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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB-/Stable issuer rating on DFDS A/S. Concurrently, the senior unsecured debt rating and short-term debt rating have been affirmed at BBB- and S-2, respectively.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BBB. Scope sees DFDS’ business risks as unchanged, but highlights current pressures on profitability in a more challenging market environment, which is considered to be partially balanced by the acquisition of FRS Ibera/Maroc in January 2024 and the upcoming Ekol acquisition in Q4, as these expands the geographical outreach.

The business risk profile continues to reflect DFDS’ diversified business model in European ferry and logistics operations. The company’s ferry network is among the largest in Europe with leading market shares on freight routes in the North Sea and the Mediterranean/Turkey, and further established routes in the Baltics, the Channel and the Strait of Gibraltar. The broad route network across several geographical markets and exposure to both freight and passenger transport reduces concentration risks, and therefore supports the resilience of financial performance.

The planned sale in Q4 2024 of the Oslo-Frederikshavn-Copenhagen route for DKK 400m is aligned with DFDS’ focus on pure transport since the route was mainly cruise related. While the route had sizeable revenues of DKK 0.9bn in 2023 and around 700,000 passengers annually between Norway and Denmark, the share of group EBITDA was relatively modest. The impact of the sale on business risks is considered neutral.

Scope expects DFDS’ EBITDA margin* to weaken in 2024 compared to the level of 18%-20% in 2021-2023, with profitability being under pressure from lower pricing power in freight transport and underperformance in certain business units. Scope then expect the group margin to stabilise or slightly increase in 2025-2026 compared to 2024, with an assumed, gradual recovery in market conditions and the disposal of the lower-margin Oslo-Frederikshavn-Copenhagen route, both helping to offset the projected, dilutive impact from the upcoming Ekol acquisition.

Scope assumes that costs for emission allowances following the introduction of the EU Emissions Trading System will be passed through to customers, but remain cautious about other medium and long-run transition risks, including the growing importance of carbon efficiency for vessels’ cost competitiveness, and to which extent supply chains are modified to counter higher costs. The Emission Trading System became effective in 2024 for ships that enter EU ports, with a gradual ramp-up under which operators are required to purchase allowances for 40% of emissions in 2024, 70% in 2025 and 100% in 2026.

Scope expects less acquisitions under DFDS’ new strategy ‘Moving Together Towards 2030’. The strategy was announced in December 2023 and represented a shift in focus from network expansion to organic growth. This reduces event risk for the company’s business and financial risks, in contrast with the previous strategy period (‘Win23’), which was characterised by a high number of acquisitions.

Financial risk profile: BB+. DFDS’ financial risk profile constrains the rating and reflects moderate credit metrics.

Scope expects leverage (debt/EBITDA) to increase towards 3.5x in 2024, compared to 2.9x in 2023. This is based on current pressures on profitability and the above-mentioned acquisition of FRS Iberia/Maroc and the planned Ekol acquisition. Subsequently, Scope expects a gradual recovery in organic EBITDA performance and the full-year effect of Ekol in 2025 to support deleveraging throughout the forecast period to around or below 3.0x. Scope expects a similar development for leverage based on funds from operations/debt, which ended at 28% in 2023 and is forecasted at 20%-25% in 2024 before improving to around 30% in 2025-2026.

Interest cover remains good despite an expected decline to around 6x in the short and medium-term, compared to a level of 7.7x in 2023. This is driven by higher interest rates and the moderate, forecasted increase in debt levels.

Scope anticipates that expected capex and lease payments of DKK 3.0bn-3.5bn per annum can be funded by operating cash flow, with forecasted cash flow cover (free operating cash flow/debt) of 5%-10% in 2024-2026. This compares to a level of 9% in 2023, excluding the DKK 1.5bn of disposal proceeds from the sale and leaseback transaction of three ferries completed in Q4 2023.

Liquidity: adequate. DFDS’ liquidity profile is adequate given the sufficient coverage of short-term debt maturities by unrestricted cash, undrawn multi-year credit lines and positive free operating cash flow. This is underpinned by past and expected liquidity ratios of above 110%.

Supplementary rating drivers: credit-neutral. No adjustments have been made for supplementary rating drivers.

Outlook and rating sensitivities

The Outlook is Stable, reflecting Scope’s expectation that DFDS’ leverage (debt/EBITDA) will improve to around 3x or below in 2025-2026, while the company maintains its strong market shares in the North Sea and Mediterranean/Turkey routes. The Outlook further assumes that DFDS will follow its financial policy including the net interest-bearing debt/EBITDA of 2x-3x over the business cycle, which is used to balance the level of shareholder remuneration and discretionary investment.

The upside scenario for the ratings and Outlook is:

1. Scope-adjusted debt/EBITDA sustained at significantly below 2.5x in connection with more conservative financial policy targets.

The downside scenario for the rating and Outlook is:

1. Scope-adjusted debt/EBITDA ratio sustained at 3.5x or above.

Debt ratings

The senior unsecured debt rating has been affirmed at BBB-, in line with the issuer rating. The instrument rating applies to all senior unsecured debt issued or guaranteed by DFDS A/S.

The short-term debt rating is affirmed at S-2. It is based on the BBB-/Stable issuer rating and reflects DFDS’ better-than-adequate liquidity cover and adequate banking relationships and standing in capital markets.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities 

DFDS A/S

Issuer rating: BBB-/Stable, affirmation

Senior unsecured debt rating: BBB-, affirmation

Short-term debt rating: S-2, affirmation

*All credit metrics refer to Scope-adjusted figures.

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, 16 October 2023), 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 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 these 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 and/or Outlook 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: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 August 2022. The Credit Ratings/Outlook were last updated on 6 September 2023.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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