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© José Lledó | Dreamstime.com

We will continue to be independent, building on our personal links with our customers, for which we are so well known in addition to our ongoing technological initiatives such as our successful blockchain project.” ZIM Integrated Shipping Services, 19 July 2018.

How troubled is ZIM? I asked my sources, following a second-quarter update that did little to boost the bulls’ morale in the liner industry?

“The damage can be contained,” one senior industry executive argued, which was generally a bullish view shared by others, including ZIM insiders.

However, I expect the Israeli ocean carrier will find it hard to avoid another round of financial restructuring as soon as next year, following those between 2014 and 2016.

Ties

Its recent results confirmed broad shipping industry trends, and were preceded by the pivotal announcement, on 19 July, of a seven-year cooperation with the 2M Alliance, aiming for “a major upgrade” of its Pacific services.

The deal should lead to improved port coverage and transit times, although reliability has never been a big issue for this niche player. However, its financial position has long been problematic, and little has been done to address this properly since the turn of the year.

Deeper ties with Maersk Line and MSC should not surprise The Loadstar readers: “Maersk Line and MSC are the most likely suitors”, I wrote one year ago as I highlighted certain financial risks to its prospects as an independent container shipping operator.

MSC remains the less-likely buyer, while a tie-up is not compelling for Maersk. But it could be driven by necessity, as ZIM, in its current shape and form, needs new ownership – essentially to be part of a carrier with a stronger consolidated balance sheet – as opposed to new partnerships; to become a viable business, at least financially.

Several changes in its management team have not moved the needle, while talk of a public listing has become history. Although a large equity injection would be good news, the most pressing need now is to comply with certain covenants, because their breach could lead to another debt-for-equity swap at some point down the line.

Warnings

At the end of last year, its debts rose and total indebtedness on 30 June was only slightly lower than on 31 December. The amount it needs to repay over the short term is meaningful, particularly when you consider its cash generation in choppy markets and its average debt duration.

ZIM debt (Source: ZIM)

“As at December 31, 2017, the company is in compliance with its financial covenants. According to these consolidated financial statements, the company’s liquidity, as defined in the related agreements, amounts to US$182m (minimum liquidity required is US$125m),” it said at the end of last year.

Not only have cash balances fallen since, but they have also deteriorated in terms of quality. Moreover, the minimum liquidity requirement is only one of three key financial covenants for a business that this year could end up with a net leverage – as gauged by net debt to projected 2018 ebitda – well over 10x, which could double comparable forward metrics of most of its larger rivals, even following the implementation of additional efficiency measures, based on my estimates.

Given bunker, lease and port expenses trends, seeking new efficiency measures with Maersk and MSC is understandable, but deeper problems are rooted in its balance sheet, as well as in its P&L, in a market where, as it acknowledges, liquidity and the “risk of deviation from financial covenants depend on the recovery of the shipping industry and especially the freight rates”, and “the levels of bunker prices” – fast-rising bunker prices are a second, key headwind it did not foresee as a possible hurdle at the end of 2017.

ZIM expenses (Source: ZIM)

Risks

In the first half, ZIM struggled despite gaining share and lower interest expenses. First-half losses stood at $67.3m, against a loss of $4.1m one year earlier.

Financial problems already appeared at gross profit (GP) level, with GP plunging to $49.9m against $132m in the first half of 2017, triggering hefty operating and net losses.

ZIM P&L (Source: ZIM)

After a decent first quarter this year, cash flows fell considerably in the three months ended 30 June, while its gross cash position deteriorated, pushing it closer to breaching its liquidity covenant.

ZIM Q1 cash flows (Source: ZIM)

 

ZIM Q1 + 1H cash flows (Source: ZIM)

The company recently renegotiated the terms of two of its covenants, which are now more stringent – although that is after the original terms were waived.

Old covenants (Source ZIM)

 

New covenants (Source ZIM)

Moreover, as far as its core liquidity covenant is concerned, ZIM said $166m of liquidity was available on 30 June, but that amount included so-called “contract assets”, which, contractually in the debt agreements, may be treated as cash and cash-like securities, but in terms of liquidity risk, should rank higher than cash and cash equivalents.

ZIM has pulled out all the stops to get this far, having already agreed three years ago, for example, to securitise its receivables to a special-purpose vehicle (SPV) included in its consolidated financial statements – it “has control, for accounting purposes, over the entity in accordance with the criteria determined in IFRS 10, consolidated financial statement”.

“As of December 31, 2017 and 2016, the receivables purchased by the SPV are securing the repayment of the ‘deferred amounts’”, it said in its annuals.

Deferred amounts (Source: ZIM)

Further to such rescheduling, it added, certain agreements of “container leases previously classified as operational leases were reclassified as financial leases, resulting in recognition of additional assets and liabilities in a total amount of US$73m”.

This, again, belies a company whose balance sheet is exploited and stretched beyond reasonable levels, and it now appears to have little option other than to hope it will enjoy more friendly trends than in the past few quarters.

Sailing solo in 2019 could prove little short of insane.

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