The credit rating company Standard & Poor’s said Thursday that it had downgraded the French container shipping line CMA CGM’s long-term corporate credit rating to CCC+ from B-, saying its liquidity position deteriorated in the first quarter of 2012.
“We expect that it will remain under strain over the coming months in the absence of corrective actions,” said S&P. “The rating remains on CreditWatch with negative implications reflecting the possibility of another downgrade within the next three months if we believed CMA CGM’s liquidity position would deteriorate further.”
Last week CMA CGM said it suffered a net loss of $248 million in the first quarter, despite container volume increasing 13.4 percent to 2.6 million TEUs and consolidated revenue increasing 2.6 percent to $3.6 billion.
Claire Defendini, a spokesman for the company, said “CMA CGM acknowledges S&P’s decision. The group is pursuing constructive discussions with its financial partners. The positive impact of the upturn in freight rates and the decline in oil prices have enabled the group to show a very clear improvement in performance since April. As a result, the group expects to report a profit for 2012.”
S&P put CMA CGM on CreditWatch with negative implications on March 9. It said “the recovery rating on the debt is ‘6’, indicating our expectation of negligible (0 percent to 10 percent) recovery in the event of a payment default.”
“The downgrade reflects CMA CGM’s deteriorated liquidity position,” S&P said. “The company reported negative operating cash flow in the first quarter of 2012 and continued to absorb its available cash. Meanwhile, we believe that CMA CGM could take longer than we previously expected to amend its debt amortization profile and financial covenants and to receive $250 million of cash proceeds from the issuance of redeemable bonds to Yildirim Group, a Turkey-based holding company (completed in January 2012).
“We believe that the company’s liquidity position will likely remain under strain over the coming months, owing to likely delays in corrective actions.”
S&P said that its previous rating was predicated on the expectation that the company would be able to complete amendments to its debt amortization profile and to its financial covenants by June 30, 2012.
“We now think it unlikely that it will be able to achieve this deadline,” the agency said. “We consider the delays to have generated increased uncertainty over the ability of CMA CGM to execute a restructuring plan, and the format that this would take, before it finds itself in a financially distressed position. This is particularly given the likely covenant breaches in June 30, 2012, the $500 million revolving credit facility coming due for extension in the near term, and the delay in receiving cash proceeds from the Yildirim Group.
“Our current base-case operating scenario estimates for 2012 that revenues will increase by about 9 percent and the EBITDA (earnings before interest, tax, depreciation and amortization) margin may improve to between 6 percent and 6.5 percent (from about 2 percent in 2011), largely thanks to cost-saving measures. Based on these assumptions, we forecast that CMA CGM will be cash-flow negative in 2012 if it cannot bolster its liquidity sources through additional asset disposals or amendments to its debt maturity profile. This is because the company faces upcoming equity payments for only partially funded newbuild vessels, maintenance capital spending, and debt maturities.”
S&P said it expects “resolve the CreditWatch within the next three months after assessing how CMA CGM is addressing its liquidity challenges. We are likely to lower the rating if we concluded that CMA CGM’s liquidity position would deteriorate further.”
“However, we could affirm the ratings or take a positive rating action if CMA CGM’s liquidity improved markedly and the company regained sufficient headroom under its financial covenants. This assumes that the company’s credit quality is not constrained in the meantime for other reasons, such as unexpected negative operating momentum or aggressive discretionary spending.”