DHT, which will compensate for lost income from the VLCC fleet. The VLCC vessels had accounted for around 29% of BW Group’s EBITDA in the nine months ended September 2016.

DHT has a stated capital allocation policy to return at least 60% of net income to shareholders in the form of cash dividends or share buybacks.

Cash proceeds from the sale of the VLCC fleet and reduced capital expenditures will further enhance BW Group’s liquidity over the next 12 months. BW Group’s next significant debt maturity is the USD194 million of outstanding bonds due in June 2017, which the company has indicated it will repay. Pro-forma for the DHT asset sale and notes repayment, BW Group is expected to maintain cash balances in excess of USD500 million.

Moody’s expects that the transaction will not materially effect on BW Group’s leverage profile given the expected debt repayment of the notes. For the twelve months ended 30 September 2016, BW Group had a standalone adjusted debt/EBITDA of 4.0x. Moody’s calculation of EBITDA includes dividends received from BW Group’s investments while adjusted debt is pro-forma for the release of BW Group’s guarantee of the loans of its 51% owned joint venture at BW Gas Juju’s.

BW Group faces total committed capital expenditures of USD1.0 billion through 2019, which will be funded by its existing cash balances, operating cash flows, loans and cash dividends from its investments.

The stable outlook on the ratings reflect our expectation that credit metrics, particularly interest coverage, and the liquidity profile at the BW Group will remain consistent over the next 12-18 months, despite our expectation for a weak pricing environment in many of the oil and gas shipping segments in which BW Group and its investments operate.

The rating could be downgraded if BW Group (1) experiences a prolonged deterioration in its profit margins (2) the liquidity profile significantly weakens such that cash falls below USD500 million; or (3) it takes on additional debt-funded expansion/acquisitions. Credit metrics indicating downgrade pressure include consolidated net adjusted debt/EBITDA increasing above 4.0x.

Following the release of BW Group’s guarantee of its 51% owned joint venture at BW Gas Juju loans in January 2017, an upgrade to investment grade would require well-articulated and consistently applied financial policies, limited encumbrances on holding company vessels and the expectation for limited support provided to its investments.

Upward ratings pressure could develop if BW Group’s credit metrics on a standalone basis improve to a level where adjusted debt-to-EBITDA can be maintained around 2.5x.

The principal methodology used in these ratings was Global Shipping Industry published in February 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

BW Group Ltd is a global maritime transportation group involved in oil and gas transportation, floating gas infrastructure, marine environmental technologies and deepwater production. Including the vessels held under investments, BW Group has a consolidated fleet of 171 vessels and ongoing new-builds as of 31 January 2017.

DHT Holdings Inc is a crude oil tanker company formed and listed on the New York Stock Exchange in 2005. After the acquisition of BW Group’s VLCC fleet, DHT will have a fleet with an average age of 6.9 years, consisting of 30 VLCCs (including four newbuilds for delivery in 2018), and two Aframax product tankers.

Source: Moody’s