EUR 175.34 For Business Accounts Only

NEPTUNE ORIENT LINES: Redemption Ahead of Iceberg

We initiate our coverage on Neptune Orient Line (NOL)’s SGD bonds with an OVERWEIGHT recommendation on NOLSP 4.65% 9/20s at 10.5% yield to maturity (YTM) at the time of this report, and an UNDERWEIGHT recommendation on NOLSP 4.4% 6/21s.  Our recommendations are based on our expectation of NOL’s sufficient liquidity this year on modest deterioration in CMA CGM’s 1H’20 earnings (as a result of COVID-19). We question NOL’s liquidity beyond this year and do not recommend NOLSP 6/21s.

The COVID-19 outbreak and the global economic slowdown have weighed on the marine sector and the performance of bonds issued by companies operating therein. Both of NOL’s SGD bond yields-to-maturity (YTM) have risen markedly post Chinese New Year while spreads also widened similarly. We value both SGD bonds and assess NOL’s credit outlook through CMA CGM (which acquired and delisted NOL in 2016) as a proxy.

We find that the dire liquidity situation of CMA CGM has been broadly addressed with funding sources, including the EUR1.05bn syndicated loan 70% guaranteed by France signed in March this year, proceeds of c.USD820mn from vessel sale & lease-back and vessel refinancing, USD968mn sale of ten port terminals, and the three-year extension to the credit lines totalling USD535mn, on top of the company’s USD1.8bn cash on hand. If the execution of these measures goes on as expected, CMA CGM will have more than enough cash to meet its financing needs this year, including honoring the redemption of NOL’s SGD280mn bond maturing in September (NOLSP 9/20s).

We also believe the impact of COVID-19 on CMA CGM’s 1H’20 performance would be less than generally expected by the market on account of higher yoy freight rates and a potentially modest contraction in volumes handled by the company.  We do not think S&P and Moody’s will downgrade CMA CGM’s ratings at least before the 1H’20 results expectedly to be announced sometime this September. S&P revised the company’s rating outlook to Negative in February and Moody’s placed CMA CGM’s ratings under review in April. The negative rating actions were not a surprise, given a decline in global trade as a result of COVID-19.