Hapag-Lloyd : Hapag-Lloyd taps the market with a small issue

Hapag-Lloyd plans to issue € 150m of new senior corporate notes with a maturity of five years. Proceeds will be used to fund debt maturities and for general corporate purposes. - - >Changing our credit opinion from Negative to Stable and our recommendation on the 2018 and 2019 notes from Reduce to Stable - The improved industry outlook is the trigger for our changed credit opinion. Higher freight rates will enhance the company’s earnings starting in 2017 and support its deleveraging plans. We remain cautious, however, as the extent and the speed of the recovery are not very clear at present. In general, we believe freight rates need to increase more substantially for Hapag-Lloyd to achieve significant deleveraging.Based on our assumption of premature redemption we raise our recommendation from Reduce to Stable.We recommend subscribing to the new EUR secured notes at a yield of 7% or more - The improving industry fundamentals should be supportive for the issuance. CMA CGM’s corporate notes, due 2021, are the most comparable in terms of rating (B3/CCC+) and maturity to the planned issue; these notes are trading at a YTM of 9.5%. Hapag-Lloyd’s 2018 and 2019 corporate notes are trading at YTM’s of 5.2% and 5.3%, respectively. We believe the new issue will be priced somewhere between Hapag-Lloyd’s outstanding issues and CMA CGM’s 2021 notes. The yield gap between Hapag-Lloyd’ and CMA-CGM’s notes has been observable for a good while, and can be explained by the stronger support from Hapag-Lloyd’s shareholders in the past, CMA CGM’s financial situation following the acquisition of NOL for $ 5bn, and Hapag-Lloyd’s successful integration of CSAV in 2015, reflected in strong earnings in that year.Non-sector peer bonds rated B/CCC with a workout date ± 1 year around 2022 trade at an average YTW of 7.1% (Appendix 5). This would be a fair price for the new issuance in our view.