CMA CGM Q1 20 update and new position on the 2022 notes

All,

We have updated our model and liquidity projections for CMA CGM, following the Q1 20 results and call. Please find them here.

 - We are moving to a 2% long on the 2022 notes at around 92 (YTM11.2%). CMA CGM's better than expected Q1 20 and Q2 20 outlook, the successful cost cutting efforts so far, combined with the liquidity measures implemented over the past 12 months, should ensure that the company will be still be in a relatively comfortable position when it comes to the maturity of the 2022 notes. We see significant incentives for management to repay the 2022 notes in full even if the 2025 notes remain unaddressed. It would buy almost 3 years of additional optionality to the equity in a highly volatile sector. Even if the industry price discipline does not hold long beyond early-mid 2021, the overall volumes recovery by then should enable margins to gradually soft land towards a decent level into 2022. 

 - We remain long the 21s for 3% of NAV notes at around 99-100. We see the recently announced EUR1.05b state backed facility as confirmation that both the banks and the government are willing to continue to support the company for as long as possible with the provision of liquidity. The recently announced partial call of the notes further strengthens our view that management will continue to work to buy time for a potential recovery of EBITDA down the line.

 - We are not considering the 25s as their recovery is more a function of long-term business solvency as opposed to liquidity in the short to medium term.

The industry dynamics have changed significantly since 2009, following a wave of mergers and alliances. This allowed for more pricing discipline in the industry, allowing operators such as CMA CGM to have better than expected margins upon weak volumes in 2H 19 and then IMO2020 transition+coronavirus events. But it remains a commoditized industry and we have no visibility on how long this will last. However, we estimate that this discipline is likely to continue for the next 6-9 months, which would ensure that any cash burn should remain contained over the 2021-2022 period.

Please feel free to reach out if you would like to exchange ideas on the name.

Juliano