Logistics Service Provider CEVA Logistics Ratings Placed On CreditWatch Negative On Pending Ownership Change

  • French container liner CMA CGM S.A., which currently owns about a third of Switzerland-based CEVA Logistics AG, has entered into forward share purchase and total return swap agreements with banks to acquire further shares in CEVA, with the likely purchase granting CMA CGM majority ownership (50.6%) and control of CEVA.
  • In addition, CMA CGM made a voluntary public tender offer of Swiss franc 30 per share to CEVA's shareholders, which could result in CMA CGM's ownership exceeding the expected 50.6%.
  • If the transaction goes ahead, we would assess CEVA's overall credit quality within the context of the creditworthiness of the two entities combined, and expect the combined group's credit profile will be one notch lower than our current rating on CEVA.
  • We are therefore placing our 'BB-' ratings on CEVA on CreditWatch with negative implications and assigning a preliminary 'B+' issue rating to the company's $825 million proposed term loan B. The recovery rating on the debt is '4', reflecting our expectation of average recovery (30%-50%; rounded estimate: 45%) in the event of a payment default.
  • The CreditWatch negative reflects that we would likely downgrade CEVA by one notch upon its acquisition by CMA CGM.
FRANKFURT (S&P Global Ratings) Feb. 4, 2019--S&P Global Ratings today took the 
above rating actions. 

The CreditWatch placement reflects our view that CMA GGM's acquisition of CEVA 
will almost certainly go ahead. CMA CGM, which currently owns about a third of 
CEVA, entered into a forward share purchase and total return swap agreements 
with banks in January 2019 to acquire further shares in CEVA. The likely 
purchase, currently subject to antitrust authorities' approval, will grant CMA 
CGM the majority ownership (50.6%) and control of CEVA. In addition, on Jan. 
28, 2019, CMA CGM made a voluntary public tender offer of Swiss franc (CHF) 30 
per share to CEVA's shareholders, which could result in CMA CGM's ownership 
exceeding the expected 50.6%.

If the transaction goes ahead and CMA CGM gains control over CEVA, we would 
assess CEVA's overall credit quality within the context of the 
creditworthiness of the two entities combined, and CEVA's status within the 
enlarged group. Based on the expected formation of the larger group and the 
depth of relations between its subsidiaries, when the transaction closes we 
anticipate we will treat CEVA as a core entity and will therefore equalize our 
rating on the company with that on its new parent, and the consolidated group 
credit profile (GCP). Based on our revised preliminary view of the combined 
entity, we expect this will be one notch lower than our current rating on 
CEVA. Consequently, we will likely lower the rating on CEVA by one notch to 
'B+' from 'BB-' after the transaction closes. 

We expect the GCP will primarily be constrained by the group's higher level of 
financial leverage compared with CEVA on a stand-alone basis. We revised our 
consolidated forecast based on our better-informed view of CEVA's and CMA 
CGM's operating performance in 2018, which for both companies was weaker 
compared with 2017 and our expectations, and more visibility regarding 
prospects for 2019. Our base case forecasts reported EBITDA for CEVA of about 
$190 million in 2018 (compared with about $210 million in 2017) and $1.2 
billion in 2018 for CMA CGM (compared with $2.2 billion in 2017). Based on 
this, we anticipate the consolidated entity's credit ratios of S&P Global 
Ratings-adjusted funds from operations (FFO) to debt of about 12% and adjusted 
debt to EBITDA of 5.0x-5.2x at transaction close, will not support our 'BB-' 
issuer credit rating on CEVA. We consider a ratio of adjusted FFO to debt of 
above 16% as commensurate with our 'BB-' rating level, and now believe that 
this will be difficult to achieve in 2019.

Nevertheless, we do consider that the acquisition could bring benefits other 
than larger scale, such as an enhanced product offering; improved customer 
proposition; and closer integration of services, resulting in potential 
operating and revenue synergies across the two businesses that could help 
counterbalance the effect of this high leverage over time. In addition to 
these synergies' potential, we believe the consolidated group could benefit 
from improvement in CEVA's and CMA CGM's stand-alone credit metrics during 
2019 and into 2020. In our view, there is at least a one-in-three chance that 
the adjusted FFO to adjusted debt ratio of the combined entity could exceed 
16% in the next 12 months, which would be consistent with a higher rating. We 
would likely reflect this possibility in a positive outlook on the combined 
group after transaction closing. 

We believe that in 2019-2020, CEVA's EBITDA will likely increase after the 
contract logistics operations in Italy (Italian business depressed the 
company's EBITDA by $42 million in the first nine months of 2018) and other 
onerous contracts have been largely restructured or disposed, and margin 
improvement initiatives take effect. 

CMA CGM will likely see overall demand-and-supply conditions shift in favor of 
ocean carriers after a difficult 2018 that saw container liners struggle to 
pass through elevated bunker fuel prices via higher freight rates, 
particularly in the first half of the year. With no incentive to place new 
large orders, demonstrated by muted contracting activity since late 2015, the 
containership order book has reached close to its historical low of 13% of the 
total global fleet. Combined with funding constraints and more stringent 
regulations aiming to cut sulfur emissions to 0.5% as of January 2020, these 
factors will likely help restore the demand-and-supply balance in the 
containership segment into 2019-2020. However, we remain cautious in our 
expectations for freight rates, forecasting a low single-digit average 
increase in fixed-bunker revenue per twenty-foot-equivalent (TEU; a measure of 
container-carrying capacity) for CMA CGM in 2019-2020. This compares with a 
flat growth rate we expect CMA CGM achieved in 2018. We believe that 
persistent significant deliveries of greater than 12,000 TEU containerships 
scheduled in 2019 will constrain freight rates, in particular on the main 
Asia-Europe and Transpacific lanes (where these mega-containerships operate), 
despite the likely favorable demand-and-supply balance in the industry in 
general. Risks are also evident in the outlook for global trade volumes, which 
we expect will expand by a low-to-mid single rate, coming most significantly 
from the ongoing U.S.-China trade tensions. Bearing in mind the supply 
pressure coming from the deliveries of ultra-large containerships, freight 
rates will ultimately depend upon how prudent the leading container liners are 
in their capacity management and rate-setting decisions, which are even more 
important given volatile bunker fuel prices.
The CreditWatch negative reflects that we would likely downgrade CEVA by one 
notch upon its acquisition by CMA CGM. We believe that if CMA CGM becomes 
CEVA's controlling shareholder, the credit profile of the enlarged combined 
group will likely be one notch lower than that of CEVA on a stand-alone basis, 
and that this would then cap our rating on CEVA. 

We aim to resolve the CreditWatch within the next three months after the 
acquisition is complete and once we have reviewed the new formation of the 
larger group, its final capital structure, and its financial policy.

We assigned our preliminary 'B+' rating to the proposed $825 million term loan 
B to be issued by CEVA Logistics AG through CEVA Logistics Finance, the 
proceeds of which will be used to refinance CEVA's existing term loan B and 
notes. The issue rating reflects our view of CEVA's expected creditworthiness 
after its acquisition by CMA CGM. The recovery rating on the proposed term 
loan B is '4', indicating our expectation of average recovery (30%-50%; 
rounded estimate: 45%) in the event of a payment default. 

The preliminary rating is subject to the successful completion of the 
transaction, and to our review of the final documentation. If S&P Global 
Ratings does not receive the final documentation within a reasonable 
timeframe, or if the final documentation materially departs from the 
information we have already reviewed, we reserve the right to revise or 
withdraw our rating.