TRIS Rating Downgrades Ratings of “RCL”: Company Rating to “BBB” from “BBB+”,Issue Rating to “BBB-” from “BBB”, with “Negative” Outlook

TRIS Rating Co., Ltd. has downgraded the company rating of Regional Container Lines PLC (RCL) to “BBB” from “BBB+” and has also downgraded the rating of RCL’s senior debentures to “BBB-” from “BBB”. The outlook remains “negative”. The downgrades reflect RCL’s lower-than-expected operating performance amid several unfavorable operating factors, including the surging bunker oil price, the volatility of the global economy, increasing competition in the Asian region, and the excess supply of vessels. In addition, the company seems to have lost its competitiveness in both the liner (carrier-owned container or COC) and the feeder (shipper-owned container or SOC) segments. In 2010, RCL reported the trading volumes in both of these segments grew by only 7%, compared with more than 10% growth in global container trade volume. The average freight rates, especially for the SOC segment, tumbled in 2009 and have not fully recovered since then. However, the ratings continue to reflect RCL’s capable and experienced management team and its relatively strong market position among regional feeders, resulting from its fleet size, frequency of service, and the young age of its fleet.

The “negative” outlook reflects RCL’s weakening operating performance and the deterioration of

its competitive position, especially in the feeder segment. In addition, several unfavourable market conditions are expected to pressure the company’s ability to improve its operating performance and financial position in the near term. The ratings could be downgraded if its operating margin fails to recover and the liquidity profile does not strengthen in the next six to 12 months. On the other hand, the outlook could be revised back to “stable” should profit margins rebound and the company can generate strong operating cash flows to repay its debts.

TRIS Rating reported that in the first quarter of 2011, both RCL’s lifting volume and the average freight rate grew slightly, rising by only 1% year-on-year (y-o-y). The marginal growth in both lifting volume and the freight rate were mainly due to the excess supply of vessels which intensified the competition. According to a research by Alphaliner, the supply of new vessels added to industry capacity during 2011-2013 will be approximately 4.4 million twenty-foot equivalent units (TEU) or 31% of the existing capacity. In addition, the average bunker price in the first quarter of 2011 increased significantly by 26% y-o-y to US$582 per metric ton. As a result, bunker cost as a percentage of total revenue in the first quarter of 2011 jumped to 41% from only around 30% in the same period last year. The bunker surcharge did not change much from the previous year so RCL could not recover much of the leap in fuel costs.

TRIS Rating said, the small growth in revenue, coupled with the higher bunker price, caused RCL’s earnings and cash flow protection to be lower than projections. The adjusted operating margin deteriorated significantly, falling from 8.4% in 2010 to -8.6% in the first quarter of 2011. In addition, the adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio tumbled from 2.6 times in 2010 to -1.9 times in the first quarter of 2011. The adjusted funds from operations to total debt ratio also declined, sagging from 8.1% in 2010 to -4.0% in the first quarter of 2011 (non-annualized). In addition, RCL’s financial leverage, as measured by the total debt to capitalization ratio, held at 47% throughout 2010 and through the first quarter of 2011. The company’s liquidity position is tightening. At the end of March 2011, the company had Bt1,639 million cash on hand, down from Bt2,290 million at the end of 2010. However, the company will not make any major investment in the next few years.

Most of RCL’s credit facilities contain several financial covenants relating to leverage and EBITDA-related ratios. The company breached some of its EBITDA-related covenants. However, RCL has received waivers from its lenders. In addition, the company has successfully removed the EBITDA-related ratios from the financial covenants, but the company has to maintain a minimum of US$40 million in cash on hand for the life of the loan agreements, said TRIS Rating. -- End

Company Rating: Downgraded to BBB from BBB+ Issue Rating: RCL12OA: Bt2,500 million senior debentures due 2012 Downgraded to BBB- from BBB Rating Outlook: Negative TRIS Rating Co., Ltd./www.trisrating.com Contact: [email protected], Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2011, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.