Zero Freight Rates Fueling CMA CGM Default Risk to 90%: Corporate Finance

Bonds and derivatives tied to CMA CGM SA, the third-largest container line, are signaling that the company has a nine in 10 chance of defaulting as the slowing global recovery pushes freight rates to about zero.

Penalized by the U.S. last month for breaching trade sanctions with Iran, Cuba and Sudan, CMA CGM has seen the price of its $475 million of 8.5 percent notes due 2017 plunge to 47.25 cents on the dollar since they were sold April 14, Bloomberg Bond Trader prices show. Credit-default swap prices signal a 90 percent probability of the Marseille-based company being unable to meet its obligations within five years.

Freight charges collapsed on the Asia-to-Europe lines, the world’s second-busiest route, as a capacity glut combines with the slowest growth in trade since 2009. Rates excluding fuel surcharges were “practically” zero in July and little changed last month, the worst run ever, according to Menno Sanderse, an analyst at Morgan Stanley in London.

“Shipping and logistics is a pretty beat-up sector,” said Louis Gargour, who owns the bonds as the chief investment officer at LNG Capital LLP, a London-based hedge fund he co- founded in 2006. “The good side is everybody I know is very interested in this company at 50 cents on the dollar, although it’s a gamble.”

CMA CGM was founded by Jacques Saade in 1978 after he fled to France from Lebanon’s civil war. It employs more than 17,200 people and runs a fleet of 394 vessels, according to its website. The company grew from five employees and a rented boat into a global operator, ranking behind Copenhagen-based A.P. Moeller-Maersk A/S and Mediterranean Shipping Co. SA in Geneva.

Debt, Earnings

The company posted an 8 percent increase in first-half sales to $7.3 billion and had $675 million of cash at the end of July, according to a statement on its website. CMA CGM said it had $5.3 billion of net debt at the end of June and recorded $685 million of earnings before interest, tax, depreciation and amortization in the first half of the year.

That means debt is more than three times Ebitda, compared with a ratio of about less than one time at Maersk, according to that company’s earnings report on Aug. 17.

CMA CGM also issued 325 million euros ($459 million) of 8.875 percent bonds maturing in 2019 in April, which were quoted at 49 percent of face value, Bloomberg Bond Trader prices show.

Default swaps on the company’s debt cost 4.8 million euros upfront and 500,000 euros annually to insure 10 million euros of debt for five years, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The contracts have risen from 800,000 euros upfront on June 6.

Bonds ‘Whipsawed’

“We are surprised to see the value of the debt drop so much,” said Michel Sirat, the container line’s chief financial officer based in Marseille. “Our bonds are whipsawed because of prevalent fears in financial markets and questions about our liquidity, but we have a strong cash position and are fully compliant with our debt covenants.”

The drop in its bonds prompted the company to issue a statement on Aug. 3, saying it’s taking the “poor performance very seriously,” and that it doesn’t plan major new investments this year and next.

CMA CGM is rated B+ by Standard & Poor’s, which said in a May report that the company’s rankings are constrained by its “high operating risk in the cyclical, capital-intensive, and competitive container-shipping industry.”

Covenants Breached

The container line has about $4 billion of loans, according to data compiled by Bloomberg. Covenants on most of its borrowings were breached in 2009 after a slump in world trade amid the deepest financial crisis since the 1930s.

CMA CGM received $500 million from Turkish family-owned company Yildirim in November in return for a 20 percent stake as it sought to restructure about $5 billion of debt. In May, Yildirim agreed to buy 50 percent of Malta Freeport Terminals from CMA CGM for 200 million euros.

Analysts are increasingly bearish on what slowing trade growth means for shipping company earnings. Maersk, the world’s biggest container-shipping line, will report a 25 percent slump in net income to 19.71 billion kroner ($3.8 billion) this year, the mean of 16 estimates compiled by Bloomberg shows.

The industry may lose $2.5 billion to $3 billion this year, said Philip Damas, director of liner shipping and supply chains at Drewry Shipping Consultants Ltd. in London. Owners and operators lost $20 billion in 2009, when the global container trade contracted for the first time ever, he said.

‘Risk of Default’

“A lot of companies run the risk of default if freight rates remain at such a low level,” said Jacob Pedersen, an analyst at Sydbank A/S, Denmark’s third-largest publicly traded lender. “Companies have been taken by surprise this quarter because just a few months ago they were all sure there would be a lack of capacity and that would be positive for freight rates.”

Risk aversion has wiped out $5 trillion of global equity market value since July and brought high-yield bond sales to a halt. A Labor Department report on Sept. 2 showed the world’s largest economy added no jobs last month while a contraction in European manufacturing and plunging business and consumer confidence suggest the slowdown in growth may continue into the third quarter, members of the so-called shadow European Central Bank council said last week.

Sanctions Violated

Confidence in CMA CGM was also dented after the company’s U.S. unit paid a $374,400 settlement to the Department of Treasury’s Office of Foreign Assets Control last month following allegations it violated sanctions in exporting goods to Sudan and accepted payments for shipping services in connection with Cuba and Iran.

The alleged violations of sanction programs took place between December 2004 and April 2008 and there was no finding of fault, according to a company statement.

CMA CGM’S MV Victoria container ship was seized by the Israeli Navy after the shipper of three containers falsely described cargo contents as lentils when in fact they contained weapons, the company said on June 1. An Iranian company used one of its vessels to illegally transport arms to Lagos after labeling them as “packages of glass wool and pallets of stone,” the company said in October.

CMA CGM isn’t alone in dealing with maritime disputes. China Cosco Holdings Co., the state-controlled sea-cargo group, had at least three vessels arrested in the past two months as shipowners sought overdue payments, according to court filings in the U.S. and Singapore.

CMA CGM is counting on routes to emerging markets such as Latin America and Russia to drive growth as Europe stands on the brink of another recession. The company held a conference call with more than 150 bond investors on Aug. 31 to allay their concern about the company’s financial position, Sirat said.

“We see strong trades in Latin America, Russia, the Black Sea region and India, bringing in new avenues for growth besides the traditional routes of Asia to Europe and Asia to the U.S.,” Sirat said. “I hope our bond prices will recover after we explained our position to bondholders, because we intend to continue to access the bond market.”

To contact the reporter on this story: Patricia Kuo in London at pkuo2@bloomberg.net David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net; Faris Khan at fkhan33@bloomberg.net

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