Zim Sailing Stormy Seas to Another Bailout

The Israel Corp. unit has $531 million in obligations coming due, and doesn't have enough cash to service them.

Yoram Gabison
Yoram Gabison
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Zim Integrated Shipping Services will probably find itself back on life support soon, since it doesn't have the wherewithal to meet its obligations in the year to come. Apparently it will need either another sizable cash infusion from its parent company, The Israel Corporation, or enter another debt restructuring arrangement.

The company has $531 million in debt repayments and other bills coming due over the next year, including $137 million next month. But it had only $182 million in cash on its books as of the end of September.

In the past four and a half years, Israel Corp. has pumped no less than $1 billion into Zim. To put this into perspective, the holding company's market value is $5 billion and its shareholders equity is $4.6 billion.

The injections helped Zim survive a $7 billion debt bailout at the end of 2009, a revision of the original bailout terms earlier this year, as well as last year's sharp drop in shipping rates.

Zim's next test is the $137 million first installment due in January to one of two South Korean shipyards that it contracted to build 13 freighters for a total cost of $2 billion. The next installment, $98 million, is due next September.

These ships, which were relatively expensive when Zim ordered them in October 2007, are scheduled for delivery by 2015. They will increase Zim's cargo capacity compared to what it was at the end of last year by 30%. The ships on order have an overall capacity of 113,600 TEU (20-foot equivalent units ).

It is doubtful, however, that Zim can make its payments on time while holding to its financial covenants. The company is obligated to maintain at least $80 million cash on hand at the end of each month beginning the end of 2012 or an amount equal to principal, interest and fees payable on its financial debt in the following three-month period - whichever is the greater of the two.

Zim will almost definitely violate this covenant if it pays the shipyard $137 million in January.

Delaying deliveries

Management said in its third-quarter financial statements that it was likely it would reach an accord on postponing delivery of the freighters, which would enable the company to push off making payments. So far there hasn't been any word on negotiations with the shipyards panning out, but the fact that construction hasn't yet begun could work in Zim's favor by presumably allowing the shipyards more flexibility.

A lack of agreement on rescheduling the ships' delivery would likely throw the issue into arbitration in London. This, however, would mean making an impairment provision for $235 million - the full amount advanced so far for the ships - which would wipe out all Zim's equity of $198 million at the end of September. In any case, such a move wouldn't violate the company's covenants, none of which make any restrictions on its equity position.

With $296 million in principal and interest to pay off in 2013, Zim's operational cash earnings - Ebitda - for the first nine months of the year amounted to just $102 million. So even in the event that it could use up all its cash, Zim will seemingly need to either make further credit arrangements, receive more funding from Israel Corporation, cash in on some of its assets, or combine these measures in some way.

Yet another set of restrictions Zim faces is its revised commitments to the banks dating from the beginning of 2012. These require it to achieve minimum Ebitda of $61 million in 2012, $180 million for the 12-month period ending March 2013, and $200 million for the 12-month period ending June 2013.

Market setback

Zim's ability to meet these covenants depends largely on the condition of the container shipping market, which has been quite bleak this quarter, and long-term trends - particular the launch of huge vessels with capacity exceeding 8,000 TEU. The September 2012 inauguration by rival Mediterranean Shipping Company of a direct route between Haifa, the United States and the Far-East using ships with capacity measuring 9,200 TEU doesn't bode well for Zim.

In the third quarter the company generated $125 million in operating profits, but that was before shipping prices plunged on several of its main trading routes. The price for shipping a container between Shanghai and Europe has dropped 30% the past few weeks while the price to the Mediterranean Sea and the Black Sea has fallen 40%. These routes provided Zim with 22% of its revenues in 2011. Meanwhile its tonnage also slipped lately as its ships have been forced to ply their routes with diminished cargos.

Part of Zim's drop in revenues has been offset by a 15% reduction in fuel prices to $600 per ton, but this only lessens the blow to profitability to a limited extent. As long as shipping prices stay at their current depressed levels, Zim will be hard-pressed to reach its operating profit targets of $120 million and $180 million for the 12 months ending respectively in March and June 2013.

Israel Corp.’s Idan Ofer.Credit: Aviv Hofi