S&P lowers ratings on CMA CGM

   Standard & Poor’s Rating Services lowered its ratings on the French container shipping company CMA CGM on Friday.
   “The downgrade reflects CMA CGM’s significantly lower than forecasted operating profits in 2011 and the revision of our assessment of the company’s liquidity profile to ‘weak’ from ‘less than adequate,'” said S&P, giving its rationale for the downgrade.
   “We believe that CMA CGM’s cash flow generation will remain limited, thereby eroding its liquidity position over the coming quarters if it cannot bolster its liquidity sources through asset disposals or amendments to its debt maturity profile.
   “Furthermore, CMA CGM will likely breach its financial covenant tests in 2012, in our view, if it cannot take timely corrective actions,” S&P explained. Consequently, we are revising our assessment of CMA CGM’s financial risk profile to ‘highly leveraged’ from ‘aggressive.'”
   S&P noted CMA-CGM “reported significantly lower operating profits in 2011 than we had anticipated, owing to depressed freight rates and elevated operating costs.”
   Last week the privately held French liner carrier, the third largest in the world after Maersk and Mediterranean Shipping Co., said earnings before interest, taxes, depreciation and amortization was $711 million in 2011, compared to $2.5 billion in 2010 even though revenues rose 4 percent to $14.87 billion. The company had a net loss of $30 million in 2011 compared to a profit of $1.6 billion in 2010.
   S&P revised its liquidity assessment on CMA CGM to “weak” and lowering the rating to B-. It also placed the ratings on CreditWatch Negative, reflecting the possibility of another downgrade within the next three months if CMA CGM cannot improve its weakening liquidity and avert the likely covenant breaches.
   “CMA CGM’s earnings came under pressure last year on account of inflated operating costs and depressed freight rates, in particular on Asia-Europe trades,” S&P said. “We believe the industry’s cyclical downturn may be bottoming out now that global container operators are rationalizing capacity and restoring freight rates. This bodes well for a turnaround in CMA CGM’s operating performance. What’s more, the company has been proactive in improving its cost position.
   “Nevertheless, we believe that the persistent industry overcapacity, tepid demand, and elevated bunker fuel prices will limit the upside potential for CMA CGM’s earnings and cash flow generation. Consequently, CMA CGM’s liquidity sources are likely to erode over the coming quarters as it faces upcoming equity payments for only partially funded newbuild vessels, maintenance capital spending, and mounting debt maturities.”
   S&P said according to its analysis, “CMA CGM will generate negative free operating cash flows of about $100 million-$150 million in 2012. This is based on our assumptions that revenues will increase by about 9% and the EBITDA margin will improve to about 6%, largely thanks to cost savings.”