Peter T. Leach | Sep 06, 2011 9:28AM EDT
Container ship operator CMA CGM, hit by sharply declining bond prices and falling freight rates, faces a 90 percent chance of defaulting on payment obligations over the next five years, according to an analysis by Bloomberg.
The report, based on figures from the Bloomberg Bond Trader service, suggests new financial troubles in the shipping world as carriers report deteriorating profitability amid stagnant demand and plentiful capacity.
CMA CGM is one of the few carriers to report significant profit this year, but the company also is feeling the impact of U.S. government penalties for breaching trade sanctions against Iran, Cuba and Sudan, and the price of its $475 million in 8.5 percent notes due 2017 has plummeted to 47.25 cents since April.
Bloomberg said in a report on the bonds on Monday that the credit-default swap prices signal a 90 percent probability the Marseille-based shipping line would be unable to meet its obligations within five years.
A spokesman for CMA CGM issued a statement Tuesday slamming the Bloomberg report as a "mixed bag of unrelated facts."
"There is absolutely no liquidity on CMA CGM's credit default swaps," said Guillaume Foucault, managing director of Financial Dynamics, a Paris-based communications firm, who responded to a request for comment on behalf of CMA CGM. He called the swap price "a theoretical calculation. Even on the group's bond, there is a very limited liquidity."
The report on the world’s third-largest container line follows CMA CGM’s agreement in November 2010 with 75 creditor banks to restructure more than $5 billion in loans the carrier had borrowed to finance its new ship orders.
Bloomberg also cited a report from Morgan Stanley that freight rates had collapsed to “practically” zero excluding surcharges on Asia-Europe trade lanes. The Shanghai Shipping Exchange SCFI index of freight rates shows pricing on lanes to Europe and the Mediterranean extremely low but improving somewhat from July to early September.
Foucault said the spot rate measures mean little to CMA CGM's business. "Asia-Europe lines account for only 10 percent of our trades, and thus give a misleading view of CMA CGM activity," he said. "Our revenues are not fully correlated to the freight rates, notably thanks to the group's long-term contracts."
CMA CGM last month reported an 8 percent increase in first-half sales to $7.3 billion and had $675 million of cash at the end of July. The company said last month it expected 2011 to be a positive year despite reporting a 72 percent year-over year decline in first-half profit to $237 million, as higher fuel costs offset shipping volume gains.
At that time 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.
CMA CGM also issued $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.
“We are surprised to see the value of the debt drop so much,” Michel Sirat, the container line’s chief financial officer, told Bloomberg. “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.
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.
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.
