12-04-2023 09:53

A credit rating gives access to a very deep pool of capital

Stena AB is one of the largest family-owned companies in Sweden, with global operations in shipping, ferry lines, offshore, real estate and finance. How do you run and fund a capital-intensive business with a sub-investment-grade credit profile that’s investing in a sustainability journey? We asked Stena AB Finance Director Peter Claesson.
Calm ocean under blue sky

In this Nordea On Your Mind interview with Johan Trocmé (JT), Stena AB Finance Director Peter Claesson (PC) describes balancing risks with a diversified portfolio of businesses, each with its own suitable capital structure. Debt is kept at manageable levels, with a broad funding base helped further by a credit rating. Risks are also managed by multi-year charter contracts for ships and a high degree of hedged interest rates to as far out as 2030.

JT: How would you quickly describe Stena group's business and how you run the group?

PC: Stena AB group is a 100% privately owned diversified company with five business areas. These are: Ferries, Shipping (Tankers; LNG and RORO Northern Marine and Logistics), Offshore Drilling, Real Estate, and Adactum which is our investment company. The group composition is designed to be resistant to market volatility in the general business cycle. Really by applying basic portfolio theory to reduce the business cycle sensitivity for the whole group. This is then complemented by our policy to have access to abundant liquidity in order for the group to be able to absorb a multi-year recession scenario. The group is decentralised and each business area has its own independent management team and board of directors.

JT: Do you have any publicly communicated leverage target? Could you share something regarding how you think about leverage, and what levels are suitable for Stena? How do you weigh in that the nature of the businesses varies quite a bit across your portfolio?

PC: We do not have a public target for leverage. We are, however, of the view that our leverage in terms of net debt/EBITDA should be somewhere in the range of 2-4.5x depending on where we are in the business cycle. Another factor to weigh in is to what extent are we exposed to fluctuations in earnings, for example what the level of spot exposure in shipping is and to what extent we have multi-year charter contracts in place. The more multi-year charters we have in place – Stena has in recent years had a high level of such contracts – the less concerned we need to be about higher leverage. The most prominent example of this is of course our real estate division that primarily consists of Swedish residential real estate. In this business, leverage is around 10x, whereas loan to value (LTV) is a very conservative 40%.

As a capital-intensive company, it is very important to have access to multiple pools of capital. Our funding structure consists of our core relationship banks that have been with us for many years.

Peter Claesson, Finance Director at Stena AB

JT: How do you decide on an optimal mix of different funding sources, including loans, bonds, commercial paper and leasing? Would you say that the ideal mix for Stena today is different than, say, five years ago? If so, why?

PC: As a capital-intensive company, it is very important to have access to multiple pools of capital. Our funding structure consist of our core relationship banks that have been with us for many years. Adding to this is capital market funding, where Stena has been a borrower in the global bond markets since the early 1990s. We also borrow in the Chinese and Japanese leasing markets and have also done deals in the TLB (Term Loan B) market. It is difficult to say what the optimal position is, but we try to optimise our borrowing cost. A cause of concern for us is that it has become more difficult for us to obtain funding for our drilling division. For us, this has meant that we have needed to fund this division increasingly in the bond market or in the Asian leasing markets.


Source: Stena AB

JT: What role do credit ratings play for your funding? Has your view on how important or useful it is to have one or several credit ratings changed in recent years?

PC: We have ratings by Moody's and S&P for our outstanding and future bonds in the capital market. Having a rating means that we have access to a very deep pool of capital, which is important for Stena. I think it could also be used as a sign of quality for parties that might not be very familiar with our company. For example, on governance, Stena has been rated Strong by S&P, and in the sub-BBB segment, Stena is one of only three companies in the entire rated universe that has achieved this rating by S&P.

JT: Do you think the 2022-23 inflation spike and interest rate increases could affect your and other corporates' views on interest rate-, refinancing- and liquidity risks over the next few years? Or could it be more of a temporary deviation, for which there is room to deal with in existing financial policies?

PC: As I have pointed out previously in this interview, Stena is a capital-intensive company. As such, it has been very important for us to lock in our funding costs for a multi-year period. We have to a large extent hedged interest rates for the group up until 2030. This has been very important for us to do, since without it we would have been very sensitive in our financial net to changes in interest rates. To the extent that the rate increases will cause a downturn in the business cycle, we will of course not be immune to this.


Photo: Stena AB

JT: Could you say a few words about Stena's sustainability ambitions and journey in the coming years? How is it affecting your funding today, and how do you think it may play into your funding going forward?

PC: Stena has quite high ambitions and a history of being in the forefront of technical innovations in the shipping industry. Each business area has a decarbonisation plan, and we are committed to meet society's future needs. A few examples of our decarbonisation plans are given below. We have engaged in future alternative fuels, where Stena was the first ferry company to have a vessel propelled using methanol, and we also have plans to have a fully electric ferry between Gothenburg and Fredrikshavn sometime after 2030.

That said, we are in businesses that are relatively carbon-intensive simply because we provide services for travel and transportation in various ways. On the other hand, societies and the economy are demanding these services, and we aim to make them as efficient as possible. We believe we are better equipped than most to run these operations in an energy-efficient way by making the most of our technical edge while at the same time staying committed to do what we can in every way to de-carbonise within each existing business line.

Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.

Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.

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