CMA CGM on S&P’s CreditWatch

CMA CGM on S&P’s CreditWatch Credit rating agency Standard & Poor's placed a long-term BB+ corporate rating, with 'negative implications,' on French liner carrier CMA CGM last week, saying that slowing demand for shipping services has undermined the carrier's business.
   In its CreditWatch ratings, S&P said that while CMA CGM is 'one of the world’s largest and most efficient container shipping operators' and 'benefits from a strong competitive position,' the current fallow period for the liner shipping industry is too much to overcome.
   'This action is a result of the continued deterioration of industry conditions and our concern that this may further weaken the group’s financial credit measures,' Standard & Poor’s credit analyst Stuart Clements said in a statement. 'The CreditWatch placement has been prompted by the continued global economic downturn, which continues to depress container freight rates and operators’ earnings. A substantial reduction in demand is now evident, at a time when ship supply continues to increase, and we believe that supply now substantially exceeds demand.'
   S&P said that excess vessel capacity and a demand drop deeper and more sustained than previously anticipated would continue to depress freight rates and 'may further weaken CMA CGM’s profitability and leverage measures.'
   The French carrier's operating margin in the 12 months ending Sept. 30, 2008 fell from 22 percent to 18 percent, a reflection of higher costs and falling rates, S&P said.
   'Since then, freight rates have fallen further and we anticipate a further decline in profit margins,' the ratings agency said. 'CMA CGM will need strong cash flow generation to support its financial leverage (on an adjusted basis), which is high for the ratings, in a deteriorating industry environment. Investment commitments remain significant, reflecting the group’s aggressive growth ambitions. However, the company pays low dividends, enabling it to reinvest free cash flows in the business, which we consider a positive rating factor.'
   S&P said placing CMA CGM on credit watch would enable it to gain a better understanding of the carrier and the industry on the whole.
   'We aim to resolve the CreditWatch within a maximum of three months,' S&P said. 'Given the weak industry conditions, we consider a positive rating development unlikely in the near term. We could lower the rating if we judge that adverse market conditions will pressure profit margins and cash flows such that the financial profile weakens below our benchmark ratios for the rating.'