Standard & Poor's Rating Services downgrades Japan's Kawasaki Kisen ratings to 'BB'
Standard & Poor's Rating Services today lowered to 'BB' from 'BB+' its long-term corporate credit and senior unsecured debt ratings on Kawasaki Kisen Kaisha Ltd. (Kawasaki Kisen), one of the world's leading shipping companies, and removed the ratings from CreditWatch, where we placed them on Oct. 5, 2011, Reuters reports. The outlook on the ratings is stable. We base this action on our view that the company will show a sharp deterioration in earnings and financial performance in its financial results for fiscal 2011 (ended March 31, 2012) amid difficult conditions in the container shipping industry. The outlook on the long-term corporate credit rating is stable, reflecting our expectation that the company's financial performance will gradually recover in coming years.
Kawasaki Kisen expects to make a large net loss of JPY32 billion in fiscal 2011. Across the industry, higher fuel costs and fierce competition on prices have produced a significant deterioration in the profitability of container shipping companies. The strong yen, a sluggish dry bulk market, and a sharp decline in car exports following the Great East Japan Earthquake on March 11 further weakened the company's earnings. Standard & Poor's believes Kawasaki Kisen's ratio of total debt to capital will increase to 70% or more as of March 31, 2012.
However, we are of the opinion that Kawasaki Kisen's key financial ratios will recover gradually after hitting bottom in fiscal 2011. In our view, the company is likely to lower debt to EBITDA to below 5x in the coming two to three years from a level we estimate of more than 13x in fiscal 2011. We expect the market for container and dry bulk shipping to remain weak because new vessels that shipping companies are scheduled to launch will continue to increase capacity. However, most container operators, including Kawasaki Kisen, are eager to increase prices following significant losses. Also, Standard & Poor's expects earnings in Kawasaki Kisen's car carrier business to improve steadily on the back of a recovery in production at Japanese automakers. At the same time, company management has frozen new capital expenditure on fleet expansion to improve the company's financial standing.
We may consider lowering the ratings on Kawasaki Kisen if weakness in the shipping market results in a larger loss than the company expects in fiscal 2011. Another loss or negative free cash flow in fiscal 2012 would further pressure the ratings. On the other hand, we may revise the outlook to positive if we become more confident that Kawasaki Kisen can lower its debt to EBITDA to below 4x. Given the severity of the current business environment, however, we believe the possibility of such an outcome is low.
Kawasaki Kisen expects to make a large net loss of JPY32 billion in fiscal 2011. Across the industry, higher fuel costs and fierce competition on prices have produced a significant deterioration in the profitability of container shipping companies. The strong yen, a sluggish dry bulk market, and a sharp decline in car exports following the Great East Japan Earthquake on March 11 further weakened the company's earnings. Standard & Poor's believes Kawasaki Kisen's ratio of total debt to capital will increase to 70% or more as of March 31, 2012.
However, we are of the opinion that Kawasaki Kisen's key financial ratios will recover gradually after hitting bottom in fiscal 2011. In our view, the company is likely to lower debt to EBITDA to below 5x in the coming two to three years from a level we estimate of more than 13x in fiscal 2011. We expect the market for container and dry bulk shipping to remain weak because new vessels that shipping companies are scheduled to launch will continue to increase capacity. However, most container operators, including Kawasaki Kisen, are eager to increase prices following significant losses. Also, Standard & Poor's expects earnings in Kawasaki Kisen's car carrier business to improve steadily on the back of a recovery in production at Japanese automakers. At the same time, company management has frozen new capital expenditure on fleet expansion to improve the company's financial standing.
We may consider lowering the ratings on Kawasaki Kisen if weakness in the shipping market results in a larger loss than the company expects in fiscal 2011. Another loss or negative free cash flow in fiscal 2012 would further pressure the ratings. On the other hand, we may revise the outlook to positive if we become more confident that Kawasaki Kisen can lower its debt to EBITDA to below 4x. Given the severity of the current business environment, however, we believe the possibility of such an outcome is low.
