08 April 2019 by jbchevrel
Today CMA CGM (CMACG) and Hapag-Lloyd AG (HPLGR) were the 2 worst-performing names in Xover, wider by c50bp and c40bp resp., compared to ‘only’ 7bp for the index. The container shipping industry being highly cyclical, competitive and fragmented, those names are usual high-betas. Beyond that, while the tone has improved between the US and China on trade, and while the macro backdrop seems to have improved, it is worth noting that CMACG and HPLGR are almost at the widest level since late 2016. Regulation is part of the answer. Indeed, International Maritime Organization's (IMO 2020) sulphur regulation, which will ban ships from using any marine fuel with a sulphur content above 0.5% as of 01-Jan-20, is expected to impose a heavy burden on owners as the annual fuel costs for the shipping industry are likely to jump by up to $60B, including $10B for the containership sector alone. This could mean c$1B annual cost for both CAMCG and HPLGR. HPLGR said they expect the resulting costs to be passed on customers, but this remains to be seen, in the very competitive context. CMACG, on its side, announced a $1.2B cost-cutting plan to offset it. The acquisition of CEVA Logistics could add to CMACG c$430M EBITDA by 2021, with a broadly neutral impact on leverage, according to S&P research. Bloomberg calculated that even if 50% of costs are passed on, HPLGR could still face re-leveraging of +1.5x to 4.5x ND/EBITDA. Worst case, net leverage could go to 8x by end-2020. CMACG net leverage is below 7x, and it trades c400bp wider. Fierce competition is making the names vulnerable, and just 5% decline in freight rates over 12M could shave off half of HPLGR EBITDA. For example, in 2018, Asia-Europe rates fluctuated between $1,200 per 40-foot box in H1 to $1,800 in August. Despite the structural seasonality of the rates, this volatility introduces a dissymmetry for CDS market participants.