When French freight shipping giant CMA CGM wanted to visit the capital markets, it knew the cyclical nature of its business could prove tricky. But, along with lead manager BNP Paribas, the company worked hard to convince investors of its creditworthiness, not once but three times. Edward Russell-Walling reports.

BNP Paribas team 0118

Container shipping is notoriously cyclical, which is why debt capital market investors have regarded the sector with extreme caution. Yet French shipping giant CMA CGM has been able to make serial visits to the high-yield market over the past half-year, culminating in its lowest ever coupon. BNP Paribas has been a lead manager throughout.

The issuer began life in Marseilles in 1978 as CMA, or the Compagnie Maritime d'Affrètement. Its founder was Jacques Saadé, a Lebanese emigré who started with one ship trading between Marseilles and Beirut; today the group has more than 460 vessels, spanning the globe. Mr Saadé recently stepped down, leaving his son Rodolphe Saadé as chairman and CEO.

CMA acquired France’s state-owned Compagnie Générale Maritime in 1999 to become CMA CGM. The French state retains a 6% stake in the overall business. Another 24% is owned by Turkish port operator Yildrim (which has been trying to sell its holding) and the Saadé family owns the remaining 70%.

Third in the world

By 2016, when it completed the $2.4bn acquisition of Singapore's Neptune Oriental Lines (NOL), CMA CGM was the world’s third largest shipping company by capacity, after AP Moeller-Maersk and the Swiss family-owned Mediterranean Shipping Company. That said, it will be replaced as number three if and when the current merger between China’s Cosco Shipping and Hong Kong’s Orient Overseas International is completed.

Mergers such as these are the most recent result of the habitually fierce competition between shipping lines. Before the financial crisis, speed was a great differentiator, with pressure to move goods from China to Europe and the US as fast as possible. With much ship-building to take advantage of the boom, the crisis was followed by a glut in shipping supply, which in turn set off the present wave of rationalisation and consolidation. When CMA CGM bought NOL, it had not made a profit since 2010.

Since the crisis, the industry has become more focused on size and cost, as BNP Paribas head of corporate leveraged capital markets Arnaud Tresca explains. “There has been a race for capacity, because scale is a key driver of profitability,” he says. “To manage your costs, you need to be big and diversified across routes; and to provide a cheaper, quality service, you must have big vessels.”

CMA CGM is no stranger to big ships. In 2012 it took delivery of what was then the largest container ship in the world, the Marco Polo. In September, it confirmed that it had ordered nine new mega-vessels, each with a record-breaking capacity of 22,000 twenty-foot equivalent containers.

Powerful alliances

An allied development has been the growth of shipping alliances, which work much like code sharing in the airline industry, allowing members to provide global coverage without having to overstretch their own capacity. Since 2016, CMA CGM has been a key member of the Ocean Alliance, the dominant global grouping in both the Asia-Europe and the trans-Pacific trades.

CMA CMG issued its first bond in 2003 in a small €100m deal with a 10% yield, and has accessed the euro market every other year since the crisis. “When there is a good dynamic in the shipping cycle, they try to extend their maturities,” says Mr Tresca.

Ship-owners looking to borrow have two options, at least in theory. They can borrow in the bank market, securing the loans on their vessels. Banks will not lend to the shipping sector without security, however, leaving the capital markets as the only avenue for unsecured borrowing.

Maersk, with a more diversified business, has an investment-grade rating, but most other container lines must resort to the high-yield market. “When freight rates fall below a certain level, shipping companies lose money,” says Mr Tresca. “Rates have historically been volatile, so there has been cautiousness from investors on the sector.”

Nonetheless, CMA CGM was able to visit the capital markets on three occasions in 2017, the first time in July. When the company announced its impending takeover of NOL in 2015, some investors were not happy. The deal was 100% debt financed, and CMA CGM assumed $2.7bn of NOL debt, leaving it highly leveraged.

“It worked hard through 2016 and 2017, successfully turned the NOL business around, and sold non-core assets to enhance liquidity,” says Mr Tresca. “This, combined with a rebound in freight rates, allowed management to present a very compelling story by July. They managed to convince investors that they were a creditworthy company worth investing in.”

Enjoying an upgrade

The company had just concluded the sale of NOL’s ports business for $817m and Standard & Poor’s had upgraded the outlook on its B corporate rating from 'negative' to 'positive'. So, with BNP Paribas and HSBC as joint global coordinators, it came to market in mid-2017, looking for €500m.

The response was sufficiently encouraging for the size to be increased to €650m, in a five-year deal with a 6.5% coupon. “It had considered seven years, but did five, because it was focused on the absolute coupon,” says Stanford Hartman, head of high-yield syndicate at BNP Paribas.

The issuer returned in October, this time to refinance €500m of secured borrowing. Part of the July proceeds went to refinance a €300m bond maturing in 2018. “So there was an element of rolling the 2018 investors into the new deal,” says Mr Hartman. “But the October transaction was a new money financing.”

The economic backdrop was, if anything, even better than in July, as prospects for world trade and global economic growth – and therefore shipping – continued to brighten. To investors, the bankers emphasised the fact that CMA CGM had always outperformed its peers on a cost basis.

“CMA CGM is the best operator in the sector, with a lower break-even point,” says Mr Tresca. “If rates go down, it makes money for longer than the competition. When rates go up, it is the first to make a profit.” For example, in the third quarter of 2017, the company’s 10% core EBIT margin (ratio of earnings before interest and taxes to net revenue) was the highest among all its major competitors, and well above the estimated industry average of 5%.

A leaner industry

If superior profitability was one marketing theme, another was that the industry itself was consolidating and therefore healthier. A third was that the company was adapting its strategy to a new environment of slower growth in trade volumes and shorter industry cycles. It was developing a wider range of niche businesses, such as reefer, short sea and cabotage, as well as special cargoes. It was also leveraging technology wherever it could and building an integrated logistics offer.

In mid-October, with BNP Paribas and HSBC as joint global coordinators once again, CMA CGM launched a new €300m seven-year senior transaction. “Seven years is a long tenor for shipping,” says Mr Hartman. The week before, S&P had helped the cause by upgrading the issuer's corporate rating to B+. In the same week, Moody’s changed the outlook on its B1 rating to 'positive'.

Initial price thoughts were 5.5% to 5.75%. A day later, guidance was set at 5.5% area for an increased €500m size. The deal was finally priced at par to yield 5.25%, CMA CGM’s lowest ever coupon. That was 125 basis points inside the July pricing, for a longer tenor. The bonds traded up marginally on the break.

“It was CMA CGM’s largest order book and its most diverse investor base, with investors from the US, Europe and Asia,” says Mr Hartman. Historically, when absolute yields are that low, US investors have not been active in shipping bonds denominated in euros, he adds. There was also some interest from Asian investors holding outstanding NOL bonds in Singapore dollars.

Early in November, the company was able to visit the market yet again, to tap the October issue. It launched a €150m add-on, quickly increased to €250m, and priced intraday at 101.75 to yield 4.954%. “This was a testament to the company’s ability to deliver best-in-class operating performance and, with NOL, to deliver on an aggressive strategic turnaround plan,” says Mr Hartman. “It also shows the underlying faith of investors in the management team, despite being in a cyclical business.”

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