An analyst at S&P Global Platts is cautioning his readers about the impact rising interest rates may have on the shipping industry.
Jianrong Wong, a maritime analyst at Platts Ocean Intelligence, wrote on the company’s blog The Barrel that vessel loans are typically priced at a premium over the benchmark London Interbank Offered Rate or LIBOR, which reached 2.3 percent in April, its highest level since November 2008.
“As LIBOR increases, stresses on shipping industry balance sheets, cash flows and earnings also rise. With rates still at relatively low levels in historic terms, further increases are likely, and for a highly capital-intensive sector like shipping, this will undoubtedly weigh heavily on already debt-laden companies,” he said.
“Shipping companies have accumulated more debt in recent years to fund a strong appetite for newbuild vessels, as well as mergers and acquisitions,” Wong said. “Among the publicly listed companies in the sector, there are a substantial proportion of junk-rated entities. Fifteen of 17 shipping firms have been given a speculative grade by S&P Global Ratings as of February 2018. Notably, these companies all have particularly weak leverage factor scores, which contribute a substantial proportion of the final rating.”
He said as debt mounts, “bond investors could demand higher interest rates, fueling further distress among shipowners. Similarly, an exogenous shock could precipitate a repricing of risk premiums, which could lead to further downgrades by rating agencies.”
The February 13 S&P Global report cited by Wong said "global shipping is on course for recovery," noting that it believed that in 2018, demand in the three main segments of the global shipping industry (dry bulk, tankers, and containers) will outstrip supply for the first time in several years."
"The lighter new vessel delivery schedule for 2018, compared with 2017, combined with our expectation of sustained imports of commodities, and longer distances traveled, point to rising charter rates across the shipping industry this year--with the exception of the container liner segment, which we forecast will see flat rates or a slight dip."
It said it expected industry conditions to strengthen in 2019 for most of the 17 shipping companies it rates.
S&P says companies with a BBB rating or higher are investment grade and rates the Qatar LNG tanker operator Nakilat Inc. and Malaysia's MISC Berhad, which operates both gas and petroleum tankers as A+ and BBB+.
The ratings for the other 15 companies in the same report were as follows: PAO Sovcomflot, BB+; Wan Hai Lines Ltd., BB+; Capital Product Partners L.P., BB-; Bahia de las Isletas, S.L., B+; CMA CGM S.A., B+; Hapag-Lloyd AG, B+; Moby SpA Ferries, B+; Navios Maritime Midstream Partners L.P., B; Dynagas LNG Partners LP, B; Global Ship Lease, Inc., B; Navios Maritime Acquisition Corp., B; Navios Maritime Partners L.P., B; International Seaways Inc., B; Navios Maritime Holdings Inc., B-; Eletson Holdings Inc., CCC+.
S&P also gives an investment grade long-term corporate credit rating of BBB to A.P. Moller Maersk, though in November it put Maersk on its creditwatch negative list citing a loss of diversification because of its decision to exit the oil and gas business.
"We view this transaction as transformational, resulting in the loss of diversification benefits that we previously factored into our rating on Maersk. That said, we still believe that if the company were to apply a significant part of the proceeds from the divestment towards debt repayment,
this could allow us to affirm the rating." Maersk completed the same of Maersk Oil to France's Total in March.