The ratings on France-based container ship operator CMA CGM S.A. remain on CreditWatch, where Standard & Poor's Ratings Services placed them with negative implications on June 14, 2012, reflecting CMA CGM's weak liquidity position.
We believe that CMA CGM's liquidity position will likely remain under strain over the coming months, owing to delays in corrective actions, such as amendments to the company's debt amortization profile and major asset disposals. Furthermore, we understand that there is a delay in receiving $250 million of cash proceeds from the issuance of redeemable bonds to Turkey-based holding company Yildirim Group (completed in January 2012). We consider these delays to have generated increased uncertainty over CMA CGM's ability to execute a restructuring plan, and the format this would take, before it finds itself in a financially distressed position.
The ratings on CMA CGM are constrained by our view of the group's 'very aggressive' financial policy, as well as the high operating risk in the cyclical, capital-intensive, and competitive container shipping industry. However, we consider these risks to be partially offset by CMA CGM's leading global market position, a diverse route network, high quality and competitive fleet, and above-industry-average profitability.
Liquidity
We assess CMA CGM's liquidity as 'weak' under our criteria. Our assessment primarily reflects our view that the CMA CGM's' liquidity position will remain under strain over the coming months. We acknowledge the recent improvement in CMA CGM's cash position, thanks to improved industry conditions and consequently improved operating performance; however, the company's internal liquidity sources are not sufficient to cover its short-term liquidity uses and the company depends on external parties to boost its liquidity profile.
We understand that CMA CGM is in advanced discussions with its lenders to reschedule its debt repayments and avert covenant breaches. We also understand that it intends to continue its asset disposal program. These measures, if completed successfully, would significantly improve the company's liquidity profile.
Our assessment of CMA CGM's' liquidity profile as of March 31, 2012, incorporates the following expectations and base-case assumptions:
-- In the absence of corrective actions, liquidity sources will not be sufficient to cover liquidity uses over the next 12 months.
-- In the absence of corrective actions, the company will continue breaching the covenant tests in 2012.
-- CMA CGM has a poor standing in credit markets, as reflected in wide spreads on its bonds. Nevertheless, the company retains core bank relationships.
Recovery analysis
The $475 million senior unsecured notes due 2017 and the EUR325 million senior unsecured notes due 2019 issued by CMA CGM are rated 'CCC-', two notches below the issuer credit rating. The recovery rating on these notes is '6', indicating our expectation of negligible (0%-10%) recovery for noteholders in the event of a payment default. The notes are unsecured and are not guaranteed by any subsidiaries.
CreditWatch
We expect to resolve the CreditWatch within the next three months, after assessing how CMA CGM is addressing its liquidity challenges. We are likely to lower the rating if we concluded that CMA CGM's liquidity position would deteriorate further.
However, we could affirm the ratings or take a positive rating action if CMA CGM's' liquidity improved markedly and the company regained sufficient headroom under its financial covenants. This assumes that the company's credit quality is not constrained in the meantime by other factors, such as unexpected negative operating conditions or aggressive discretionary spending.
Source: S&P Ratings