oWe expect passenger travel in the EU to gradually improve and help support recovery for Stena AB's ferry operations, with EBITDA above Swedish krona (SEK) 2.5 billion and SEK3 billion in 2021 and 2022 respectively, up from SEK1.5 billion in 2020.
oWe also expect improving earnings from drilling operations, with still-negative EBITDA in 2021 before turning positive in 2022, on the back of contracts being secured for most of the fleet for the remainder of 2021 and 2022, underpinned by recent charter rate increases.
oOverall, we anticipate a 20%-25% increase in Stena's EBITDA this year compared with 2020 that should lead to adjusted leverage of less than 7.5x at year-end 2021, incorporating a low contribution from tanker operations due to depressed charter rates.
oWe therefore revised our outlook on Stena AB to stable from negative and affirmed the 'B+' long-term issuer credit rating. The issue ratings on the $350 million and EUR315 million senior senior secured debt issuances are unchanged at 'BB-', with a recovery rating of '2' (expected recovery estimate: 75%), and the issue ratings on the $600 million senior unsecured notes were affirmed at 'B+', with a recovery rating of '4' (expected recovery estimate: 45%), reflecting the unsecured obligations of the group.
oThe stable outlook reflects our expectation that credit ratios will gradually improve over 2021 and 2022, with S&P Global Ratings-adjusted debt to EBITDA stabilizing below 7x in 2022.
STOCKHOLM (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.
We expect that Stena's operating performance will gradually improve in 2021 and 2022 and consider the major uncertainty around the recovery of the ferry and drilling businesses is alleviating.
Passenger volumes in Stena Line's network continue to recover. Notably, passenger volumes in Stena's ferry network have started to improve. Compared with first-half 2020, when volumes were only heavily affected by the COVID-19 pandemic in the second quarter, passenger volumes in first-half 2021 were down 13%, implying an improvement toward the second quarter. We anticipate that volumes will continue to increase in the third quarter, as vaccination rates improve. We also view positively the resilience of freight operations through the pandemic, with a solid 15% increase in volumes in the first half, which supported earnings. Moreover, management has used the pandemic to improve its operating cost position by closing less profitable lines, such as Oslo-Fredrikshamn and Trelleborg-Sassnitz, and lowering overheads. Overall, costs are down about SEK1 billion, which should sustainably improve margins for ferry operations. Already in second-quarter 2021, reported EBITDA margin was about 22%, despite lower volumes, compared with 23% in 2018 and 24% in 2019. We therefore anticipate that ferry operations will reach about pre-COVID-19 earnings in 2022, with EBITDA of SEK3.1 billion-SEK3.5 billion, compared with SEK1.5 billion in 2020, followed by SEK3.3 billion-3.9 billion in 2023, assuming no further lock downs or virus waves.
We don't expect rig operations to meaningfully contribute to Stena's EBITDA mix over 2021-2023, after a negative contribution in 2018-2020, meaning the group's earnings base is less diversified than previously.
Although we view positively that Stena has signed contracts for four of its drilling units, which implies that most available days in 2021 and 2022 are secured, the earnings contribution will remain low for now. Market charter rates for Stena's rig type are about $235,000 per day, up from $150,000-$175,000 per day about a year ago. This is still well below the more than $500,000 peak a few years ago. The contracts Stena has signed are short term and there is limited visibility beyond 2022. We still expect the business unit to post negative EBITDA in the SEK hundreds of millions in 2021, compared with negative SEK950 million in 2020. We then anticipate positive SEK0-500 million in 2022. This means that Stena's diversification, as measured by the EBITDA contribution of its largest businesses, will remain below historical levels at least until 2023. In the past, four distinct business segments usually contributed at least 10% of EBITDA to the group. We have therefore removed the diversification modifier that lifted our rating on Stena by one notch previously.
Tanker shipping rates remain sluggish in 2021.
Depressed tanker rates will burden the shipping division's profits. Medium range product tanker average spot earnings were about $6,000 per day in the year-to-date as of August 2021, compared with an average rate of about $15,000 per day in 2020, according to Clarkson Research. We anticipate a gradual improvement in the tanker business in 2022 and EBITDA generation of about SEK1.5 billion-SEK2.0 billion, as oil demand rebounds and new ship deliveries slow. This also takes into account a higher contribution from roll-on-roll-off (RORO) vessel deliveries, for which long-term charter rates have been secured already.
We believe Stena's increased focus on RORO and real estate should support cash flow stability.
Stena's real estate operations have continued to deliver stable operating results throughout the pandemic, with SEK1.4 billion-SEK1.5 billion in EBITDA last year. We anticipate no changes in 2021 or 2022. In addition, Stena recently took delivery of one RORO passenger ship, with eight other RORO ships on order--including one to be delivered in 2021 and the remainder up until 2025. The RORO segment is generally more stable than other shipping operations, and Stena has signed long-term, 10-year charter contracts for five of the vessels. This implies a higher contribution from the RORO segment, and we anticipate EBITDA will increase to about SEK650 million by 2023.
Continued high investments will be offset by asset sales in 2021.
The RORO vessel orders, maintenance capital expenditure (capex), and real estate investment lead us to expect about SEK9 billion in capex this year, which is significantly up from SEK6 billion last year. However, these investments have already been offset by asset sales and compensation for a cancelled rig contract, totaling about SEK10 billion. Therefore, we expect debt to moderately decrease over 2021, despite the massive investments, supporting an adjusted debt to EBTDA decline to 7.0x-7.5x in 2021. We don't assume any further assets sales in 2022 and, since capex is expected to remain relatively high at about SEK7 billion-SEK7.5 billion, debt is likely to increase somewhat over the next few years. In our view, it is positive that capex has been directed to Stena's less-risky operations, real estate, and the RORO segment, which could strengthen the business risk profile over 2023-2025. We also think the investments should ultimately underpin the stability of Stena's cash flow streams. This is why we removed the negative comparable rating analysis, which depressed the rating by one notch previously.
The stable outlook reflects our expectation that the group's EBITDA will increase from 2021, factoring in the improving passenger traffic, boosted earnings of the ferry business, and continued solid performance of the real estate division. We also forecast that financial leverage will remain high but decrease to rating-commensurate levels of 7.0x-7.5x in 2021, before dropping further to 6.5x-7.0x in 2022. Furthermore, we take into account Stena's strong liquidity position, which provides a necessary cushion against its volatile drilling and shipping businesses.
We view a downgrade as unlikely over the next 12 months because the group's earnings should improve, for example, thanks to its drilling business becoming less of a burden to EBITDA.
However, we could still consider a negative rating action if pressure returns in the drilling segment, or if the ferry business fails to recover in line with our base case, for example, on the back of reemerged travel restrictions. As such, we could lower the rating if we forecast adjusted debt to EBITDA will increase to above 7.5x for an extended period.
We could also consider a downgrade if Stena's liquidity deteriorates, and this is not offset by improved credit metrics. This could be the case if the company cannot secure new financing well in advance of debt maturities, and instead uses available liquidity to make the payments. We note, however, that liquidity headroom is currently ample.
We could raise the ratings on Stena by one notch over time if we see a stronger-than-expected improvement in drilling, with other segments performing as anticipated. We consider debt to EBITDA consistently below 6x as commensurate with a higher 'BB-' rating. If we deem the business risk profile has materially strengthened because of a higher share of stable EBITDA from real estate and RORO vessels, this could also lead to an upgrade.
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