BW has a "fair" business risk profile, in our view. The shipping industry is facing a prolonged downturn and we expect it to face another difficult year due to oversupply of ships, tepid demand, and high bunker fuel prices. BW also generates most of its revenues from VLCC and VLGC segments. The company's ownership of the largest fleet of VLGC globally and a large number of LNG carriers supports its competitive position.
BW's EBITDA margins are exposed to higher bunker prices and volatility in freight rates in the VLCC and VLGC segments. Stable cash flows from long-term fixed charter contracts in the LNG carrier business and medium-term charter contracts for product tankers should support BW's margins.
An escalation in geopolitical unrest in the Middle East, and Iran's closure of the Strait of Hormuz could increase bunker fuel prices and disrupt a key trade route for BW.
The company's weak financial performance in the first three quarters of 2011 is likely to slow down its deleveraging plans over the next 12 months. We expect BW's operating lease adjusted (OLA) EBITDA margin for 2011 to decline to less than 40% from 44.3% in 2010. The OLA ratio of debt to EBITDA is likely to be about 6x for 2011. The company's capital expenditure for 2011 is also likely to materially exceed our expectation. We do not expect BW's OLA debt to EBITDA ratio or EBITDA margin to recover materially over the next 12 months.
We regard BW's 47%-ownership in associate company BW Offshore Ltd. (BWO) as a strategic investment. We therefore fully consolidate BWO's financial figures with BW's, although BWO's financing is non-recourse to BW. We also factor in $108 million in annual cash inflows from BW's joint venture with Marubeni Corp. (BBB/Stable/--).
Liquidity
We assess BW's liquidity as "adequate", in accordance with our criteria. We expect that the company's sources of liquidity will cover its cash requirements by at least 1.2x over the next 12-18 months. We expect BW to comply with its covenants even if EBITDA drops 15%. Our liquidity assessment is based on the following factors:
-- BW's main liquidity sources include annualized funds from operations of more than $500 million, consolidated cash reserves of $204 million (as of Dec. 31, 2011), and an unused secured revolving credit facility of about $500 million.
-- BW's cash needs include about $104 million in capital expenditure for the next two years. This figure includes installments on two new-build LNG carriers. The contract for the carriers was signed in late September 2011 and delivery is likely in late 2014 and early 2015.
BW has minimal debt maturities till 2016. It refinanced $700 million of debt maturing in 2013 through a new $1.5 billion secured revolving credit facility that is due in 2018. We believe that BW has a good standing in its industry and in the credit markets.
Outlook
The stable outlook reflects our expectation that BW's financial strength will remain largely stable and the shipping industry will not recover over the next 12 months. We expect the company's liquidity to remain adequate due to steady earnings from BW's fixed contracts, the company's efforts to preserve cash flows, and the potential benefits of softness in bunker fuel prices.
We may lower the ratings if BW's financial health deteriorates substantially such that its ratio of OLA debt to EBITDA is likely to weaken to more than 7x in 2012. This could happen due to the company's weaker than expected operating performance or large capital expenditure.
Conversely, we could revise the outlook to positive if BW strengthens its balance sheet through deleveraging measures and its debt-to-EBITDA ratio is close to 5.0x.
Source: S&P Ratings