Zim Integrated Shipping Services, the international shipping subsidiary of The Israel Corporation, has managed to remove a major threat to its financial stability by coming to an agreement to cancel an order for five new ships and defer delivery of four others.
Zim also secured the right until next January to rescind orders on those four remaining ships, which are now scheduled for delivery in 2016.
The vessels were ordered from a South Korean shipyard in 2007 and 2008 at a cost of $171 million each in a deal worth around $1.54 billion. The initial delivery date was scheduled for last year, but it was deferred until 2015 due to the crisis in the global shipping industry and Zim’s poor financial state.
Under an agreement reached on Monday, the deal for the delivery of five of the ships, worth $855 million, will be scrapped immediately. Zim had put down an $85 million deposit on the ships and will get $30 million of that back. The remaining $55 million will be considered a cancellation fee.
The renegotiated deal also calls for the delivery of the four remaining ships to be delayed from 2015 to 2016, unless the $684 million purchase is also scrapped. That would entail a cancellation fee of $68 million.
Zim will be making a $133 million provision in its fourth-quarter 2012 financial reports for the renegotiated deal. Because its shareholder equity stood at $198 million at the end of the third quarter of last year, the company will be wiping out most of its equity by the provision, assuming that it did not make a substantial profit on its operations during the quarter.
Zim’s bank loan criteria do not include a minimum level of shareholder equity, so the reduction will not violate any of the company’s financial obligations.
Furthermore, the rescinding a portion of the ship order in Korea will save Zim a $235 million payment it was committed to make this year towards the construction of the ships. Its cash on hand and its cash flow surplus from current operations would not have been enough to meet the payment.
Zim had also committed to its banks that it would have $80 million on hand at the end of every month as of the end of last year.
If it had not renegotiated the deal with the Koreans, and had not gotten an additional cash injection from The Israel Corp., it’s reasonable to assume that Zim would have been forced to issue a going concern warning, raising the specter that it might no longer continue to stay in business.
The deal that Zim has struck to cancel ship orders is a significant accomplishment.
Not only did it succeed in getting back the $30 million, which is unusual under such circumstances, but also gains because the price tag on ships at the time they were ordered was substantially higher than it would be now. The ships ordered also have less fuel-efficient engines than are available today.
Zim is now free to order less expensive and more fuel efficient ships instead. In fact, the company reported that it placed a preliminary order with another shipyard in January.