Insolvency legislation and the procurement dilemma
Thoughtful post from procurement expert Peter Smith on last week’s news that three City Link ...
Of all of the major deepsea liner shipping companies who continue to experience financial difficulties, one that stands out at the beginning of this year is the Israeli shipping company Zim Integrated Shipping Services, which has been singled out by Standard & Poors as putting a drag on its parent company’s credit rating.
Last Year Israel Corp, the country’s largest single company, announced that it was exploring the possibility of offering debentures – long-term loans which act much like bonds – to the public as part of a refinancing exercise, leading to the ratings agency reviewing its current financial and credit strength.
The analysis, released last week, made interesting reading. The key problem is that while Zim’s cash reserves are understood to be thinning, the likelihood that it will receive any further cash inflow from its parent is receding because that would, in S&P’s view, be likely to hit Israel Corp’s overall credit rating, and thus affect its ability to issue the debentures.
“There has been a further worsening in the credit quality of Zim, reflecting its short-term liquidity crisis due to the continued weakness in its operating performance, inter alia, as a result of highly unfavourable terms of trade in the shipping industry,” S&P Israel wrote.
It continued: “While Zim, which constitutes some 2% of the company’s investment portfolio, is currently pursuing a solution to its liquidity crisis, we believe that Israel Crop will not serve as Zim’s deep pocket as it did in the debt settlements of 2009 and 2010. In our opinion, such assistance, should it be forthcoming, will not be at the scale seen in the past. In our assessment, limited assistance could be extended to Zim without harming Israel Corp’s rating.
“Negative pressure on the rating could occur if the company decides to inject considerable sums into Zim, which could harm the company’s financial profile.”
In the fourth quarter of 2009, when the line really was on the brink of extinction, Israel Corp and its largest shareholder, the Ofer family, injected $342m in fresh capital and released another $72m in new capital following a debt restructuring. That was followed in the second quarter last year by Israel Corp converting a $25m loan into equity, with the Ofers putting a further $14m of fresh capital into the line.
These bailouts came after the shipping line had suffered the worst financial period in its history. In the 19 quarters between the beginning of 2008 and the third quarter of last year, when it last released financial figures, it had turned a profit in just five quarters. The best result was in the fourth quarter of 2010, when it made nearly $100m – although that included $118m gained by the sale of its stake in the Nigerian container terminal Tin Can Island to China Merchants.
French liner consultancy Alphaliner said that the line had posted cumulative losses of $1.3bn from the beginning of 2008 to the third quarter of last year, while its equity base had shrunk to just $198m.
Meanwhile, it has a series of newbuildings currently under construction at two South Korean yards – according to Clarksons’ data one a series of nine 12,600teu vessels ordered at $170m each, and the second a series of four 10,600teu vessels – all supposed to be due for delivery in 2015. For a number of months it has been trying to negotiate down the price of the first series, which it ordered at the height of the market – new vessels of that size are now going for around 60% of the value they were ordered at – as well as to delay the actual delivery of the vessels. Nonetheless, it is still committed to advance payments on the ships. In its last annual report it revealed that it has so far paid £235m in deposits, while one of the yards is to be paid a deposit of $137m this month, with a further $51m due later in the year. In addition, the other shipyard is due a $47m deposit later this year.
So will Zim need further funds? It seemed to think at the end of November when it released its third quarter 2012 results, announcing an $18m net profit: “Zim recognises that there is still uncertainty and potential volatility in market conditions. Therefore, should the need arise; it will approach its financing partners, who have been supportive in the past, to achieve certain concessions or additional flexibility to help the company overcome any difficult period,” it said.
Which prompts the further question that if it does need further cash, how much will that be, and will it be under a threshold considered justifiable to its majority owner? And there are few outside its Haifa headquarters that could even hazard a guess at the answers.