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Rating Action:

Moody's assigns B3 rating to CMA CGM's €500 million notes

03 Jul 2017

London, 03 July 2017 -- Moody's Investors Service, ("Moody's") today assigned B3 rating to the proposed €500 million senior unsecured notes due 2022 issued by CMA CGM S.A. (CMA CGM). CMA CGM's corporate family rating (CFR) of B1 and Probability of Default Rating (PDR) of B1-PD are unchanged. The outlook is stable.

RATINGS RATIONALE

Today's assignment of a B3 rating to CMA CGM's proposed senior unsecured notes due 2022, which is two notches lower than the company's B1 CFR, reflects not only their pari passu ranking with all other unsecured indebtedness issued by CMA CGM, but also their contractual subordination to the secured debt existing within the group (primarily vessel and container financing).

The proceeds of the offering will be applied to pre-funding debt maturities in particular the €300 million bond due 2018, as well as reducing outstanding balances on the revolving credit facilities (unrated).

CMA CGM's B1 CFR also continues to reflect (1) CMA CGM's (in combination with recently acquired Neptune Orient Lines (NOL)) leading market position with a top three market share; (2) diverse, modern and flexible fleet as a result of significant proportion of chartered vessels; (3) operational efficiency aided by the integration of NOL and anticipated synergies of $500 million in 2018. These strengths are counterbalanced by (4) highly competitive operating environment in the largely commoditized container liner industry; (5) dominance of short-term contracts limiting revenue visibility; (6) significantly elevated leverage following the acquisition of NOL (7.2x for last twelve months ending 31 March 2017 including standard Moody's adjustments), although it is expected to be reduced toward the end of calendar year 2017; (7) tight liquidity relying on asset sales and refinancing existing debt obligations with the banks and in the capital markets, although recently helped by the announcement of the San Pedro sale.

On 30 June 2017, CMA CGM announced a stock purchase agreement to sell 90% interest in APL Ltd., the entity which ultimately owns the San Pedro container terminal at the port of Los Angeles, for approximately $800 million and an earn-out opportunity. The transaction is contingent only on anti-trust approval and is expected to be closed in the second half of 2017. The proceeds of the asset sale will be applied to debt reduction as previously indicated by CMA CGM which is a strong credit positive.

In September 2016, CMA CGM completed its acquisition of NOL after acquiring the controlling stake in the Singaporean carrier in June that year. The transaction strengthened CMA CGM's position as the third largest container liner with a capacity of 2.2 million TEU and an 11% market share. In addition to solidifying CMA CGM's market position, the acquisition of NOL also strengthened CMA CGM's presence on certain routes, particularly Transpacific and intra-Asia routes, increasing its geographic diversification. Additionally, CMA CGM realized $1 billion in cost savings in 2016 and expects to deliver on $500 million in synergies with NOL in 2018.

Along with its strategic advantages, the acquisition of NOL involved certain execution risks such as regulatory approvals and refinancing the acquisition facility, which CMA CGM has already addressed successfully. In addition, CMA CGM integrated NOL into the new Ocean alliance which commenced operations on 1 April 2017. NOL has been a weak performer in recent years with negative net result since 2011. In the first quarter of 2017, the combined entity generated a core EBIT of $252.0 million, among the highest in the competitive set owing to both CMA CGM's operational strength and the progress of integration efforts.

Also positively, the market environment for container shipping has improved in 2017 after a very weak 2016. The supply demand balance shifted away from the dramatic oversupply witnessed in 2016 which led to a measure of strengthening in freight rates. Although still weak by historical standards, container freight rates rebounded by 37% from the trough in Q2'16 as measured by China Containerized Freight Index (CCFI). In line with the industry developments, Moody's has recently revised its outlook for the shipping industry, and for the container liner segment, to stable from negative.

CMA CGM acquired 100% of NOL for $2.5 billion and assumed NOL's financial net debt of approximately $2.6 billion. The acquisition was funded with a mix of cash and bank financing and materially increased CMA CGM's leverage to 8.2x at 31 December 2016 from 4.2x the year prior including Moody's standard adjustments This ratio is very high for the B1 category although Moody's expects it to reduce over time through synergies and asset sales, the largest of which is the announced sale of the San Pedro terminal. Positively, for the twelve months ending 31 March 2017, CMA CGM's leverage declined to 7.2x reflecting the improvement in EBIT driven by strengthening freight rates in the first quarter.

Moody's notes that CMA CGM's liquidity relies on a mix of available cash and undrawn lines, committed capex financing, as well as refinancing or extending its existing debt instruments. Moody's acknowledges that the company has a strong record of successful refinancing as evidenced most recently by its prompt retirement of the acquisition facility in December 2016. At 31 March 2017, CMA CGM had approximately $1.2 billion of cash and $442 million of available credit facilities. The company also had approximately $1.7 billion of current maturities of which $260 million were comprised of bonds and $600 million of bank debt. The most recent announcements of the San Pedro terminal sale and the proposed bond refinancing will further support CMA CGM's liquidity.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects our expectation that CMA CGM's financial profile will return to a profile in line with the B1 rating within 18 months after the closing of the NOL acquisition. It also assumes that CMA CGM will maintain an adequate liquidity profile and refinance the acquisition credit facility well in advance of its maturity.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward rating pressure could materialise if we have evidence that CMA CGM can sustain its solid operating performance and report the following metrics over an extended period of time: (1) leverage (debt/EBITDA) moving towards 4x; and (2) funds from operations interest expense coverage above 4x (ratios include Moody's adjustments). At the same time, the company should maintain an adequate liquidity profile.

Downward rating pressure could develop if challenging market conditions lead to (1) leverage above 5x for an extended period of time; (2) funds from operations interest expense coverage below 3x (ratios include Moody's adjustments); or (3) a material weakening of the company's liquidity profile.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Global Shipping Industry published in February 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Marseille, France, CMA CGM is the third-largest container shipping company in the world measured in TEU. CMA CGM generated revenues of $16.0 billion in 2016.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maria Maslovsky
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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