oWe expect CMA CGM's EBITDA in 2021 will likely be 2.5x our March 2021 forecast mainly because of freight rates staying at record highs, due to limited containership capacity amid continued congestion in major ports and disruption of logistical supply chains.
oStrong earnings and debt repayment will result in S&P Global Ratings-adjusted funds from operations (FFO) to debt exceeding 60% in 2021 and remaining strong in 2022, benefitting from still-inflated freight rates, before dropping to a more sustainable 25%-30%.
oWe are therefore raising our long-term issuer credit rating on CMA CGM to 'BB' from 'BB-', and our issue rating on the group's senior unsecured debt to 'BB-' from 'B', while revising the recovery rating to '5' from '6'.
oThe stable outlook reflects our view that CMA CGM's EBITDA will start moderating from midyear 2022 to a more sustainable annual run rate of about $5.0 billion, allowing the group to maintain adjusted FFO to debt above 25%.
FRANKFURT (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.
Freight rates are unlikely to moderate in the second half of 2021, contrary to our previous expectations.
Uninterrupted strong demand for tangible goods, accompanied by prolonged congestion in major maritime ports and disruption of logistical supply chains are tying up containership capacity and boosting freight rates. In particular, freight rates on the main container liner trades--Transpacific and Asia-Europe--remain at record highs. According to Clarksons Research, the Shanghai Containerized Freight Index reached a new high at mid-June of 3,748 points, 3x the elevated average in 2020 and 4x the prepandemic 10-year average of 950 points.
Short-to-medium-term freight rate conditions should be supportive, and underpin CMA CGM's cash flow.
The movement of essential goods, strong pickup in e-commerce, and shift in consumer spending to tangible goods from services have supported shipping volume recovery and container-liner freight rates from June 2020. Trade momentum remained solid in first-quarter 2021, despite the usual seasonal slowdown. As a result, we forecast a rebound in shipped volumes consistent with global GDP growth of 5%-6% in 2021 following a 1%-2% contraction in 2020 compared with 2019. Despite the most recent spike in new ship orders (lifting the containership order book to 18% of the total global fleet from about 9% three months ago), containership supply growth is unlikely to surpass demand growth in the coming quarters, propping up freight rates. We believe that more stringent regulation on sulfur emissions (limiting sulfur used in ship fuel to 0.5% from Jan. 1, 2020), and broader considerations about greenhouse gas emissions in general--particularly in the context of decarbonization--will likely result in uncertainties over the costs and benefits of various technologies and fuel, and should constrain orders to some extent in the short term. We also note that lead times between placing orders for ships and the ability of shipyards to deliver currently stand at 18 months-24 months. We believe that demand-and-supply conditions will be largely in balance in 2021 and 2022. We now forecast that freight rates could start normalizing only from year-end 2021 at the earliest, as the pandemic's impact on container shipping eases.
We anticipate the container liner industry will remain disciplined in deploying capacity, as demonstrated since the pandemic began.
Soon after the initial COVID-19 outbreak last year, there was a withdrawal of sailings from China, and container liner operators continued to adjust capacities to demand trends in a timely manner throughout 2020. These measures demonstrate industry players' reactive supply management, which we consider normal in a sector that has been through several rounds of consolidation in recent years. The five largest container shipping companies now have a combined market share of about 65%, up from 30% around 15 years ago.
Supported by continuously strong freight rates, CMA CGM's EBITDA should significantly outperform our March 2021 base case.
We now expect the group's average revenue per twenty-foot equivalent unit (TEU) to increase by about 50% in 2021 compared with our previous forecast of 2%. This, supported by robust trade volumes growth, should translate into adjusted EBITDA of about $16 billion, which is 2.5x our previous forecast. We believe the slower normalization of freight rates than we previously expected will not only boost CMA CGM's EBITDA in 2021, but also strongly support its 2022 earnings.
We expect EBITDA will be inflated in 2022 as well, although lower than in 2021.
