CMA CGM is building a war chest. The French ocean carrier has nurtured its debt-ridden balance sheet back to health and is raising capital to guard against future down cycles in what promises to be an increasingly volatile environment for the container shipping industry.
After coming close to bankruptcy in 2009 because of its huge bank debt, the container line engineered a turnaround by cutting operating costs, selling some assets and taking on two outside investors. The family-owned line has been so successful in reducing debt and costs that it plans to launch a public offering of its stock.
“We are considering an IPO at the end of 2014 or early 2015 for various reasons,” Rodolphe Saade, the carrier’s executive officer, said in an interview with The Journal of Commerce. “It will allow Robert Yildirim and the French sovereign fund to exit CMA CGM and enable us to raise a capital reserve against future downturns as well as raise capital for new investments in terminals and vessels.”
The Saade family, however, intends to retain control of the world’s third-largest container line. “No matter what happens, the Saade family will retain its majority stake of 70 percent in CMA CGM and control of the company,” he said.
“It is steaming smoothly toward an IPO next year,” said Rahul Kapoor, a Sing-apore-based shipping analyst for Drewry Maritime Equity Research. “Given that the capital market conditions are good next year, I think it will be a very good offering. They like size, and CMA CGM is the third-largest container line by capacity.”
CMA CGM swung to a net profit of $102 million in this year’s first quarter, from a $240 million loss a year earlier, on higher volumes and a 3 percent rise in average freight rates. The carrier earned a full-year profit of $361 million in 2012, compared with a $5 million loss in 2011. Second quarter earnings were due to be released at the end of August (See www.joc.com for updates).
“The first six months were difficult, especially in Asia-Europe, at least until June, but in the U.S. trades, especially from Asia, we have seen a recovery in volumes, and freight rates are also on the rise,” Saade said before the second quarter earnings were released. “The rest of the trades were pretty strong. In the trans-Pacific, Africa, Latin America, the Middle East and Australia, we have done well. We cover all trades, so we are in a position to balance our results.”
CMA CGM still has $4.2 billion in bank debt, but is gradually whittling it down from the $5.6 billion burden that almost sank the Marseilles-based carrier in 2009 before it reached an agreement with creditors to postpone and prolong repayment to 72 banks. It took on the debt in a ship-ordering spree when the global economy was still growing rapidly.
“Instead of dealing with 72 banks, we are now dealing with 66 or 67 banks, and we are working on reducing this to a more reasonable level,” Saade said. “At the same time, when you are in shipping and you invest billions of dollars, you need to make sure that you have enough banks to help out to finance your developments.”
The carrier is paying back interest and principal at the rate of about $1 billion per year in capital and interest to the banks. “That’s many ships,” Saade said.
CMA CGM has regained enough credit to start ordering ships again. It has taken delivery of three new 16,000 20-foot-equivalent-unit container ships last year and this, and is expanding the order. “We are not planning any additional ship orders in 2013, but we have increased to nine the series of vessels of 16,000 TEUs, and these will most probably be delivered in 2015,” Saade said. “The Nos. 4, 5, and 6 (ships) were ordered a couple of months ago, and Nos. 7, 8 and 9 are still under review.”
As of Aug. 25, CMA CGM’s 1.5 million-TEU fleet trailed only Maersk Line’s 2.6 million and Mediterranean Shipping Co.’s 2.4 million TEUs, according to research analyst Alphaliner.
The carrier’s once-shaky balance sheet is much stronger these days, and investors have taken note, evidenced by the performance of its bonds since 2011. CMA CGM issued $459 million of five-year bonds at par in April 2011 with a coupon of 8.875 percent that declined to 30 cents on the dollar by the end of that year. They got back up to 90 cents on the dollar by mid-2013.
“The bonds are now the best-performing shipping securities,” Kapoor said. “If you look at the stock price and share performance of shipping lines, the CMA CGM bonds left them all behind. That gives you a very clear picture of how investors view its turnaround in the past year-and-a-half.”
CMA CGM has shed so much of its debt that its debt-to-equity ratio has gone below 1-to-1. “That’s a significant deleveraging,” Kapoor said. The turnaround represents a change in behavior for the once high-flying line. “They have become quite pragmatic,” said Lars Jensen, CEO of Copenhagen-based SeaIntel Maritime Analysis. He said it shows a shift in the mindset of Jacques Saade, founder of CMA CGM and father of Rodolphe Saade.
