Moody’s has affirmed the B2 corporate family rating (CFR) and the B2-PD probability of default rating (PDR) of CMA CGM S.A. (“CMA”), as well as the Caa1 senior unsecured rating. The outlook on all ratings changed to positive from negative.
Moody’s also assigned a Caa1 rating on the proposed new €525 million senior unsecured bonds that will be used to refinance the senior unsecured bonds maturing in January 2021.
Today’s rating action reflects a strong operating performance and an improvement in credit metrics as well as an improvement of CMA’s liquidity profile with a reduction of refinancing risks. The container shipping market has performed very strongly amidst the pandemic, where all carriers have exhibited discipline in terms of adjusting capacity to decreased demand during the first half of 2020. Moody’s understands volumes during the third quarter have been strong, sending up freight rates higher than at the start of the year. Coupled with low bunker prices, carriers have recorded double digit growth rates in EBITDA during this time period compared to the first half of 2019. Further positive rating pressure requires sustained performance of CMA as well as its key subsidiary CEVA Logistics AG (“CEVA”), and leverage improvements as well as the preservation of a sufficient liquidity profile.
During the first half of 2020, CMA has strengthened its liquidity profile significantly with the help of good market fundamentals translating into very high profitability and positive free cash flow generation. Furthermore, the liquidity profile benefitted from raising debt guaranteed by the French state, which clearly shows its support to the company. As of June 30 this year, available liquidity on a group level stood at $2.6 billion, which is around $1.0 billion higher than what was available as of December 31, 2019. Thus, the short-term liquidity risk that was one of the main drivers of the previously assigned negative outlook, has now abated.
In light of how the industry has behaved during the first half of the year, coupled with continued low bunker prices and relatively high freight rates and strong volumes during Q3, Moody’s believes the second half will be even better in terms of operating performance. Adding a high likelihood that 2021 will at least be a stable year for container shipping, Moody’s foresee an intact or even improving liquidity profile for CMA going forward, supported by continued positive free cash flow generation. That being said, downside risks remain present, such as a larger second wave of virus outbreaks or increased tension between US and China on international trade.
CMA’s credit profile is still constrained by the operating performance of CEVA and the need of support by CMA. Since Q4 2019, CMA has injected a total of USD730 million in equity into CEVA, of which $521 has been in the form of cash; cash that instead could have been used to improve its own liquidity further. Nevertheless, we expect CEVA’s performance to slowly improve its operations and ultimately be free cash flow positive.
RATIONALE FOR THE POSITIVE OUTLOOK
The positive outlook balances the risk of a global second wave in COVID-19 infections, jeopardizing the anticipated recovery of the global economy, with CMA’s significantly improved liquidity profile as well as our expectations of continued capacity discipline by the large container carriers. Incorporating our projections of CEVA Logistics, Moody’s now expects RCF / Net debt in the 20% area and a debt / EBITDA level of 3.5x — 4.0x within the next 12-18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A prerequisite for positive ratings pressure would first and foremost a sustained or improved liquidity profile. Furthermore, this would have to be accompanied by sustaining a debt / EBITDA ratio below 5x as well as FFO Interest Coverage above 3.0x.
Negative ratings pressure could arise if the company’s debt/EBITDA ratio increased above 5.5 and FFO interest coverage decreased below 2.0x and stayed at such levels for a prolonged period. Additionally, sustained negative free cash flow and a weakened liquidity profile would cause negative pressure on ratings.