CSAV downgraded by S&P again

CSAV downgraded by S&P again    Credit rating agency Standard & Poor’s has once again buffeted Chilean liner carrier CSAV, knocking the company down from a B- to a BB- rating, and continuing to slot the carrier on its “negative” watch.
   In comments accompanying the rating, S&P delivered a scathing review of CSAV’s operational and financial difficulties within a struggling industry.
   “The action reflects our opinion that the gap between supply and demand in container shipping markets is currently far from narrowing and the industry will therefore continue to face very challenging conditions in 2009 and probably 2010,” the report said. “Within this scenario and absent a significant restructuring of its business strategy, we expect CSAV to continue posting significant losses that would challenge its credit quality by further eroding its operational performance, its financial risk profile, and its liquidity position, and that could lead the company to delay payments to lessors.”
   CSAV lost nearly $39 million in 2008, despite significant gains from a fuel hedging strategy that is somewhat backfiring this year, as prices have submerged below the level the line guaranteed in 2008. S&P pointed to a recent announcement by CSAV — that it was seeking help from a German shipping bank to redirect its business model — as proof that the line has gone wayward.
   “CSAV recently announced that it has retained HSH Corporate Finance GmbH to help it redesign its business strategy, which in our opinion speaks to the disappointing results of the current business model and the company’s need to further restructure its operations to improve profitability, one of its main weaknesses when compared with other rated peers,” S&P said.
   Delving further into CSAV’s financial difficulties, S&P said the company is too reliant on off-balance sheet financing and the chartering of ships.
   “The ratings on CSAV reflect the company’s weak business risk profile and highly leveraged financial profile,” the report said. “The company’s modest business position in the volatile container shipping market is the result of its weak operating efficiency, particularly in the most competitive long-haul routes such as the east/west trades. It also has an aggressive ship-management strategy (involving heavy use of a chartered fleet) in a higher-than-average risk industry. These negatives lead to very volatile profits and cash-flow generation. In addition, CSAV’s heavy use of off-balance-sheet financing and its active investment program are likely to reduce the company’s financial flexibility. The company’s strong positioning in the South American West Coast routes (that stem from its longstanding relationships with major Chilean exporters) and its port services operations in Chile’s major ports (which provide CSAV with a relatively predictable stream of profits) partially mitigate the negative factors.” ' Eric Johnson