S&P lowers CMA CGM credit rating

Credit ratings agency Standard & Poor’s on Friday downgraded French ocean carrier CMA CGM from BBB- to BB+, but the move seems to be more a sign of weakening conditions for the liner shipping industry than an indictment of the line.
   In fact, in an accompanying report S&P had mostly good things to say about the privately owned carrier, saying it was operationally more efficient than rivals and was poised to take advantage of a geographically diverse base of business even if revenue drops from falling rates around the globe in 2009.
   However, the ratings drop was mostly caused by two factors -- the increasingly gloomy outlook for container shipping next year (primarily a result of slowing demand for Asian-made goods) and CMA CGM’s extensive order book over the next few years.
   “CMA CGM's outstanding newbuild commitments are considerable: 45 owned vessels, with remaining contractual commitments totaling about $4 billion, and 13 chartered-in vessels,” S&P analyst Andreas Kindahl wrote. “Most of the owned vessels are to be funded through cash and a combination of financial leases, secured new debt, and the Vega ContainerVessel 2006-1 PLC securitization (Standard & Poor's underlying rating A-/Watch Neg). We expect the company to spend fairly significant amounts on containers, a new headquarters, and terminal facilities over the next few years ($1.4 billion to $2 billion). Although CMA CGM's investment program should gradually improve its operating performance and profitability over the longer term, sizable commitments will restrict its financial flexibility over the medium term.”
   The French carrier has 386 vessels with a slot capacity of more than 983,000 TEUs on more than 150 shipping routes, calling at 403 ports in 150 different countries.
   S&P’s “stable outlook reflects CMA CGM's strong competitive position and normally efficient operations, which should continue to buoy profitability and cash flow generation throughout the business cycle,” the S&P report said. “Moreover, CMA CGM's costs are likely to fall substantially in the coming year, which will provide important support to operating profitability if, as we expect, freight rates fall.”
   The report stresses that an industry-wide drive to build capacity has coincided with falling demand, a recipe for poor revenue generation in the near-term. So the problem won’t just afflict the French carrier.
   “Although long-term growth prospects for container shipping remain healthy, the industry is slowing on the back of lower global GDP growth, and rising capacity is a major concern,” Kindahl wrote. “Oversupply is likely to put pressure on the freight rates and earnings of all container-liner operators in the coming years, mitigated only by the reduction of key cost factors such as bunker and chartering prices.
   “Standard & Poor's views the container shipping industry as having higher-than-average risk characteristics,” the report continued. “Although a high growth business, container shipping remains cyclical, competitive and fragmented, and requires large capital investments.”
   But the size and modernity of CMA CGM’s assets, as well as the company’s endeavor to expand and become more efficient give it advantages over its competitors.
   “Size advantages include economies of scale (lower cost per TEU), greater revenue and geographic diversification, and the ability to offer a one-stop service to the large global direct shippers, which should lead to more stable margins over a cycle,” the report said. “We consider CMA CGM's operational efficiency to be better than the industry average. This reflects the group's large and modern fleet, as well as management's ability to proactively respond to changes in the industry environment while closely supervising profitability at each level in its system to detect inefficiencies.”
   Yet it's important to note that CMA CGM's bread and butter business -- Asia/Europe, where about 40 percent of volume comes from -- has seen the steepest fall in rates in 2008.
   Aside from the fact that it owns a sizable fleet, the French carrier has also been able to tap into developing and underserved trades by using short-term vessel charters, another strategy praised by S&P.
   “Through the use of short-term vessel charters, CMA CGM has historically been able to successfully expand its route network and market presence without having to invest significantly in new ships,” Kindahl wrote. “This will also allow the company to rapidly adjust its cost base if industry conditions worsen, providing important cost-base flexibility.”
   Finally, the ratings agency took note of CMA CGM’s continued expansion into other facets of container movement, including leasing of terminals and ownership stakes in intermodal projects, such as its 8 percent stake in a network of Chinese intermodal facilities.
   “Vertical integration is another way for CMA CGM to secure access to important infrastructure assets (such as ports and terminals) and to broaden its service offering across the container value chain, which could lead to higher margins,” the report said. “CMA CGM is increasingly seeking control of infrastructure such as ports or marine terminals. It considers direct investments in cases where business and economic factors justify ownership.” — Eric Johnson