CMA CGM Bonds Outpace Peers After Debt Talks: Corporate Finance
CMA CGM SA’s bonds rallied eight times faster than peers in the past week after the third-biggest container line won support from banks to loosen debt terms, bolstering plans for a share sale as early as next year.
The extra yield over benchmark debt on the Marseille-based shipper’s senior notes due 2017 tumbled 8 percent since the Feb. 12 agreement, compared with a 1 percent drop in Bank of America Merrill Lynch’s Large Cap Issuers Distressed High Yield Index.
The owner of the world’s largest container ship got banks to reorganize loans and extend a 280 million-euro ($374 million) facility to refinance debt coming due this year. Talks have been going on since it breached financing conditions in 2009. CMA CGM said the restructuring and a $150 million investment from the French government lifted the threat of default and allowed it to focus on a planned U.S. initial public offering.
“Bonds can start to rally when companies announce plans for an IPO, especially if it’s expected that a portion of the IPO proceeds will repay debt,” said Quin Casey, a London-based analyst at Aviva Investors Ltd., which manages 274 billion pounds ($424 billion), including the French shipping company’s bonds. “CMA CGM is an improving credit. The bonds may continue to outperform its peers.”
CMA CGM’s profit was hurt by declining container rates and the firm reported a 72 percent slump in earnings before interest, taxes, depreciation and amortization in 2011.
The group of 70 lenders led by BNP Paribas SA and Societe Generale SA agreed to last week’s debt restructuring. They replaced loan covenants based on Ebitda with a measure linked to the company’s net worth, or how far its assets exceed liabilities, according to the company.
Ebitda increased to $617 million in the third quarter, from $460 million in the second, and a loss of $31 million in the first three months of 2012, the company said. Its net worth stands at $4.2 billion, from $4 billion at the end of 2012.
“Given what happened in the container-shipping industry in the past three years, our lenders have come to terms with the reality that it’s difficult to manage covenants based on Ebitda with this level of volatility,” Chief Financial Officer Michel Sirat said in a phone interview. “After the debt restructuring, our most important financial plan this year is to get ready for a potential IPO in 2014.”
Bondholders are counting on the new covenant arrangement to free CMA CGM from the threat of default as the industry endures the oversupply of capacity. The global containership fleet will expand another 7.3 percent in 2013, according to London-based Clarkson Plc, the biggest shipbroker.
The yield on CMA CGM’s $395.7 million of senior, unsecured notes due April 2017 and redeemable by the company next year, narrowed to 1,172 basis points more than government debt, from 1,277 basis points on Feb. 11, according to Bloomberg prices.
The bonds also have rallied faster than those of rival Hapag-Lloyd AG’s $250 million of 9.75 percent notes due in 2017, whose yield relative to benchmarks tightened 2 percent since Feb. 11, Bloomberg prices show.
“The credit fundamentals have improved significantly,” said Steven Mitra, a partner at LNG Capital LLP, a London-based hedge fund. “The bonds continue to offer attractive value.”
CMA CGM will consider taking advantage of favorable credit- market conditions to sell debt this year, Sirat said. Apart from the dollar bonds, its only outstanding notes are 286.1 million euros of 8.875 percent senior securities due in 2019 and with a call option in 2015, data compiled by Bloomberg show. The company issued both bonds in April 2011.
Ratings companies were becoming more favorable about CMA CGM even before the restructuring and cash injection, amid signs of a global economic recovery that would bolster demand. Standard & Poor’s put the company on “positive” watch Nov. 28, which meant it could upgrade its CCC+ rating, seven levels below investment grade, within three months.
The New York-based ratings firm cited a “significant improvement in CMA CGM’s operating cash flow and liquidity position.” It also said the rating was constrained by a “highly leveraged financial risk profile and the high operating risk in the cyclical, capital-intensive and competitive container shipping industry.”
Moody’s Investors Service downgraded the company by one level to B3 in March 2012 after “weaker-than-expected” results. That’s still one level higher than S&P’s assessment.
CMA CGM said last week it has $4.6 billion of loans and bonds and about $600 million of cash, compared with $6.2 billion of debt and about $630 million of cash at the end of 2009. Net debt was 4.8 times Ebitda in the 12 months to September, from 12.9 times as of June, according to Spread Research.
“The key challenge for CMA CGM is how they can weather the currently soft freight rates and at the same time be able to convince potential equity investors that the industry is on a systemic recovery,” said Paul Marty, a Lyon, France-based credit analyst at Spread Research. “The agreement with banks and new investors will buy them time but it won’t insulate the company from the downturn and the highly cyclical nature of the industry.”
The cost to ship a 20-foot container to Europe from China for the week ending Feb. 8 was $1,509, 49 percent higher than the 2009 average of $1,011, the lowest in data going back to 2003, according the China Containerized Freight Index, published by the Shanghai Shipping Exchange. The price of marine fuel, the vessels’ biggest expense, climbed 77 percent to a record $664.19 per metric ton, Bloomberg data show.
CMA CGM was founded in 1978 by a refugee from Lebanon’s civil war, according to its website. It employs more than 17,200 people and runs a fleet of 394 vessels, ranking behind Copenhagen-based A.P. Moeller-Maersk A/S and Mediterranean Shipping Co. SA of Geneva. CMA CGM linked up in 2010 with Yildirim Holding AS, a Turkish container-port operator, which bought a 20 percent stake for $500 million.
The French shipper has also raised $885 million from selling assets, including a stake in Malta Freeport Terminals to Yildirim in the past three years, Sirat said. The investments from Yildirim and the French government fund imply an equity value for CMA CGM of about $2.5 billion and a total worth of about $7.5 billion, according to Spread Research.
“CMA CGM is now in good stead,” said Kai Miller, the Hamburg-based head of the container desk at London ship-broker ICAP. “It’s capitalized well in an industry that has fundamentally changed.”
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