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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BBB-/Stable to Aker ASA and holding companies. Scope has also assigned a first-time rating of BBB- to the company’s senior unsecured debt and a S-2 short-term rating.

Rating rationale

Aker ASA and holding companies’ (Aker) business risk profile (assessed at BB+) benefits from the company’s buy-and-hold investment approach, especially its industrial holdings that focus on i) cash flow from the recurring income of holdings Aker BP, Aker Solutions and American Shipping Company and ii) the capital appreciation from its growth companies that currently do not distribute dividends. However, this approach does not rule out periodic disposals. Aker’s blended industry risk of BB is predominantly driven by its exposure to BB industries such as exploration and production, energy services and shipping.

The majority of Aker’s financially relevant holdings in terms of gross asset value (77% at Q1 2022) or income contribution (99% of 2022E) are publicly listed companies in well-developed markets benefitting from high trading volumes and as such could provide cash inflows through partial liquidation if needed. Other holdings are for the most part shareholdings in majority-owned unlisted growth companies, cash and interest bearing receivables. The ability and willingness to use core holding Aker BP to generate liquidity was evidenced in November 2021 when Aker sold NOK 3.2bn of Aker BP shares overnight through a trade sale. Liquidity therefore constitutes a key strength in Aker’s business risk profile.

Aker’s business risk profile is somewhat constrained by its limited diversification. The company is exposed to only four core holdings (i.e. those representing over 5% of gross asset value), representing 78% of gross asset value at Q1 2022 and dominated by Aker BP with 52% of total gross asset value. In terms of income, two core holdings provide 97% of recurring revenues. Aker’s geographical diversification is moderate, with the majority of dividend income from its core holdings coming from Norway (94%). This lack of geographical asset diversification is mitigated by Norway being a low-risk country. Concentration of investments is relatively high, with Aker’s largest holding Aker BP contributing 92% of income (2022E). Aker BP’s predictable payout capacity resulting from its low-cost assets in the current high oil-price environment, its public investment grade rating, Scope’s assessed credit quality with plenty of headroom to covenants and Aker’s influence via board mandates on the company help mitigate the top holding’s income concentration.

Aker’s financial risk profile (assessed at BBB) benefits from a low loan-to-value (LTV) ratio, which stood at 7% as at Q1 2022. According to Scope’s calculations, Aker’s LTV has been between 8.0% and 14.7% at year-end over the last five years, which shows its conservative risk profile. Scope expects an LTV of around 10% in the short to medium term in the absence of any large debt-funded transactions. While the LTV remains strongly exposed to the volatility of its underlying holdings’ share prices, a sensitivity analysis showed that share prices and GAV of unlisted holdings as at YE 2021 would need to decrease by more than 45% (debt unchanged) to take the LTV above 15%, which is still low.

The financial risk profile is somewhat held back by Aker’s total cost coverage that averaged 1.1x over 2017-2021. Its recurring income stems mostly from dividends. Its costs are predominantly driven by the substantial dividends paid to its own shareholders and to a smaller degree interest expenses and operating expenses. The company has an official policy of paying its shareholders dividends of 2-4% of its net asset value, which is not representative of actual income. Embedded in this policy is the company’s aim to balance cash inflows and outflows at all times, resulting in a target total cost coverage of at least 1x. Scope therefore expects a total cost coverage of 1.0x-1.1x going forward, with the paid dividend balancing swings in income. Aker’s flexibility in its dividend payments is also demonstrated by the company only committing at the AGMs (in April) to about half of the dividend per share to be paid as ordinary throughout the year; the potential second half would be paid out at the discretion of the board in November subject to a financial review assessing the solidity and liquidity of the company.

Scope assesses Aker’s liquidity as adequate given that i) the company is able to balance cash inflows and cash outflows; ii) committed credit lines increased in April 2022 through a refinancing to NOK 8bn (twice NOK 4bn) from NOK 4bn as at Q1 2022, approximately NOK 4.6bn of which is undrawn subsequent to the refinancing; iii) total cash position amounted to NOK 4.4bn at Q1 2022 and restricted cash stood at NOK 24m at YE 2021; iv) the ownership of 21.2% (post-transaction) in Aker BP is worth NOK 46bn (June 2022) in addition to other listed shareholdings; and v) the only short-term bond coming to maturity is worth NOK 1bn in 2022, followed by a NOK 2bn bond in 2023.

Over the past few years, Aker’s exposure to climate solutions and renewable energy has grown from around zero to more than 20% of total investments. At the same time, Aker has also reduced its exposure to oil and gas from 75% in 2019 to around 50% as at Q1 2022. The establishment of Aker Asset Management in 2021 will further support Aker’s green investment ambitions.

Outlook and rating-change drivers

The Outlook for Aker is Stable and incorporates a continuation of the company’s core long-term holdings Aker BP, Aker Solutions, Aker Horizons and Cognite. The Outlook relies on the fact that the company will balance its cash inflows and outflows and therefore achieve a total cost coverage of 1x or above for the foreseeable future. It further incorporates Scope’s expectation that the company will not engage in debt-financed increases in shareholdings, which would increase leverage as measured by the Scope-adjusted LTV to above 15% on a sustained basis, while we view temporary swings above this level as witnessed in the past as normal course of business.

A negative rating action would be possible if Aker’s financial risk profile deteriorated, exemplified by a total cost coverage worsened below 1.0x on a sustained basis and/or the LTV increased significantly above 15%, while Scope does not gain confidence that such levels can be remedied by the company. This could be the result of its main holding Aker BP not being able to pay dividends at all, Aker and its holdings’ dividend pay-out exceeding a balancing position and/or the company engaging in debt-funded increases in shareholdings.

A positive rating action may be warranted if the company diversified its income-generating holdings or achieved a total cost coverage of 1.3x or above on a sustained basis. Diversification could be the result of a more mature investment portfolio paying dividends to Aker and a better cost coverage could occur through increased income and adjusted dividend pay-outs accompanied by a change of financial policy restricting dividends.

Long-term and short-term debt ratings

Following the refinancing in April 2022, Aker had NOK 5bn in senior unsecured bond debt in addition to EUR 100m (NOK 1bn) in Schuldschein and about NOK 3.4bn drawn on its senior unsecured RCF facilities, all ranked pari passu.

Scope rates senior unsecured debt at the issuer’s level of BBB-.

The S-2 short-term rating is supported by adequate liquidity, good banking relationships, and adequate access to diverse funding sources.

Disclosure

Scope uses the following key credit metrics to gauge the financial risk profile of an investment holding company: total cost coverage; leverage (LTV); and liquidity. Scope uses total cost coverage as the key indicator. The rating agency defines the total cost coverage ratio as cash inflows versus non-discretionary cash outflows at the holding company level. The ratio signals the extent to which an investment holding company can cover all its discretionary payments. An investment holding company’s leverage – measured as the LTV ratio – only serves as a supplementary credit ratio, indicating its headroom for additional external funding, should this be required to cover upcoming debt maturities. However, as the LTV of an investment holding company tends to be volatile due to constant changes in the portfolio’s market value, Scope only focusses on this ratio in the event of major debt repayments over the foreseeable future. Scope assesses the liquidity of an investment holding company in a similar way to its assessment of liquidity for any other non-financial corporate.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (General Corporate Rating Methodology, 15 July 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities' Related Third Parties and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 17 August 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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