A tale of 2 ship businesses & their tryst with Green Bonds

Last week, Maersk, the world’s largest container shipping business, was in the market looking to raise €500mn through 10-year green bonds. If the pandemic has been kind to anyone financially, container shipping businesses are definitely somewhere on the top, if not at the top of that list. It made over €8bn in EBITDA in 2020, an exceptional c. 46% growth over 2019. But that $8bn looks paltry now, as management guides for $22-23bn in EBITDA for 2021! With cash on balance sheet of over $11bn, did it really need to come to the debt markets for a relatively small €500mn? Definitely not.

This is being viewed as a strategic move. The global shipping industry accounts for c.2.2% of GHG emissions. The International Maritime Organisation (IMO) targets halving the annual GHG emissions by 2050 from a 2008 baseline and currently is mulling on regulations that should go effective from 2023, to pave the way towards that ambitious goal of decarbonising shipping.
The proceeds of this issuance will fund Maersk’s first methanol-fueled ship, which is set to be delivered in mid-2023 and 8 more such ships that will be delivered starting in 2024. Methanol-fuelled ships will be key drivers of C02 emission reduction in Maersk’s ambitious goal of becoming carbon neutral by 2050.

With solid Investment Grade ratings and its exceptional performance, debt investors have been more than willing to lend money to Maersk. Unsurprisingly, the placement was well received, with a 7.5x oversubscription at a $3.7bn order book. The bonds now carry a coupon of 0.75%: Maersk’s lowest rate on record!

On the other end of the spectrum is a European High Yield issuer: Hurtigruten, a leading Norwegian cruise operator. It was in the market to raise about NOK (Norwegian Krona) 500-750mn (c. $56mn to $84mn) through a 3-year green bond, with proceeds intended to fund the conversion of 3 of its cruise ships to hybrid-battery power, a transformation that should reduce Co2 emission by 20-25%. The pandemic has been brutal to Hurtigruten’s operations. An optimistic re-opening last year in August was quickly shut down by a CV-19 case outbreak on one of its ships. Since July this year operations have been slowly ramping up, but recovery to pre-pandemic levels is a long way and is still subject to significant uncertainty. Cruise ships are notoriously pollutive and the industry isn’t really a poster child for green initiatives. However, Hurtigruten’s credentials within that space are remarkable. It ordered the world’s first hybrid battery-powered cruise ship back in 2016 and banned the use of heavy fuel oils on its ships in 2009, 10 years before it was mandatory to do so as per regulations. Sustainalytics, one of the leading ESG research providers, categories Hurtigruten as “low risk”, due to its strong green credentials that are ahead of the industry and remains the only cruise line in that risk bucket, with all other major cruise companies slotted in higher risk brackets. Hoping to capitalize on its green credentials, the NOK issuance was a test of its debut green financing strategy. However, after initial discussions with investors, the company announced that it cancelled the fundraising, citing “unsatisfactory” market conditions.

In Hurtigruten’s case, debt investors wanted a premium for the relatively illiquid nature of the debt (small size: max. $84mn and denominated in Norwegian Krona (NOK). This coupled with its weak financial position that is expected to recover going forward but clearly is not without its risks and the unsecured nature of the debt in the capital structure makes Hurtigruten a risky lending proposition at the moment. Moody’s rates the business at Caa1, clearly encapsulating this risky profile. The coupon discount that management expected for the green credentials vs. the premium lenders expected for the aforementioned valid risks clearly didn’t gel well.

For context, Hurtigruten’s €300mn Sr. Secured 3.5% 2024’s that are currently trading at 96ish levels yield 500bps in ZSpread terms. These ofcourse are secured by a strong collateral package of 2 vessels purchased in 2019 whose valuation pre-pandemic was at a handsome €450mn level, which even after a substantial discount would result in near par to par recovery. Hurtigruten’s PE owners TDR Capital injected €75mn through a deeply subordinated loan which lie at the bottom of the current capital structure and mature only after all the debt senior to it, thus protecting debtholders. They opted for a 15% interest on these loans although structured as PIK (payment in kind) notes, thus ensuring no near term cash outflow on a vulnerable business. The Green Bonds would be unsecured and clearly given the risks coupled with an illiquidity premium would have resulted in coupon expectations of above 5% (Secured bonds yield) for sure, but substantially below the 15% PIK notes range.

Clearly, Green credentials on their own just don’t cut it, they will always be judged in tandem with the overall financial profile of a business.

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