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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB-/Stable issuer rating on DFDS A/S. Scope has also affirmed the BBB- senior unsecured debt rating and S-2 short-term debt rating.

Rating rationale

The rating affirmation is driven by the continued stability of DFDS’ good business risk profile (assessed at BBB) and a recovery in operating performance during 2022 which has supported deleveraging, with the Scope-adjusted debt/EBITDA ratio standing around 3.0x currently.

The business risk profile reflects DFDS’ diversified business model in ferry and logistics operations, with activities in several European regions. DFDS’ ferry business benefits from leading market positions in the North Sea and the Mediterranean/Turkey in addition to established routes in the Baltic Sea and English Channel. The company’s large route network and exposure to both freight and passenger segments reduces concentration risk, which should support the resilience of operations compared to less diversified peers. Much of DFDS’ logistics business is sourced from existing customer relationships in the freight ferry operations, providing a benefit in terms of growth and cross-selling opportunities related to established routes. Scope continues to assess DFDS’ profitability as solid based on: i) its stable group EBITDA margin, which is expected to stay between 18% and 20% during the next few years; and ii) the above-average EBITDA margin in its ferry division versus Scope’s group of ferry peers. Regarding the stability of profitability margins, Scope notes positively the bunker-adjustment-factor hedge mechanism, which reduces the impact of bunker price volatility by enabling for higher bunker prices to be largely passed on to customers via a surcharge.

DFDS is expected to maintain its strategy of growth through bolt-on acquisitions, with most targets likely being within the logistics segment. So far in 2023, DFDS has acquired McBurney Transport Group in Q1 2023 – a company focused on moving cold chain and dry goods in trailers by road and ferry between Ireland and the UK – for a debt-free purchase price of DKK 1.1bn. In addition, an agreement to acquire Dutch logistics company Estron Group was signed in July 2023. The current acquisition pipeline most notably includes the potential purchase of Ekol Logistics’ international road haulage activities, which was approved by the Turkish Competition Authority last month. If completed, the transaction would enable DFDS to combine its existing ferry activities in the Mediterranean with logistics services – as it has done successfully in Northern Europe.

After having been negatively impacted by the Covid-19 response and related travel restrictions in 2020-21, DFDS’ operating performance has largely recovered as illustrated by Scope-adjusted EBITDA of DKK 5.0bn for FY 2022. The recovery in passenger volumes has continued into 2023 and is now close to pre-pandemic levels. Freight volumes have seen a slight decline in the first half of 2023, also after adjusting for additional volumes in the Channel last year due to the suspension of a competitor, and for the impact of the war in Ukraine on ferry routes in the Baltic Sea, as the war did not materially impact volumes until Q3 2022. Based on updated Q2 2023 guidance and Scope’s expectation that freight volumes will stabilise in H2 2023, Scope-adjusted EBITDA is expected to remain at around DKK 5.0bn in 2023 and increase to more than DKK 5.5bn by 2025. Nevertheless, there is still a risk of further deterioration in the macroeconomic environment and a recession, which could threaten freight volumes and by extension forecasted EBITDA growth.

While internally generated funds are projected to comfortably cover capex and lease payments, as illustrated by estimates of Scope-adjusted free operating cash flow in the range of DKK 1.3bn-1.5bn in 2023-25, discretionary spending on shareholder remuneration and bolt-on acquistions could potentially require external funding. This would likely be the case in the event of one or more large investments, like the potential acquisition of Turkey-based Ekol Logistics’ international road haulage activities.

In Scope’s rating case, the Scope-adjusted debt/EBITDA ratio is expected to improve from around 3.0x in 2023 to around 2.5x in 2025. Accordingly, there is additional headroom for higher discretionary spending than forecasted. This supports the current assessment of DFDS’ financial profile. High deleveraging capacity in the absence of growth investments and dividend payments is viewed positively as it provides flexibility in financial planning, which should enable DFDS to adapt the level of cash outflows if needed (e.g. in the event of a deeper economic slowdown than assumed). The company has publicly stated that a net interest-bearing debt/EBITDA ratio in the range of 2.0x-3.0x over a business cycle is representative of its target capital structure. It is therefore not expected that the Scope-adjusted debt/EBITDA ratio will stay above 3.0x on a sustained basis. Nevertheless, Scope has incorporated the possibility of temporary spikes in connection with large investments.

Debt protection as measured by Scope-adjusted EBITDA/interest coverage is expected to weaken to around 7.0x in the next few years, driven mainly by an increase in interest cost on the back of higher interest rates. At end-2022, the company’s reported share of fixed-rate debt was around 40%, including interest rate derivatives. Thus, around 60% of debt is exposed to floating rates.

Liquidity remains adequate. Upcoming debt maturities in 2023-25 are expected to be comfortably covered by available liquidity sources. At end-2022, the company had DKK 1.0bn of cash and cash equivalents and DKK 1.7bn of undrawn committed credit lines. The company’s revolving credit facilities are committed with maturities above one year, which Scope expects will be renewed. In addition, the forecasted annual free operating cash flow of DKK 1.3bn-1.5bn in 2023-24 is supporting liquidity. Simultaneously, refinancing is not considered to be an issue given DFDS’ investment-grade credit profile, good banking relationships and access to diverse funding sources.

Scope is not aware of any substandard behavior or lack of transparency with regard to environmental, social and governance factors. The company is considered to have clear policies regarding the reduction of carbon emissions and a demonstrated willingness and ability to invest in green technology. Its green investments include efforts to make the fleet more fuel-efficient and increase the usage of non-fossil fuel sources such as methanol, ammonia and hydrogen, as well as battery power for shorter routes. Regarding governance, DFDS’ financial policy continues to include guidance on its dividend policy, leverage and rating commitment – which Scope sees as positive.

Outlook and rating-change drivers

The Stable Outlook incorporates Scope’s expectation that the company will show financial leverage of around 3.0x or below, while maintaining its market leadership in its North Sea and the Mediterranean/Turkey routes and expanding its logistics presence. In addition, the Outlook reflects Scope’s assumption that DFDS will maintain and follow its financial policy, including its leverage target of 2.0x-3.0x over a business cycle, a moderate dividend payout policy, and that it will keep adequate liquidity, notably through cash and committed loan facilities.

A positive rating action could be warranted if the Scope-adjusted debt/EBITDA ratio was sustained at significantly below 2.5x. This would likely require a more conservative financial policy with respect to growth ambitions and shareholder returns.

A negative rating action could be triggered if the Scope-adjusted debt/EBITDA ratio was sustained at 3.5x or above, particularly due to a more aggressive financial policy prioritising shareholder returns and/or growth capex and M&A. It could potentially also be triggered by external factors such as a worse-than-expected slowing of the global economic environment.

Long-term and short-term debt ratings

The instrument rating on senior unsecured debt has been affirmed at BBB- in line with the issuer rating. The instrument rating is applicable to all senior unsecured debt issued or guaranteed by DFDS.

The affirmed 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 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: Per Haakestad, Senior Specialist
Person responsible for approval of the Credit Ratings: Philipp Wass, 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/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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