During the carrier’s debt crisis, its bank creditors forced Jacques Saade to step down as CEO, and he become chairman for 2011 and 2012. He took back the helm following agreement on how to resolve the debt. “He didn’t really want to take on outside investors,” Jensen said. But the investment not only allowed CMA CGM to secure more funding that enabled it to survive, but it also got the carrier to the point where it has a smoothly running operation.
The French carrier took on its first outside investment last year, when Yildirim Group, a Turkish investment group, invested a total of $350 million in two transactions in return for a 24 percent stake. CMA CGM received another $150 million investment in July from Le Fonds Strategique d’Investissement, the French government’s sovereign wealth fund, which acquired a 6 percent stake in the carrier.
In June, CMA CGM closed on the sale of a 49 percent stake in Terminal Link, its global container terminal unit, to China Merchants Holdings for $532 million, which it put into its cash reserves rather than help pay down net debt. “The sale does not change control of the company, because we keep control of 51 percent,” Saade said. “Not only does it allow us to increase our cash flow, but at the same time, it allows us to team up with a Chinese investor who will also be a partner in terminal investment in the future.”
The Terminal Link sale and the outside investments have given CMA CGM $700 million in new equity, Kapoor said. “That has given them less debt and more equity, and their cost-reduction program has been better than they forecast in 2011,” he said. “They have been most aggressive in cutting procurement costs and reducing bunker costs through slow-steaming.”
It further cut costs by entering into a series of vessel-sharing agreements, first with MSC last year, and then with Maersk. The three carriers plan to form a three-carrier VSA next April called the P3 Network, under which they will combine services in the three major east-west trades: the Asia-Europe, Asia-to-North America and trans-Atlantic.
“What we wanted to do with the P3 Network is to try to stabilize the market as much as we could,” Saade said. “Setting up the P3 is a good answer to all the number of extra ships that will be delivered in the years to come.”
The P3 Network, which is awaiting approval by antitrust authorities in Europe, China and the U.S., will not reduce the huge amount of new vessel capacity entering the market this year and next, but it will help the three partners cut future costs by achieving more economies of scale with their big new container ships.
“A big part of the turnaround has been the realization by CMA CGM that it is more beneficial not to go it alone, but to get some external investors because they do need cash when times are rough, and because it is highly beneficial to engage in partnerships with some of their major competitors,” Jensen said.
CMA CGM’s cost-cutting already is paying off. It reduced costs by more than 10 percent in 2012 year-over-year, producing $600 million in cost savings, far higher than its initial target of $400 million, Kapoor said. “They had the highest operating margin in the industry in the first quarter.”
Despite the turnaround, CMA CGM will have to launch an IPO next year because it needs to pay off its outside investors, especially Yildirim Group, whose president, Robert Yildirim, saw an opportunity to make a good return on its investment in CMA CGM. “We are making the investment to make money, and we expect CMA CGM to become profitable, and that will give us the opportunity to do an IPO as our exit strategy,” he told The Journal of Commerce last year. He said the risk of investing in the French line was low, “because I didn’t think the French government would let it go down, and I didn’t think the 72 creditor banks would lose their $5 billion in loans to CMA CGM.”
The Yildirim investment has worked out well. “Robert is a very good businessman,” Saade said. “He is also a connoisseur of shipping, because he has invested in CMA CGM at the time we were facing great difficulties, and he has made a very smart investment. Maybe he doesn’t know shipping the way we do running lines and operations, but he is a very good businessman.”
The IPO, however, isn’t a done deal. “We believe that in order to go through an IPO, we need to make sure the company is doing well financially,” Saade said. “2012 was a good year. We expect 2013 to be pretty much the same. And 2014 is too soon to say, but if the results are good, then we should definitely consider an IPO.”
The company is considering launching the IPO on the Euronext Paris stock exchange, with a parallel offering in Hong Kong. “It’s going to be an important decision for the family and the shareholders,” Saade said. “But we believe that it should make sense, provided the market allows for it.”
CMA CGM also is planning an IPO for another reason. “It’s not only to raise capital to pay off investors, but also to raise capital to last it through the slumps,” Jensen said. CMA CGM and MSC have both sold parts of their port groups this year. “Clearly, some of these funds are not for investment. They are for a war chest to help them ride through the volatility we are seeing in the market, which is actually going to get worse in the coming years.”