Moody's Investors Service has upgraded CMA CGM S.A.'s corporate family rating (CFR) to B2 from B3 and the company's probability of default rating to B2-PD from B3-PD. Concurrently, the rating agency has upgraded to Caa1 (LGD5/84) from Caa2 (LGD5/80) CMA CGM's EUR325 million and $475 million worth of senior unsecured notes maturing in 2019 and 2017, respectively. The outlook on the ratings is stable.
"We have upgraded CMA CGM's rating to B2 to recognize the return of the company to a more stable operating and financial profile following the completion of its restructuring and because of its strengthened liquidity position after the sale of 49% of its terminal business and an $150 million equity injection as part of its restructuring," said Marco Vetulli, a Moody's Vice President - Senior Credit Officer and lead analyst for CMA CGM.
The rating action reflects Moody's acknowledgement that after the strengthening of its liquidity position, the company can fully focus on exploiting its competitive position in an industry which, however, remains volatile.
The material improvement in CMA CGM's liquidity is due to (1) the company completing the sale of 49% of its terminals business, Terminal Link, to China Merchants Holdings International for $528 million; and (2) the subscription of $150 million in mandatory convertible bonds by Fonds Strategique d'Investissement (FSI).These two transactions represented the final step of CMA CGM's financial restructuring, undertaken during the past year and they have enabled the company to significantly improve its financial flexibility and hence its credit profile.
Furthermore, Moody's notes that CMA CGM is one of the most efficient companies in the container shipping space because of its ongoing and successful efforts to improve its cost structure.
As a result of the strong operating efficiency, CMA CGM was able to achieve good results in first half 2013, despite negative market conditions. Moreover, Moody's expects that the company will maintain a consolidated financial profile that is commensurate with a B2 rating on sustainable basis, even if freight rates in the container shipping sector remain low over the next 12-18 months, as a result of oversupply.
CMA CGM's B2 corporate family rating (CFR) is constrained by two main factors. The first constraint is the high cyclicality in the container shipping market, which is exacerbated by both (1) the fierce competition between the main players, which limits CMA CGM's ability to recover increases in certain operating costs (especially bunker costs); and (2) the high reliance of this shipping segment on short-term contracts, which limits visibility with regard to CMA CGM's revenues. These market characteristics have credit-negative implications for the ratings of container shipping companies, on account of their high operating leverage and high sensitivity to operating cash-flow shifts.
The second constraint on the rating is CMA CGM's weak credit metrics. These weak metrics are a result of the company's leveraged capital structure, with debt/EBITDA, on an adjusted basis, of around 6.2x as of end-June 2013.
However, the rating also takes into account (1) CMA CGM's sound business profile, stemming from its leading market positions, which have been gained as a result of the successful commercial and operational strategies implemented by its management; (2) its low capital investment commitments relative to its main competitors; (3) the flexibility of its fleet (due to the fairly 80% of its chartered vessels that can be redelivered in the coming 2 years); (4) the company's operating efficiency; and (5) its strong asset base.
Rationale for Stable Outlook
The stable rating outlook incorporates Moody's expectation that CMA CGM will be able to maintain its current operating performance, with the potential for further improvements over the next two to three years if market conditions improve. The outlook also takes into account Moody's expectation that the company will maintain a prudent liquidity profile while demonstrating its ability to refinance its debt maturity in timely manner.
What could Change the Rating Up/Down?
Before any upgrade, the company should evidence its capacity in weathering difficult market conditions by building a track record of more stable operating performance. Upward rating pressure could materialise as a result of (1) a reduction in CMA CGM's financial leverage sustainably below 5.5x; and (2) an increase in its funds from operations (FFO) interest expense coverage above 3.5x on a sustainable basis.
Conversely, immediate downward rating pressure could develop as a result of pressure on the company's liquidity, although Moody's does not currently expect this. Longer term, downward rating pressure could result if a lack of short-term improvement in market conditions leads to (1) financial leverage above 7v for an extended period of time; or (2) FFO interest expense coverage below 2.5x.