MOL Mulls Selling Box Business

MOL said last week it is considering spinning off its container shipping division and selling it to a non-Japanese shipping line as one option to turn around the loss-making business.

Japan’s second-largest shipping lines suggested this possibility in an interview with Reuters last week just one day before Standard & Poor's Ratings Services placed MOL’s long-term corporate credit and senior unsecured debt ratings on CreditWatch with negative implications.

MOL Senior Managing Executive Officer Kenichi Yonetani told Reuters, "That (spinning off) would increase flexibility and speed up decision making, consolidating the business with other firms for instance."

He said that a recent strong upturn in the dry bulk market could lift its group profit, offsetting a bigger-than-expected loss in its container shipping business.

But the container business is the biggest drag on its earnings in the year to March 2010 due to unprofitable rates, declining volumes and mounting concerns about vessel overcapacity.

Yonetani said there would be more benefits in consolidating the business with that of a foreign ally than with a Japanese rival such as NYK or “K” Line, as there would be no overlap of facilities.

S&P said the move reflected its view that it might take longer than expected for MOL to rebuild its financial standing, given that cash flow at the company could come under massive downward pressure in the immediate future, due to shipping market deterioration and a substantial decline in cargo transportation demand since late 2008.

The ratings agency said that although the company's cash flow is expected to remain relatively stable, backed by long-term freight contracts in its dry bulk, tanker, and LNG carrier businesses, Standard & Poor's may consider downgrading MOL by one notch if the likelihood increases that the company's cash flow and debt leverage will deteriorate to a point that is not commensurate with the current rating

MOL is the only shipper among Japan's three major shipping companies that has forecast a first-half profit, as it managed to avoid the worst of a collapse in commodity shipping rates by locking in fees through long-term contracts.

MOL expects a loss of $203 million in the container division for the year to March 2010, following a $216 million loss in the 2008/09 business year.

The division could see an even wider loss this business year due to rising fuel oil prices and sluggish demand, Yonetani said.