oWe think container shipping and logistics industry conditions might remain difficult over the next 12 months, potentially constraining CMA CGM S.A.'s cash generation and financial flexibility to meet near-term liquidity needs at a time when it also faces significant bullet debt maturities.
oWe note that CMA CGM has recently undertaken several measures to boost its liquidity sources under its close-to-completion treasury plan aimed at releasing $2.1 billion in cash proceeds. Although the group's proactive treasury management provides a critical boost to its liquidity profile, we still see little leeway for liquidity sources to exceed uses in the next 12 months if operating cash flows do not stabilize at 2019 levels and capital market refinancing is inaccessible.
oWe are therefore revising our outlook on CMA CGM to negative from stable and affirming our 'B+' long-term issuer credit rating and 'B-' issue rating on the company's senior unsecured debt.
oThe negative outlook reflects the one-in-three possibility that CMA CGM's liquidity could become increasingly constrained resulting in a downgrade within the next six months.
FRANKFURT (S&P Global Ratings) Feb. 12, 2020--S&P Global Ratings today took the rating actions listed above.
In our base case, we assume the shipping segment will generate reported EBITDA (pre-International Financial Reporting Standards [IFRS] 16) of $1.3 billion-$1.4 billion in 2019, which is above the $1.16 billion reported in 2018. Two main factors support the group's better shipping earnings. CMA CGM's transported trade volumes have increased above the market average, thanks to the contribution from the fast-expanding intraregional trade segment and strong backhaul volumes on U.S. lines. The company has also trimmed operating expenses, which we forecast will be down by about $60 per twenty-foot equivalent unit (TEU) in 2019 year on year. The positive EBITDA trend could continue into 2020, but to a lesser extent than we previously expected, with the shipping segment achieving reported EBITDA (pre-IFRS 16) of $1.4 billion-$1.5 billion. We factor into our forecast CMA CGM's continued tight rein on cost control and container liners' pass-through of fuel cost inflation to customers. This comes as the industry shifts to new regulation under International Maritime Organization (IMO) 2020 requiring the use of more expensive low-sulfur-compliant fuel oil. However, our base-case forecast is susceptible to possible downward revisions amid challenging and difficult to predict trading conditions linked to global trade disputes and, more recently, the coronavirus outbreak in China. What's more, the operational turnaround and financial recovery at CEVA Logistics is taking longer than we previously expected, which has prompted our further downward revision of the company's reported EBITDA. We now forecast EBITDA (pre-IFRS 16) in 2019 to be moderately below the about $192 million in 2018--adjusted for share-based compensation of $32 million, initial public offering (IPO) costs of $19 million, and $20 million in dividends from the Anji-CEVA joint venture. It could then potentially improve to about $200 million in 2020, if the positive effect from the restructured contract portfolio (for example in Italy) more than offsets depressed air freight volumes and weak demand from the auto and technology sectors. That said, we think it unlikely that CEVA Logistics will become a positive contributor to the group's free operating cash flow (FOCF) in 2020. We anticipate container shipping and logistics industry conditions could remain difficult over the next 12 months, potentially adversely affecting the group's profits. This is because cooling economic growth and trade disputes weigh on global cargo volumes. Furthermore, the recent coronavirus outbreak in China has exacerbated these issues, because it is increasingly disrupting worldwide trade and supply chains. Higher bunker fuel prices and the inability to fully recover IMO 2020-related bunker cost inflation pose another risk to CMA CGM's EBITDA generation. However, we understand that bunker adjustment factors, which were previously agreed with customers, and spot market cost pass-through measures have been successfully implemented in recent months. We also note that bunker prices have recently fallen significantly, which should provide some relief in times of pressured volumes. We believe the group continues to face the risk of a potential further cash drain to avoid financial covenant breaches at CEVA Logistics amid a difficult trading environment. So far CMA CGM has injected $200 million in cash into CEVA Logistics for compliance purposes but more may be required if current conditions drag on its earnings, which we cannot confidently quantify and forecast in our liquidity analysis. All or any of these aforementioned threats materializing would reduce the group's liquidity leeway ahead