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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BBB-/Stable to DFDS A/S. Scope has also assigned first-time ratings of BBB- to senior unsecured debt issued by DFDS A/S and a short-term rating of S-2.

Rating rationale

The issuer rating reflects Scope’s view of DFDS’s business risk profile, assessed at BBB. The company’s business model is balanced between the Ferry and Logistics divisions, which offer different levels of profitability and growth. The diversification with regards to geographic markets, client segments and services is also credit-positive. DFDS offers freight, passenger, hybrid customers and door-to-door transport for both dry goods and more specialised cold chain solutions for items such as meat, seafood and dairy.

In the Ferry division, DFDS’s competitive position reflects its established presence in freight ferry. DFDS has leading market positions in the North Sea and the Mediterranean/Türkiye. Profitability is also protected in part by a surcharge for price changes in bunker fuel oil, which enables DFDS to pass unfavourable fuel price increases on to customers. The company also benefits from the stability of passenger revenue, which is not dependent on the economic cycle, although the freight business does have more macroeconomic exposure. The company is still recovering volumes after Covid-19-related restrictions in the past two years, especially in the Passenger subsegment. Scope expects the company to see a full return of passenger and freight volumes, though this might only happen in 2023 or possibly later, depending on macroeconomic conditions.

In the Logistics division, much of the business comes from existing customer relationships in Freight Ferry. The Logistics division is therefore focused on providing growth and cross-selling opportunities related to established routes. The acquisition of HSF Logistics Group in 2021 significantly bolstered the company’s position in cold chain logistics. The company is likely to continue to use M&A as a growth strategy, especially in Logistics, where there are more targets for acquisition.

The company’s financial risk profile is assessed at BB+, which is focused on the forward-looking, forecasted trajectory. Increasing profitability is expected to lead to a deleveraging profile and boost cash flow, on the back of recovery in passenger volumes and established stability in pricing and profitability in this segment. At the same time, operating cash flow will likely be heavily or completely used for capex across business lines. Scope expects high capex of over DKK 2bn and up to nearly DKK 4bn per year in 2022 to 2024, considering the substantial investments needed for conversions to make the fleet greener and the buildout of terminal and logistics capabilities. These levels include all growth capex; maintenance levels would be about half that, should they need to be pared back, which would raise free operating cash flows.

Despite increased cash outflow for capex and shareholder remuneration, Scope expects improved financial leverage of below 3.0x going forward, driven by improved operating profits. This view is based on the company’s own communication about its leverage target (as measured by net interest-bearing debt/EBITDA) of 2.0x-3.0x over a business cycle. The company suspended dividends during the past two years of pandemic but is expected to resume material cash dividends to equity investors. Share buybacks may occur after more significant deleveraging. Deleveraging could, however, be negatively impacted if the company decided to make a transformative acquisition, which also entails execution and integration risks.

Recent 2Q22 earnings and the raised FY2022 outlook guidance from the company is supportive, reflecting a trajectory of improving profitability and subsequent deleveraging, with YoY EBITDA growth of nearly 24% on an LTM basis and debt levels remaining relatively constant since 2021 year-end. Against the backdrop of strong performance, the company has accordingly also planned to use its increased cash flows in part on discretionary spending on capex/investments and M&A.

However, there is still a risk of further deterioration in the macroeconomic environment and potential recession, which could threaten freight volumes and the forecasted EBITDA growth that is expected to drive deleveraging. However, Scope expects the company to manage the significant inflationary cost pressures in the current environment with the aforementioned surcharge mechanism, as well as the imbalance between capacity and demand in global freight, which the war in Ukraine and lockdowns in China have exacerbated. These latter issues actually favours DFDS’s geographic footprint, as customers look to find alternative transport routes to avoid current bottlenecks. This should support Scope’s expectation that operating profitability as measured by the Scope-adjusted EBITDA margin will stay above 19% on a sustained basis. Cash flow generation as measured by Scope-adjusted funds from operations/Scope-adjusted debt is expected to improve to 30% and above.

Liquidity remains adequate given the sufficient coverage of short-term financial maturities by unrestricted cash, available loan facilities, and to a lesser extent free operating cash flow.

We are not aware of any sub-standard behaviour or lack of transparency with regards to environmental, social and governance areas. We highlight the issuer’s clear policies regarding the reduction of carbon emissions as well as its demonstrated willingness and ability to invest in green technology, e.g. via more fuel-efficient vessels and non-fossil fuel energy sources such as methanol, ammonia and hydrogen, as well as battery power for shorter routes. Its financial policy includes guidance on dividend policy and rating commitment. Transparency on financial and other disclosures is high.

Outlook and rating-change drivers

The Stable Outlook on the issuer incorporates the expectation that the issuer will show financial leverage of below 3.0x in the next year or so, driven by rebounding passenger volumes and continued stability and slight improvement of profit margins, while maintaining its market leadership in the North Sea and the Mediterranean/Türkiye routes and expanding its logistics presence. Moreover, it reflects the assumption that the issuer will maintain and follow its financial policy, which includes its target leverage and a moderate dividend payout policy, and that it will maintain adequate liquidity, notably via cash and committed loan facilities.

A positive rating action could be triggered if Scope-adjusted debt/EBITDA were sustained at significantly below 2.5x, particularly in connection with a more conservative financial policy regarding shareholder returns, M&A, and capex. This could also be driven by a swift recovery of the global economy in combination with continued accelerated growth in Logistics.

A negative rating action might be warranted if Scope-adjusted debt/EBITDA were sustained at 3.5x or above, particularly due to a more aggressive financial policy prioritising shareholder returns and/or M&A. It could also be triggered by external factors such as a worse-than-expected slowing of the global economic environment or a prolonged disruption in the global freight markets, reflecting current macroeconomic trends.

Long-term and short-term debt ratings

Scope has assigned a BBB- instrument rating on senior unsecured debt, in line with the issuer rating. The instrument rating is applicable to all senior unsecured debt issued by DFDS or guaranteed by DFDS.

Based on adequate liquidity and DFDS’s BBB-/Stable issuer rating, we have assigned a short-term rating of S-2. The short-term rating reflects our perception of the company’s sustainable liquidity profile in terms of short-term debt coverage and good access to external corporate funding. Including all internal and external sources of liquidity, coverage of short-term debt is projected at over 100% each year over the forecast period of 2022E-2025E.

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 Outlook, (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 Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

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