CMA-CGM : Brighter outlook for 2017

We are raising our credit opinion on CMA-CGM to Stable vs. Negative because we believe the group's earnings bottomed out in 2016 and that it is now on the road to recovery. We are upgrading the 2021 CMACG bonds to Buy from Reduce and the 2018 CMACG notes to Neutral. Given the rally on the bonds since mid-November, the recovery is already largely priced in, but there remains upside based on newsflow that is henceforth set to be more buoyant than in 2016. - > - Support factors - - The world's third largest container shipping group.- CMA CGM boasts one of the highest profitability in the sector with a well-balanced geographical mix and excellent cost streamlining.- Major French group which contributes to the country's prestige on the international arena, and the biggest private sector employer in Marseilles. The French government intervened to encourage the banks to reach an agreement during the crisis in 2009. BpiFrance acquired a stake in 2013, helping to enhance its corporate governance.- High level of liquidity maintained. At 30 September 2016 CMA-CGM had cash resources of around $ 1bn, pro forma the repayment of the acquisition loan for NOL ($ 1.6bn). The latter was covered by several sale & leaseback transactions on NOL's containers and vessels, as well as a new receivables securitization program. - Points to watch - - High volatility in freight rates (hence in profits) in the sector which respond to changes in world trade and competitive pressure exacerbated by excess supply. The impact on margins is enhanced by a largely fixed cost structure. - CMA CGM's earnings have fallen sharply since H2 2015, hit by the steep decline in freight rates. The trend was somewhat better in Q3 2016, with an upswing in EBITDA compared with the previous quarter (at $ 72m), although it still contracted by 70% year on year.- Despite this backdrop, CMA CGM completed the acquisition of NOL last summer for $ 5bn (of which $ 2.4bn in cash), leading to a sharp releveraging of its balance sheet. Net debt at end-September 2016 amounted to $ 8.2bn (+$ 4.5bn year to date), for a Net Debt/EBITDA ratio of almost 27x. The group plans to digest this acquisition within 18-24 months after completion, thanks to at least $ 1bn of asset sales and $ 1.5bn of cost savings (synergies of $ 0.5bn and cost reductions of $ 1bn).