Bangkok--5 Dec--Moody's Investors
Moody's Investors Service today affirmed its Ba1 ratings on BW Group's ("BW") senior secured notes due in 2017.
The outlook on the ratings is negative. Both the ratings & the outlook are in line with the company's corporate family ratings (CFR).
As the company now no longer has any unsecured debt, Moody's has withdrawn its senior unsecured ratings.
RATINGS RATIONALE
The rating action follows the first draw-down of funds by BW from its recently executed senior secured revolving credit facility ("RCF"), that triggered a change in the status of the notes from unsecured to secured, as per the revised terms following consent from noteholders in October 2011. The proceeds will be used to repay, fully, the amount outstanding under the company's senior unsecured RCF.
As explained in Moody's announcement on 30 September 2011 ("Moody's sees no impact on BW Group's ratings from consent solicitation") and also in its Special Comment on 10 October 2011 ("Our answers to questions on the proposed consent solicitation by Singapore-based shipper BW Group"), the event is credit neutral and has no impact on either the company's CFR or the bond ratings.
The notes and the RCF now have a priority claim over their respective pool of vessels with fair market value of at least 125% of the bonds outstanding. This pool will be `topped-up' by BW as and when the value of the collateral declines below 125%. This exposes the company to a decline in the fair market value of its vessels. On full drawdown of the RCF, the company is expected to have unencumebered vessels of US$1.4 billion, based on latest available valuation, which is over 50% of the collateral value needed (or value of encumbered assets) for both the notes and the RCF. Decline in this headroom would result in negative ratings pressure.
This may happen, if either the market value of the fleet of vessels declines, or there is an increase in the amount of secured debt.
The company now has the ability to incur more secured debt, both at the parent and at a subsidiary/JV level, and ability to enter into sale and leaseback transactions. If the company were to use this flexibility, it may result in an increase in amount of secured debt and consequently reduce the headroom under the covenant depending on the terms of the debt and use of proceeds.
Unsecured obligations of the company in future, if any, will be subordinated and may be rated one or multiple notches below BW's CFR at that time.
BW's CFR of Ba1 reflects the company's long track record of prudent management, strong market position, fair customer and geographic diversity and modest new build program in the medium term.
At the same time, its ratings are constrained by its declining fixed contract coverage amidst declining charter rate environment and high consolidated financial leverage. The ratings also factors in the weak industry outlook as well as increased acquisition appetite following recent disposals.
The negative outlook on the ratings reflects the company's increasing exposure to declining spot charter rates and our expectation that the company's credit metrics may weaken further or stay beyond our downgrade threshold by the end of 2011.
The ratings could be downgraded, if BW's financial profile fails to recover from current levels, or further deteriorates, leading to Debt/EBITDA exceeding 5.5-6.0x and EBIT/Interest falling below 1.25x.
Such a development may be due to a) a sustained deterioration in daily charter rates, resulting in lower-than-expected EBITDA; or b) an increase in management's level of risk appetite -- although not expected - leading to higher capex or material debt-funded acquisitions.
The outlook could revert to stable, if BW's financial profile returns to levels more supportive of the company's ratings. In particular, Moody's would expect Debt/EBITDA to return to 5.5x or below, and EBIT/Interest to be maintained above 1.25x over the next 12-18 months.
The principal methodology used in rating BW Group Limited was the Global Shipping Industry Methodology published in December 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
Although the present credit ratings have been issued in a non-EU country which has not been recognised as endorsable at point of registration, the present credit ratings may still be used by financial institutions for regulatory purposes until 31 January 2012, including credit ratings issued within this period. Moreover, ESMA may decide and disclose by end December 2011 to extend the possibility to use credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, provided that exceptional circumstances occur that may imply potential market disruption or financial instability. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.
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