Standard & Poor's Ratings Services said today it revised its outlook on France-based container ship operator CMA CGM S.A. to negative from stable. At the same time, we affirmed the 'B+' long-term issuer credit rating, and the 'B-' issue rating on the $475 million senior unsecured notes due 2017 and the EUR325 million senior unsecured notes due 2019 issued by CMA CGM. The recovery rating on these notes is unchanged at'6', indicating our expectation of negligible (0%-10%) recovery for noteholders in the event of a payment default, Reuters reports. "The outlook revision reflects CMA CGM's weak operating environment in the first six months of the year, and our view that its cash flow protection measures may now fall short of the levels we consider commensurate with the current rating," said Standard & poor's credit analyst Izabela Listowska. "The negative outlook also reflects our view that CMA CGM will likely need to take preventative action to avoid breaching its financial covenant tests, due in December, and that a failure to do so well ahead of time is likely to adversely affect our rating."
Along with its industry peers, CMA CGM's earnings have come under pressure this year, owing to an inflation of operating costs and lower freight tariffs, particularly on Asia-Europe trades. In the first half of 2011, the group's reported operating expenses increased by about 20% on the previous year, aggravated by a significant rise in bunker fuel costs. While the company's volumes grew above the industry average at about 9%, this was insufficient to offset these cost increases.
CMA CGM therefore reported a considerably declined EBITDA (net of gains on asset disposals) in first-half 2011 at $321 million from $1.05 billion a year earlier. Its EBITDA margin (net of gains on asset disposals) also fell significantly to 4.4% from 15.5%. Based on actual half-year results to June 30, 2011, and our own estimates for the second half of the year, we now forecast that the EBITDA margin will be just over 5% for the full year, which is well below our original forecasts of about 10%.
"Given the anticipated ongoing difficult trading conditions, aggravated by slowing economy and volatile operating costs, we believe that CMA CGM's operating margins could remain depressed so that the group might not be able to achieve credit measures we view as commensurate with the current rating over a prolonged period," said Ms. Listowska.
We could consider a downgrade, for example, if the company continued to face sustained competitive pressure on freight tariffs and/or elevated cost inflation that would constrain a recovery in profitability. We believe that CMA CGM could also come under rating pressure if confronted with tight covenant headroom and a risk of a breach. We believe that such risks, if not properly rectified, could trigger early repayment of certain debt facilities. Although in our view CMA CGM would take proactive action to repair a breach, failure to rectify it could trigger a downgrade.
Along with its industry peers, CMA CGM's earnings have come under pressure this year, owing to an inflation of operating costs and lower freight tariffs, particularly on Asia-Europe trades. In the first half of 2011, the group's reported operating expenses increased by about 20% on the previous year, aggravated by a significant rise in bunker fuel costs. While the company's volumes grew above the industry average at about 9%, this was insufficient to offset these cost increases.
CMA CGM therefore reported a considerably declined EBITDA (net of gains on asset disposals) in first-half 2011 at $321 million from $1.05 billion a year earlier. Its EBITDA margin (net of gains on asset disposals) also fell significantly to 4.4% from 15.5%. Based on actual half-year results to June 30, 2011, and our own estimates for the second half of the year, we now forecast that the EBITDA margin will be just over 5% for the full year, which is well below our original forecasts of about 10%.
"Given the anticipated ongoing difficult trading conditions, aggravated by slowing economy and volatile operating costs, we believe that CMA CGM's operating margins could remain depressed so that the group might not be able to achieve credit measures we view as commensurate with the current rating over a prolonged period," said Ms. Listowska.
We could consider a downgrade, for example, if the company continued to face sustained competitive pressure on freight tariffs and/or elevated cost inflation that would constrain a recovery in profitability. We believe that CMA CGM could also come under rating pressure if confronted with tight covenant headroom and a risk of a breach. We believe that such risks, if not properly rectified, could trigger early repayment of certain debt facilities. Although in our view CMA CGM would take proactive action to repair a breach, failure to rectify it could trigger a downgrade.