of the forthcoming debt maturities. The group faces significant debt maturities in 2020 of about $1.6 billion, including the $405 million revolving credit facility (RCF) that is likely to be extended, and 2021 of about $1.4 billion. The largest bullet maturity is in January 2021, when the outstanding EUR725 million unsecured notes are due, closely followed by an additional about $220 million of unsecured notes due June 2021. The outlined debt maturities do not include leases and large securitization programs of $1.1 billion at the CMA CGM level and $0.47 billion at Neptune Orient Lines, both due for extension in second-half 2021. As in previous years, we assume these programs will be extended on a timely basis. CMA CGM has recently undertaken several measures to boost its liquidity sources under its close-to-completion treasury plan aimed at releasing $2.1 billion in cash proceeds. This most importantly includes a close to $1 billion terminal disposal transaction, which was signed with China Merchants Port Holdings Co. and is to be executed in second-quarter 2020, along with several sale-and-leaseback deals with total cash proceeds of about $860 million. Furthermore, we understand that CMA CGM is in advanced discussions with the existing lender group over the extension of the currently fully drawn $405 million unsecured RCF maturing in September 2020. We believe that the likelihood is high that CMA CGM will obtain the extension. Although the group's proactive and effective treasury management provides a critical boost to its liquidity profile, we still see little leeway for liquidity sources to exceed uses in the next 12 months if operating cash flows do not stabilize at 2019 levels. This is unless the group is able to refinance the January 2021, EUR725 million unsecured bond by tapping the capital markets in the meantime, which we currently view as uncertain. Under our base-case forecast, we think the group will improve its adjusted consolidated EBITDA (post-IFRS 16) to $3.7 billion-$3.8 billion in 2019 and could largely stabilize this value in 2020. This would result in adjusted funds from operations (FFO) to debt of 13%-14% and debt to EBITDA of 4.5x-5.0x in 2019-2020, which are at the lower end of the financial profile range consistent with the current rating. This is an improvement when compared with pro forma adjusted FFO to debt of about 12% and adjusted debt to EBITDA of 5.0x-5.2x after the CEVA Logistics acquisition closed in April 2019.
The negative outlook reflects the one-in-three possibility that CMA CGM's liquidity could become increasingly constrained, resulting in a downgrade within the next six months. Because we assess CMA CGM's access to capital markets for refinancing as currently uncertain, the group's liquidity hinges on its ability to:
oDeliver on our aforementioned base-case EBITDA and operating cash flow generation;
oComplete the outlined disposal and liquidity enhancement plan in full and on time; and
oExtend the fully drawn $405 million unsecured RCF at the CMA CGM level, due September 2020.
We would lower the rating if we believe that CMA CGM's earnings fall short of our base case and the group fails to stabilize its cash flow generation. This could be due to an unexpected drop in freight rates, the group's inability to pass on IMO 2020-related bunker price inflation to customers or counterbalance price inflation through a significant unit costs reduction, or a significant operational setback at CEVA Logistics. The abovementioned factors would have to be combined with CMA CGM's inability to tap the capital markets to refinance its forthcoming bond maturities, in particular the outstanding $725 million unsecured notes due in January 2021, pointing to a material liquidity shortfall.
We would also lower the rating if CMA CGM's credit measures weakened, such that adjusted FFO to debt drops to below 12%, with limited prospects for improvement in the short term.
We could revise the outlook to stable if CMA CGM were to stabilize its EBITDA and cash flow generation at 2019 levels. This would ensure sufficient liquidity to tackle its upcoming bullet maturities, while gaining the necessary cushion, in particular if capital markets refinancing is inaccessible.
A stable outlook would also depend on our expectation that the group will maintain adjusted FFO to debt of more than 12% and proactively manage its compliance with financial covenants.
Related Criteria
oGeneral Criteria: Hybrid Capital: Methodology And Assumptions, July 1, 2019
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oCriteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
oCriteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oCriteria | Corporates | Industrials: Key Credit Factors For The Transportation Cyclical Industry, Feb. 12, 2014
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
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