Moody’s Investors Service has today changed to stable from positive the outlook on CMA CGM S.A.’s B1 corporate family rating, B1-PD probability of default rating and B3 senior unsecured rating.
Concurrently, Moody’s has affirmed the ratings assigned to the company. This follows CMA CGM’s announcement of a pre-conditional voluntary general cash offer to acquire Neptune Orient Lines Limited (NOL, unrated), a Singaporean container liner, for a consideration of $2.4 billion. Temasek Holdings (Private) Limited (Aaa stable), NOL’s largest shareholder with a 67% stake, has irrevocably undertaken to tender all of its shares into the offer.
“While the affirmation reflects that CMA CGM’s potential acquisition of NOL would strengthen its business profile, it also factors in an initial increase in leverage as well as potential execution risks,” says Marie Fischer-Sabatie, a Moody’s Senior Vice President and lead analyst for the issuer. “The stable outlook reflects our view that CMA CGM will return to a financial profile in line with the B1 rating within 18 months after the acquisition closing”.
The affirmation of CMA CGM’s B1 rating reflects the expected improvement in the company’s business profile from the integration of NOL, as well as an initial weakening in its financial profile, while the transaction entails some execution risks. The acquisition of NOL would increase CMA CGM’s capacity by approximately a third (based on pro forma September 2015 data), consolidating its position as the third-largest player in the container shipping segment, narrowing the gap with Maersk Line, the market leader owned by A.P. Møller Mærsk A/S (Baa1 positive), and Mediterranean Shipping Company (unrated).
Acquiring NOL would also strengthen CMA CGM’s position on certain routes (e.g. Transpacific and intra-Asia), increasing its geographic diversification. Moody’s expects that the transaction will generate material cost synergies, notably related to network optimisation and headcount reduction, as has been the case for previous acquisitions in the sector.
CMA CGM will pay approximately $2.4 billion to acquire 100% of NOL and it will also assume NOL’s financial net debt, which amounted to $2.6 billion as at 30 September 2015. The acquisition will be funded with a mix of cash and bank financing from a syndicate of international banks. This will materially increase CMA CGM’s leverage (i.e. gross debt/EBITDA, including Moody’s adjustments), which Moody’s estimates to reach approximately 5.5x in 2016 (pro forma, i.e. with a full-year of NOL’s cash flows). CMA CGM had a leverage of 4.2x in the last 12 months (LTM) to June 2015. CMA CGM expects to review the combined group’s assets and make disposals for an amount of at least $1 billion. This will contribute to reducing leverage in the months following the acquisition closing. Moody’s therefore expects leverage to decline to a level in line with the B1, namely 4-5x, within 18 months after closing.
The transaction entails some execution risks relating to (1) asset sales, which will materially contribute to reducing debt after the acquisition; (2) the exit of NOL from alliances including G6, which could take up to 12 months, and the subsequent entrance into CMA CGM’s alliances; (3) the weak performance of NOL in the past years, with negative core EBIT since 2011; and (4) the challenging market environment in container shipping with ongoing declines in freight rates.
RATIONALE FOR THE OUTLOOK
The stable outlook reflects Moody’s expectation that CMA CGM’s financial profile will return to a profile in line with the B1 rating within 18 months after the closing of the NOL acquisition. It also assumes that CMA CGM will maintain an adequate liquidity profile and refinance the acquisition financing well in advance of its maturity.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward rating pressure could materialise if Moody’s sees evidence that CMA CGM can sustain its solid operating performance and report the following metrics over an extended period of time: (1) leverage (debt/EBITDA) moving towards 4x; and (2) funds from operations interest expense coverage above 4x (ratios include Moody’s adjustments). At the same time, the company should maintain an adequate liquidity profile.
Downward rating pressure could develop if challenging market conditions lead to (1) leverage above 5x for an extended period of time; (2) funds from operations interest expense coverage below 3x (ratios include Moody’s adjustments); or (3) a material weakening of the company’s liquidity profile.