CMA CGM refutes default worries

CMA CGM refutes default worries    French liner carrier CMA CGM has refuted reports earlier this week from Bloomberg that the line is in imminent danger of defaulting on its loan obligations.
   The newswire's report, based on figures from its in-house Bloomberg Bond Trader service, calculated CMA CGM has a nine-in-10 chance of breaching its loans within five years based on falling ocean freight rates and bond prices.
   The line has argued Bloomberg's analysis is based on a theoretical financial model that doesn't accurately capture CMA CGM's secure position atop an admittedly troubled industry.
   The report came amid falling prices on $900 million worth of CMA CGM's bonds, which have been affected significantly by ratings agencies' downgrades of the shipping industry. Adding to CMA CGM's woes, Standard & Poor's on Wednesday downgraded the line's credit rating from stable to negative, while reaffirming its B+ rating.
   “The outlook revision reflects CMA CGM’s weak operating environment in the first six months of the year, and our view that its cash flow protection measures may now fall short of the levels we consider commensurate with the current rating,” said Standard & Poor’s credit analyst Izabela Listowska. “The negative outlook also reflects our view that CMA CGM will likely need to take preventative action to avoid breaching its financial covenant tests, due in December, and that a failure to do so well ahead of time is likely to adversely affect our rating.”
   The Bloomberg report said the price of CMA CGM's $475 million worth of 8.5 percent notes due 2017 plunged to 47.25 cents on the dollar since they were sold April 14.
   The falling prices appear to be a result of withering confidence in the shipping industry from analysts and ratings agencies; and skittishness on the part of risk-averse investors.
   'CMA CGM acknowledges S&P’s decision,' Guillaume Foucault, spokesman for the carrier on financial matters, said in a statement to American Shipper. 'The group notes it has been ranked as the No. 1 player in the shipping industry by (maritime consultant) Alphaliner and remains focused on client services and business development. As it has shown in the past, CMA CGM maintains a transparent and constructive dialogue with its financial partners that are perfectly aligned on Group’s objectives.'
   'We are surprised to see the value of the debt drop so much,' Michel Sirat, the container line's chief financial officer told Bloomberg. 'Our bonds are whipsawed because of prevalent fears in financial markets and questions about our liquidity, but we have a strong cash position and are fully compliant with our debt covenants.'
   CMA CGM has previously made the defense that its bonds were unfairly maligned by credit rating agencies due to general market concern over the shipping industry. In 2009, however, the line was in a precarious position as cash flow dwindled on the back of unsustainable rates and poor demand. The carrier spent the end of 2009 and much of 2010 renegotiating payment terms with its pool of 72 banks, a process eventually resolved in January.
   In exchange for the renegotiations, the banks required that CMA CGM look to an outside investor — which it did through a $500 million cash injection from the Turkish conglomerate Yildrim Group — and sell off an asset — which it accomplished by selling a half-stake in its terminal in Malta, also to the Yildrim Group.
   Those measures, along with a record operating profits in 2010, satisfied banks. But the situation today is much different than in 2009. The company, according to a Financial Times report Tuesday, has close to $1 billion in cash, almost three quarters of which is unrestricted. Its debt is about $5.3 billion, between its bond offers and bank loans to fund the extensive fleet expansion program it has mostly completed. It has a mandate to maintain a $400 million cash balance.
   Working in its favor, CMA CGM now has the second-smallest order book, as a percentage of its current fleet, among the world's top 20 lines. In raw capacity, its order book is smaller than all but one of the biggest seven lines in the world. And Foucault said its order book is fully financed through the first half of 2012.
   The Bloomberg report focused on CMA CGM's exposure to poor freight rates on the key east/west trades, with reports surfacing again of zero base rates from Asia to northern Europe in July and August. But    CMA CGM's diversified network means its exposure to those low-rate trades is minimized. The line said earlier this week that only about 10 percent of its revenue comes from the Asia/northern Europe trade, and it is employing its most modern, cost-efficient vessels on that trade in any case.
   There is time through the end of the year in which the line and its creditors could restructure potential breaches to suit both parties. Creditors might not be keen to again restructure loans that were just recently restructured, but the banks that have essentially invested in CMA CGM likely have little interest in seeing the line default, and even less in taking ownership of expensive assets like containerships.
   There's also the fact that the line performed very well in the first half, when most of its competitors struggled with losses. According to an Alphaliner collation of first half financial results, CMA CGM made more operating profit from January through June than any other carrier. Only four lines turned a first half profit — Maersk Line, Hapag-Lloyd and OOCL being the others — and the French line matched the profit of those three lines on less than half their collective revenue. The 16 lines analyzed by Alphaliner suffered a collective loss of $363 million.
   Yet worries persist.
   'In spite of its operational solidity, CMA suffered more than its peers on the financial side because of its high leverage and the lack of political backing,' the Financial Times report said. ' Eric Johnson