Thursday, January 13, 2011

RAM Ratings lowers outlook of Hubline on weak freight rates

KUALA LUMPUR: RAM Rating Services Bhd has reaffirmed the ratings of HUBLINE BHD []'s RM220 million debt notes but revised the outlook on the long-term ratings from stable to negative.

The debt notes involved the long- and short-term ratings of A2 and P1 for Hubline's RM150 million Murabahah commercial papers/medium-term notes programme (2005/2012).

Concurrently, the A2 rating of its RM70 million Bai' Bithaman Ajil Islamic bonds (2005/2012) has also been reaffirmed.

Hubline's core business is the provision of container and dry-bulk shipping services as well as vessel chartering.

'The revision in outlook is premised on our concerns that the Group's financial performance may remain depressed by weak freight rates (for both its container and dry-bulk shipping segments) and poor dry-bulk cargo volumes.

'Large incoming supply of newbuilds will further pressure freight rates which have yet to stage a meaningful recovery. At the same time, uncertainties in economic recoveries of advanced economies may further dampen market outlook,' said the ratings agency.

RAM Ratings said amid the global economic downturn, Hubline's revenue and operating profits had been affected over the last two years by poorer freight rates and reduced demand for shipping services, particularly in its dry-bulk segment.

Although the Group's performance improved in FY September 2010, its recovery remains slow. Hubline's adjusted funds from operations (FFO) debt coverage ratio of 0.15 times as at end-September 2010 (end-September 2009: 0.14 times) was still weaker than the RAM Ratings' previous expectation.

RAM Ratings head of consumer and industrial ratings Kevin Lim said: 'Looking ahead, the operating environment for the shipping industry remains tough.'

He said improvement in Hubline's cashflow-protection metrics was envisaged to remain lethargic, with its FFO debt coverage ratio coming in at about 0.17 times in FY September 2011, compared to above 0.2 times before the global downturn.

Hubline's ratings remain supported by the Group's extensive network and niche routes that give it a competitive edge over its peers.

By operating smaller vessels, Hubline is able to call at smaller ports where the larger vessels of the main line operators are not able to service.

'Being involved in both the container and dry-bulk shipping segments, the Group is able to enjoy some degree of diversification. Meanwhile, supported by its sizeable cash reserves of RM163.62 million as at end-September 2010, Hubline's liquidity position can be considered satisfactory, RAM Ratings said.

However, the ratings were moderated by Hubline's vulnerability to various industry risks such as cyclicality, capital intensity, intense competition as well as frequent demand and supply imbalances.

'The group is also exposed to volatile bunker costs and high maintenance expenditure. The outlook may be revised to stable if Hubline is able to demonstrate sustainable improvement in its financial profile on the back of improved cargo volumes for its dry-bulk shipping services and its ability to command better freight rates for its niche routes.

'On the other hand, Hubline's ratings could be downgraded if it experiences prolonged deterioration in its financial metrics,' it said.

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