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Rating action

Scope Ratings GmbH (Scope) has today affirmed its BBB-/Stable issuer rating on Norway-based ‘Aker ASA and holding companies’. Scope has also affirmed the BBB- senior unsecured debt rating and S-2 short-term debt rating.

Rating rationale

The rating affirmation is based on the stable growth of Aker’s main holdings’ cash generation and dividend capacity, and the stability of its financial risk profile with a Scope-adjusted loan-to-value (LTV) of 10%-15%. Total cost coverage stands at around 1x, balancing the size of Aker’s dividends with recurring income.

Aker’s business risk profile (assessed at BB+) benefits from a long-term investment approach, active ownership strategy and strong track record of portfolio value development. Aker’s rating also benefits from a liquid portfolio with around 75% of asset values being listed companies on the Oslo Stock Exchange and Aker’s strong influence in core holdings through large ownership stakes and board positions. The main ratings constraints continue to be high portfolio concentration and large exposure to cyclical industries, mainly oil and gas, as Aker BP and Aker Solutions comprise above 90% of Aker’s income and around 60% of asset values. However, this is partly offset by good asset quality since both Aker BP and Aker Solutions have solid payout capacity bolstered by strong credit profiles and positive market outlooks. Aker BP’s stated ambition of growing dividends by at least 5% yearly is sustainable at Brent oil prices above USD 40/bbl. Aker Solutions exhibits a growing net cash position, which stood at NOK 7.7bn at Q2 2023. While most revenues and operating results in Aker’s holdings are derived from operations conducted in Norway, its geographical diversification is supported by a global outreach, including through oil and gas commodity markets.

The company’s increasing efforts to diversify its portfolio into green industries, industrial software and healthy living is credit-positive as it can help to reduce portfolio concentration. However, sufficient diversification will likely take some time as it requires one or more of the key growth holdings (e.g. Aker Horizons, Cognite, Aize and Industry Capital Partners) to reach a more mature stage including capacity to contribute with upstream dividends. In addition, it should be noted that such maturation entails execution risks. In February 2023, Aker updated its green financing framework to broaden its ability to fund green projects outside of Aker Horizons, indicating that it aims to continue diversifying its portfolio with more green investments.

The rating continues to reflect Aker’s strong financial risk profile (assessed at BBB), supported by its modest LTV of 12% as of Q2 2023 and its history of fulfilling its public guidance of having an LTV below 20% through-the-cycle with a normalised target of 10%-15%. The financial profile also benefits from the company’s strong focus on balancing cash inflows and outflows, which Scope expects will result in a controlled total cost coverage of at least 1.0x over the coming years, similarly to previous years. Aker’s total cost coverage is quite robust despite being comparatively lower than that of some of its peers, since i) dividend payments comprise a substantial share of its cost base (around 70% over 2017-2022); ii) it is able to influence payout policies in core holdings; and iii) it has a track record of steering the ratio towards 1.0x. Modest leverage and robust cost coverage should help Aker to withstand portfolio market value volatility and maintain ample financial flexibility even under adverse market conditions.

On 22^nd August 2023 one of Aker’s holdings – American Shipping Company (AMSC ASA) - announced the intention to sell its ‘Jones Act shipping business’. While there is uncertainty how a sale will affect the magnitude of AMSC’s future dividend payouts, a closing of the transaction is not assessed to have a rating impact given AMSC’s relatively minor part of Aker’s gross asset values and expected income in our estimates, and indications that parts of the sales proceeds could be distributed to shareholders.

Scope continues to view Aker’s dividend policy of paying out 2%-4% of its NAV negatively, as payouts are subject to asset values rather than actual income. While Scope expects the company to strive to fulfill its policy, it would likely be willing to hold back dividends to avoid a deterioration of its credit profile. This occurred during the Covid-19 crisis and simultaneous oil price collapse in March 2020, when the company revised down its dividend.

Liquidity remains strong. Liquidity ratios are expected to stand significantly above 110% in the foreseeable future, supported by a total cash position of NOK 0.9bn at mid-2023 and committed undrawn credit lines of NOK 5.4bn. Total capacity on the committed credit lines is NOK 8.0bn, split between two tranches of NOK 4.0bn maturing in 2026 and 2027, respectively. Aker’s liquidity is further supported by its strong ability to balance cash inflows and outflows; its liquid portfolio with around 75% of asset values being listed companies; its strong relationships with banks and investors; and consistently low LTV. Paired with Aker’s investment-grade credit profile, refinancing should not be an issue.

Over the past few years, Aker’s exposure to climate solutions, renewable energy, industrial digitalisation and healthy living has grown to more than 20% of total investments. At the same time, Aker has also reduced its exposure to oil and gas production from around 65% in 2019 to around 50% as of Q2 2023. The establishment of Industry Capital Partners 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, most critically Aker BP and Aker Solutions. The Outlook relies on Scope’s expectation that Aker will balance its cash inflows and outflows and therefore achieve a total cost coverage of 1.0x or higher. It further incorporates the expectation that LTV will not exceed Aker’s public guidance of below 20% through-the-cycle with a normalised range of 10%-15%, on a sustained basis.

A negative rating action could occur if Aker’s financial risk profile deteriorated, exemplified by a total cost coverage sustained at below 1.0x and/or LTV increasing to significantly above 15% while Scope does not gain confidence that such levels could be remedied by the company. Such ratios 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 debt-funded increases in shareholdings.

A positive rating action could be warranted if the company diversified its income-generating holdings or achieved total cost coverage of 1.3x or above on a sustained basis. Improved diversification could be the result of a more mature investment portfolio comprising a higher number of income-generating holdings. A sustained improvement in total cost coverage could occur through increased income, which is not balanced out by dividend payments, likely requiring a change of financial policy restricting payouts.

Long-term and short-term debt ratings

Senior unsecured debt remains rated at the level of the issuer rating, at BBB-.

The S-2 short-term debt rating is based on the BBB-/Stable issuer rating and supported by adequate liquidity, good banking relationships, and diversified access to external funding sources.

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

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 15 July 2022; Investment Holding Companies Rating Methodology, 19 May 2023), are 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 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: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 17 August 2022.

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

Conditions of use/exclusion of liability
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