Moody's Downgrades CMA CGM's Rating

Global ratings agency Moody's has downgraded the corporate family rating of French shipping major CMA CGM due to its "materially weaker" liquidity. The rating was downgraded to B2 from B1.

Concurrently, the company's senior unsecured ratings were downgraded to Caa1 from B3. The outlook was changed to stable from negative.

"Today's rating action reflects that CMA CGM's liquidity profile has weakened materially in the last 12 months as a consequence of the acquisition of CEVA Logistics AG, although expected by Moody's to improve somewhat in 2020", says Daniel Harlid, Assistant Vice President -- Analyst and lead analyst for CMA CGM.

The downgrade of CMA CGM's rating follows the acquisition of CEVA Logistics AG (Ceva, B2 Stable), that together with the a large capex program and difficult, albeit stable, market environment has and will continue to put pressure on the company's liquidity profile.

Given Moody's base case, where the free cash flow generation of the company leaves very limited room for debt reduction, Moody's now expects adjusted debt/EBITDA to be sustained above 5x and adjusted FFO Interest coverage to be sustained below 3x during the next 12-18 months.

Moody's notes that CMA GCM has historically shown good access to capital and that there is some optionality when it comes to delay capex which would improve the current liquidity profile.

Also, Moody's understands the company is planning to sell a minority stake in Ceva and divest terminals; both these actions would improve liquidity.

Nevertheless, today's rating action reflects that available liquidity has decreased substantially since June 2018, when the company had $1.6 billion of cash on balance sheet and $1.2 billion of undrawn RCFs. This is in stark contrast with the liquidity position in June 2019, consisting of $1.5 billion (of which $270 million is at a Ceva level) and only around $280 million in undrawn RCFs.

In terms of environmental, governance and social factors, CMA CGM's rating reflects the elevated environmental risk facing the shipping sector, such as carbon regulation and air pollution.

More precisely, the IMO2020 regulation which comes into force 1 January 2020 will most likely increase bunker costs for shipping companies initially before they will be able to pass it through to shippers.

Moody's notes as positive that CMA already has agreements in place with contracted customers to include a new Bunker Adjustment Factor based on the new low sulfur fuel. The rating also incorporates risks related to its ownership of Ceva, more precisely linked to related-party transactions and that the deputy chief financial officer (CFO) of CMA CGM will be CFO for Ceva. That being said, CMA's board consists of two independent directors which helps mitigate corporate governance risks.