Moody’s Japan K.K. says that new investments by Japanese shipping companies in tankers to carry liquid natural gas (LNG) will keep their debt levels high and slow deleveraging.
Moody’s notes that its three rated Japanese shipping companies — Nippon Yusen Kabushiki Kaisha (NYK, Baa2 negative), Mitsui O.S.K, Lines, Ltd. (MOL, Baa3 review for downgrade) and Kawasaki Kisen Kaisha, Ltd (K-Line, Ba2 stable) — are likely to increase their fleets of LNG tankers significantly over the next several years.
Moody’s conclusions were contained in its just-released special comment, “Debt-Funded LNG Investments Will Further Weaken Japanese Shippers’ Credit Quality,” authored by Mariko Semetko, a Moody’s AVP — Analyst.
The resulting continued high leverage could trigger downgrades for NYK and MOL.
In the case of NYK, Moody’s expects that it will need to use cash on hand to reduce leverage below 7.5x to avoid a downgrade.
Moody’s further notes that MOL’s rating is under review for downgrade because it expects the company’s debt-to-EBITDA will rise to about 8.0x by March 2015 on weak earnings. If MOL further increases debt-funded spending, mainly on LNG tankers, the metric could rise as high as the mid-8x.
At the same time, the Moody’s reports points out that several mitigants will limit a spike in debt as the shipping companies will continue their practice of funding a portion of their capital expenditures with proceeds from asset sales.
This approach will keep their incremental debt lower than it would be if they financed the full cost of the expected LNG investments with debt.
The companies also tend to invest in LNG projects with partners, which keeps their debt lower than if they financed the entire purchases on their own.
But, a meaningful earnings contribution from new LNG tankers — which would be credit positive over the longer term — will take a few years.
Because it takes about two to three years to deliver a tanker, LNG vessels that are ordered today are unlikely to generate earnings that will be sufficient to reduce leverage until after 2016-17. The companies’ leverage will remain too high for their ratings in the meantime without any countermeasures.