Our 2022 base case incorporates likely persistently strong freight rates, benefiting from the elevated base we expect at year-end 2021. In view of ongoing supply chain disruptions, customers will be keen to secure containership space for longer durations than usually, which should additionally support CMA CGM's earnings next year. That said, as infrastructure bottlenecks will start loosening, we expect freight rates to normalize but remain at a profitable level as the industrywide prudent capacity deployment continues. According to our base case, we expect CMA CGM's EBITDA to normalize from midyear 2022 to a more sustainable annual run rate of about $5.0 billion, which compares with $6.2 billion in 2020 and $3.8 billion in 2019.
Stronger cash flows than expected, combined with reduced debt, should increase the cushion under the improved credit metrics for future fluctuations in EBITDA and unforeseen operational setbacks.
We expect CMA CGM to maintain its prudent stance toward capital investments and shareholder distributions, allowing it to generate ample excess cash flows. We also acknowledge the group's proactive voluntary debt repayments of approximately $1.7 billion in the first quarter of 2021 and early redemption of the remainder of its senior unsecured notes due 2022 in April this year. In 2021, we expect adjusted debt to drop to $12 billion from $17.3 billion as of Dec. 31, 2020, translating into adjusted FFO to debt well above 60%, compared with about 28% in 2020, and falling within the range for the minimal financial risk profile category. However, we consider the intermediate category to be more appropriate for CMA CGM because the shipping industry is tied to cyclical supply-and-demand conditions and the EBITDA we forecast in 2021 and 2022 is unlikely to be sustainable in the long term. Our sensitivity analysis suggests that a possible 50% drop in EBITDA from its forecast peak in 2021 would result in a financial risk assessment of intermediate--two categories weaker than the cash flow/leverage assessment of minimal that our base-case currently indicates.
There is a high degree of uncertainty about the levels that freight rates will settle at when they begin to normalize, and CMA CGM's capex to comply with environmental regulation could increase.
To capture these risk factors, we apply a negative adjustment of one notch under our comparable rating analysis to the 'bb+' anchor, resulting in the rating of 'BB'. We also acknowledge risks stemming from the shift in consumer spending back to services from tangible goods and potential slowdown in e-commerce as the pandemic's effects ease, weighing on shipping volumes, aggravated by the accelerated deliveries of new vessels and potential overcapacity from 2023. We also understand that the environmental pressure on the container liner industry is increasing, which may accelerate fleet upgrades, requiring higher capex and potentially additional operating costs.
The stable outlook reflects our view that CMA CGM's EBITDA will start moderating to a more sustainable annual run rate of about $5.0 billion from midyear 2022, allowing the group to maintain adjusted FFO to debt above 25%. We think this will be underpinned by the sustained capacity discipline of industry players and the group's balanced financial policy.
We could raise the rating if CMA CGM sustained its adjusted FFO-to-debt ratio above 35% once freight rates normalize. In our view, this will largely depend on CMA CGM's ability and willingness to keep adjusted debt at around the current lower level. This would mean shareholder remuneration will remain prudent and the group will not unexpectedly embark on any significant debt-financed fleet expansion or mergers and acquisitions without an offsetting increase in earnings.
We view a downgrade in the near term as unlikely, considering ample headroom under the current and forecast credit metrics. In the medium term, we could lower the rating if CMA CGM's EBITDA plunged and remained below $5.0 billion; for example, due to industry players' unexpected aggressive capacity management depressing freight rates. Alternatively, we could lower the ratings if for example CMA CGM was unable to offset fuel-cost inflation because of unsuccessful pass-through efforts or failure to realize cost efficiencies. This would imply adjusted FFO to debt deteriorating to less than 25%, with limited prospects for improvement.
A downgrade could also follow if the company adopted a more-aggressive financial policy, resulting in a material buildup of adjusted debt from the current levels.
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oGeneral Criteria: Hybrid Capital: Methodology And Assumptions, 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 | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, 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: Principles Of Credit Ratings, Feb. 16, 2011
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