AlixPartners: Some carriers struggling to pay for capex, debt

The consulting firm’s Hong Kong director says a proportion of carriers are still not generating enough cash to pay for ship building programs, or worse, to pay off debt, though the industry as a whole is getting better financially.    The container shipping industry is gradually improving its financial performance but vulnerabilities remain for select carriers, according to AlixPartners’ Hong Kong Director Brian Nemeth.
   Nemeth said in a presentation at the TPM Asia conference in Shenzhen Wednesday that seven carriers had negative earnings before interest, tax, depreciation and amortization in 2011, a number that had fallen to just one in 2014.
   Nemeth noted, however, that five carriers are currently not generating enough cash to pay their debts, though the industry as a whole is relatively healthy in this metric. Finally, Nemeth said a number of carriers didn’t have enough cash from operations to finance newbuilds between 2011 and 2014, meaning they had to seek outside sources of funding for capital expenditures.
   AlixPartners tracks 17 of the top publicly-owned carriers to measure industry health.
   A positive sign, according to Nemeth, is that the debt-to-EBITDA ratio among those carriers declined collectively from 2013 to 2014 and has declined again from 2014 to 2015 year-to-date.
   The carriers’ collective Z-score, a measure of the financial precariousness of a given businesses or set of businesses, has followed a similar pattern, improving in 2014 and this year.
   “We’re seeing improvement but there’s still a lot of work to do,” Nemeth said.
   He applauded decisions by financially strapped carriers to divest non-core assets like container terminals and logistics businesses to pay off debt or to internally fund newbuilding programs.
   “The way mega-vessels are operating, the proprietary terminal is becoming a thing of the past,” he said. “They need to be more multi-use. If carriers have proprietary terminals they can’t turn into multi-use, look for them to sell them off.”
   As far as the logistics unit divestures go, Nemeth said a partial driver in those decisions is the reality that shippers were always leery of the connection between a logistics company and a sister container line, and that if a spin-off alone didn’t work, an outright sale is a smart move. That’s particularly the case this year, given the high multiples logistics companies are selling for.
   As for carrier consolidation, Nemeth said he expects to see some activity following on from the merger of Hapag-Lloyd and CSAV earlier this year, the first major merger in a decade. But that activity is contingent upon any sellers (and their shareholders) aligning price expectations with what the market is dictating.
   Still, overcapacity remains a problem that carriers won’t be able to outpace in the short term.
   “We’re at least two to three years out of supply-demand equilibrium,” said Nemeth. “The good news is that carriers are looking to improve their financial position. They’re being realistic.”
   And if this is any indication of a cooling on container line sentiment, Nemeth said a year ago he fielded calls every two to three weeks from private equity funds wanting to learn more about the shipping industry. But he hasn’t received a call in four months.
   “That has gone away,” he said. “The shine has worn off.”