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    Conversion crisis could cost Cammell in the long term

    Yard News // December 15, 2000
    Expanding British ship repair group Cammell Laird could find it much more difficult to gain access to funding for expansion in the future if it finally loses its much-publicised contract to lengthen Costa Crociere's cruise ship Costa Classica.

    Speaking in early December, a spokesperson for Moody's Investor Service in Frankfurt indicated that it would be implementing a review of the company's credit rating, with a view to downgrading that rating if Cammell Laird did not emerge victorious in its arbitration battle with Costa Crociere.

    In recent months, the acquisitive British company has taken a major shareholding in Cascade General on the US West Coast, acquired CMR in Marseilles, France, and is actively pursuing an interest in Varna shipyard in Bulgaria. It has also recently purchased a shareholding in the Grand Bahama repair yard in Freeport, which is jointly owned by Grand Bahama Port Authority.

    In October, Moody's assigned a B2 credit rating to the proposed Euro 125 million Senior Notes of Cammell Laird Holdings Plc. The investment company said the rating reflected Cammell Laird's dependence on securing a high volume of ship repair and conversion work in the face of general over-supply and consolidation in world markets.

    Moody's said at the time that given its business characteristics Cammell Laird had 'considerable leverage', and said its rating recognised the company's fast growth in orders and deliveries, the strategic location of its dry-docks, the cash-generative nature of its business and its track record of attracting large orders.

    It fixed a Senior Implied Rating for Cammell Laird Holdings as a whole at BA3, a speculative rating, but it is thought that the loss of the Costa Classica contract could cause this rating to slip, making it harder - or more expensive - for Cammell Lairdto obtain funding for future expansion. Under Moody's credit rating scheme, A and Aa ratings are 'prime' ratings; BA3 is not a prime rating.

    Moody's said the value of the contract - some 51 million - amounted to about a quarter of turnover anticipated in 1999. It would, therefore, be a 'hefty hit', which could affect the rating of the company as a whole. "Cammell Laird depends on large contracts such as Costa Classica, and this is the largest of its type to date" said the spokesperson. "If they loose the contract and don't win the arbitration, it could be much more difficult for them next time they want to go to the bond market", he said.

    In the aftermath of Costa Crociere's decision at the end of November not to send the ship to Cammell Laird, the value of the ship repairer's shares fell by around a third, reaching their lowest level since April 1998. The ship left Genoa on 18 November for Cammell Laird's yard at Birkenhead, where it was due to arrive on the 23rd. The conversion contract was due to have been completed on 22 March 2001.

    Costa Crociere alleges that there has been a substantial delay in the project to lengthen the Costa Classica, and says it proved impossible to find a satisfactory solution to the problem using 'normal business channels'. For its part, Cammell Laird has rejected the claims, and went ahead and launched the new mid-section for the ship which it has been building at the end of November.

    The cruise company, part of Carnival Corporation, said it had not exercised its right to terminate the contract but had requested that a board or arbitration should consider the matter, although it also said the duration of the postponement of the delivery of the ship to Cammell Laird was not subject to completion of the arbitration proceedings.

    In a statement, Cammell Laird said it had received notification of an application for arbitration, and confirmed that the arbitrator had been requested to determine the legality of whether Costa Crociere had the right to postpone delivery and/or terminate the contract. It said it had taken legal advice concerning its contractual position, and considered that Costa Crociere had no right to cancel the contract.

    The yard has indicated that large-scale job losses could follow any termination of the contract, and some dealers have even suggested that Cammell Laird could itself be vulnerable to a take-over.

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