Standard & Poor’s has lowered its long-term credit rating on CMA CGM to ‘B’ from ‘B+’, and its issue rating on the company’s senior unsecured debt to ‘CCC+’ from ‘B-’.
Standard & Poor’s said in a statement that the downgrade reflects its expectation that CMA CGM will see constrained earnings due to the challenging conditions in the container shipping industry and low freight rates in 2016 and 2017.
The company’s decision is partly due to CMA CGM’s additional fleet expansion and its acquisition, subject to antitrust approvals, of Neptune Orient Lines (NOL) for a total of US$2.4bn, in a partly debt-funded transaction.
The firm said that, although it thinks CMA CGM will benefit from improvements to its scale and competitive advantage from the merger with NOL, its current assessment of CMA CGM’s business risk profile as ‘weak’ will not change following the closing of the acquisition.
“We do not consider these improvements sufficiently material to revise our view of CMA CGM’s business risk profile, which remains constrained by the shipping industry’s high risk and the company’s volatile profitability,” Standard and Poor’s explained.
The credit rating agency considers the pace and scale of a rebound in CMA CGM’s credit measures to be uncertain and vulnerable to weak industry prospects.
The firm also believes the carrier’s liquidity will worsen over the next few quarters of 2016 because of the lower freight rates and operating cash flows.
Standard & Poor’s added that it would further lower the rating in the next few quarters if it believes the carrier is experiencing a larger fall in freight rates than expected.
“Container liners are experiencing severe freight-rate volatility and downward pressure on primary and secondary routes. This trend has intensified in the recent months, and we expect it will continue in the next 12-18 months,” the company added.