Bangkok--27 Sep--TRIS Rating
TRIS Rating Co., Ltd. has affirmed the company rating of Regional Container Lines PLC (RCL) at “A-” and has also affirmed the “BBB+” rating to RCL’s senior debentures (RCL096A). The outlook remains “stable”. The ratings reflect RCL’s strong market position among regional feeders, which is the result of its fleet size, frequency of service, and the young age of its ships. The ratings also take into consideration RCL’s capable and experienced management team and the global trend toward increased use of container shipments. However, these strengths are partially offset by the cyclical, highly competitive business environment and the company’s substantial capital expenditures planned for the next five years. Since
around 69% of RCL’s vessels are pledged to lenders, the rating of its debentures are one notch below the company rating.
The “stable” outlook is based on the expectation of RCL’s ability to sustain its strong market position and maintain its financial status at an acceptable level during a downward industry trend. The outlook also reflects its management’s discipline in utilizing its strong cash flow generated by operations to fund an expansion and dividend payments, rather than relying on debt financing.
TRIS Rating reported that RCL is the largest feeder operator among ASEAN shippers. According to the Port of Singapore Authority (PSA) and RCL’s local agencies’ statistics, the company has the highest feeder market share between Singapore, the Philippines, Malaysia, and Thailand. RCL’s large market share stems from the high number of trips it operates per week multiplied by its huge fleet size. RCL is also one of the top 30 shipping operators in the world based on fleet size. Currently, the company has a total capacity of 51,736 TEUs (twenty foot-equivalent unit), from 34 vessels of its own and eight charter vessels. As it owns most of its vessels, RCL can offer frequent voyages and operate on flexible schedules. While its competitors operate smaller fleets, RCL’s larger fleet size provides a competitive advantage through greater frequency of service. In addition, most of RCL’s vessels are young. Therefore, the company has benefited from more efficient use of fuel and lower maintenance expense.
TRIS Rating said, the container shipping industry is highly cyclical. Each cycle has a traditional span of 5-6 years; however, in recent years, there has been a shortening of cycles. Freight rates are also volatile and it is not easy for operators to match construction of new ships to capture uptrends in the container shipping industry cycle. Demand for shipping is closely linked to economic activities and trade. The health of the global economy has a profound impact on liner business, whereas intra-Asia trade is a major factor in the feeder business. The shipping industry hit a cyclical peak and freight rate rose considerably during 2004-2005. However, the cycle has started to turndown in 2006. RCL’s operating margin has dropped for the first six months of 2006 because freight rates fell while bunker oil cost soared. Although RCL has incurred huge capital spending during the last two years, its debt to capitalization ratio has fallen satisfactorily because it utilized excess cash generated during the upturn in the business cycle to fund some of its expansion plan. However, since the industry has already passed the peak in freight rates, it will be a challenge for the company to sustain its financial leverage.
TRIS Rating sees that the coup against Prime Minister Thaksin Shinawatra launched by the Council for Democratic Reform (CRD) on 19 September 2006 will have no immediate effect on the ratings of RCL in the short term. During the 1-year period before the general election, TRIS Rating will closely monitor the situation and will review the ratings of RCL if any effects occur in the medium term.