There’s no end in sight for the record-breaking trans-Pacific container freight market boom. Now, there could be a new, more direct way for traders and investors to bet on this ultra-hot market. Israeli liner operator ZIM has just filed for an initial public offering (IPO) and New York Stock Exchange (NYSE) listing.
This marks the fourth attempt to bring ZIM public since the Ofer family took the carrier private in 2004. As with the rest of the container industry, ZIM has traveled a rocky road over the past decade. It was forced into two major restructurings of its debt and ship leases, one during the financial crisis and one in 2015.
But the fourth time could finally be the charm for the IPO. As reported by American Shipper several days before the ZIM filing, there has not been a successful shipping IPO in the U.S market since 2015, yet ZIM appears the most likely to break the losing streak. Given today’s unprecedented rate froth, the trans-Pacific container trade, the timing couldn’t be better.
Direct exposure to trans-Pacific
Almost all U.S.-listed container stocks are companies that lease ships or boxes to liners. When liners prosper via high freight rates, leasing company stocks rise (due to lower counterparty risk and higher charter renewal rates). Nonetheless, lessors are one step removed from the freight market.
In contrast, liner companies are directly exposed to ocean freight rates. But there is only one liner in the U.S. stock market: Matson (NYSE: MATX).
Matson has significant exposure to Asia-U.S. rates. However, it is primarily a Jones Act operator with higher exposure to domestic markets, including tourism-reliant Hawaii.
Meanwhile, Maersk, the world’s largest liner operator, does have U.S.-traded American depositary receipts (OTC: AMKBY), but its common shares trade in Denmark.
A NYSE listing by ZIM would offer U.S. stock investors the most direct exposure possible to the Asia-U.S. freight market. According to Alphaliner, ZIM is the world’s tenth largest liner, but it is the most exposed to the trans-Pacific. It had 52% of capacity deployed in this trade versus the industry average of just 19% as of October.
Exposure to downside import risk
This also means that ZIM is more exposed to a collapse in U.S. containerized imports than any other liner company. On a positive note, there is no evidence this will happen anytime soon.
As of Saturday, there were 34 container ships waiting at anchorage off Los Angeles/Long Beach; congestion is more extreme than ever. As of Friday, Asia-West Coast rates (SONAR: FBXD.CNAW) were at an all-time high of $4,200 per day, according to the Freightos Baltic Daily Index.
The seeming contradiction — a U.S. import boom amid a pandemic with outsized infections in the U.S. — is explained by data from the Bureau of Economic Analysis. Despite surging unemployment and poverty, overall U.S. personal income has increased due to stimulus. Spending on services has plummeted, leading to a surge in savings as well as much higher spending on goods (i.e., imports).
With more stimulus coming in 2021, and vaccines likely to give consumers more confidence to draw down savings inflated in 2020, imports — and thus ocean freight rates — appear likely to continue their bull run into at least the second quarter.
ZIM filed its publicly accessible IPO registration on Dec. 30 (its first confidential filing was Sept. 30; see full Dec. 30 filing here). Citigroup, Goldman Sachs and Barclays are serving as global coordinators, with Jefferies and Clarksons Platou Securities as joint bookrunners.
Although price targets and IPO timing have yet to be set, ZIM seems likely to strike while the iron is hot. American Shipper has been told that talks with prospective investors are beginning this week. Thus, it seems all but certain that ZIM’s Wall Street move will happen during a period of extremely elevated trans-Pacific rates.
ZIM is different than other liners
Most ocean carriers are either regionally focused or are global, providing ships on all major lanes. ZIM is in between. ZIM said it is “uniquely positioned as a global carrier but one that focuses on select trades where it believes it can establish a competitive advantage.”
Most carriers own about half their fleet. Here again, ZIM is different. It owns only one of its 70 vessels, or 2% of its fleet.
ZIM also differs from other carriers in that it leases 89% of its containers and owns a mere 11%. Most carriers own closer to half their containers, with Maersk recently affirming that it will move to own even more.
ZIM maintains that its leasing strategy allows it to maintain a sizable presence while limiting capital costs and maintaining flexibility.
On one hand, this is a plus. While more leased assets are listed in the asset column of the balance sheet under new accounting rules, ZIM can still claim to be “asset-light” — a category today’s investors heavily favor over asset-intensive businesses like traditional shipowners (one reason why there have been no shipping IPOs in New York since 2015).
On the other hand, the reason most liners own half their fleets and half their boxes is that if you own assets for their full lifetime, it’s cheaper to own than lease. Plus, leasing all your ships and boxes exposes you to surging charter rates — exactly what is occurring today.
As of Sept. 30, 78% of ZIM’s leases had less than one year in duration. As previously reported by American Shipper, ship leasing rates are going “through the roof.” Thus, the high upside exposure to surging trans-Pacific revenues could be counterbalanced by higher near-term charter costs.
Big debt load
Another area of potential concern for IPO investors: ZIM’s debt.
As of Sept. 30, total outstanding debt was $1.7 billion, up from $1.6 billion as of Dec. 31, 2019 and $1.46 billion as of Dec. 31, 2018. The increase in the first nine months of 2020 was primarily due to a $101.4 million increase in lease liabilities. Current trends in charter markets imply that these liabilities could escalate.
ZIM’s current assets were $823.4 million and current liabilities were $975.9 million, equating to a working capital deficit of $152.5 million. Total equity was negative $95 million.
In December, indentures on ZIM’s Series 1 and 2 were amended to allow the company to pay up to 50% of annual net income in dividends. This revision followed $47 million in ZIM repurchases of Series 1 and 2 notes over recent months.
Yet operational restrictions remain. In general, ZIM’s restructuring-induced debt constraints raise the question: To what extent does ZIM lease virtually all of its assets as a strategic decision, and to what extent does it do so because it has to?
ZIM acknowledged, “The terms of our Series 1 and 2 notes currently limit our ability to buy or charter large vessels for long periods of time.”
The carrier is seeking ways around this limitation. It currently operates a fleet of ships of up to 12,000 twenty-foot equivalent units (TEUs) in size. It stated in its prospectus that it “is exploring long-term lease arrangements” for 15,000-TEU ships to be deployed in the trans-Pacific. These would replace short-term charters, “which would increase our ability to service such routes.”
There are other red flags in the prospectus as well, beyond debt issues and exposure to spiking charter rates. One is insider equity sales. As a result of its restructurings, prior holders of ZIM lease obligations and debt now own a material percentage of the company.
According to the prospectus, the largest shareholder is Kenon Holdings, controlled by Idan Ofer, with 32% of pre-IPO shares. The second largest shareholder is Deutsche Bank, with 16.7%. The third largest holder is Danaos (NYSE: DAC) with 10.2%.
Companies like Danaos and Deutsche Bank could theoretically exit positions once ZIM is freely trading on NYSE and lockups expire.
ZIM conceded, “The perception in the public market that our shareholders might sell our ordinary shares could depress the market price for our ordinary shares and could impair our future ability to obtain capital, especially through an offering of equity securities.”
Related-party deals and ‘Israel factor’
ZIM also features another commonplace red flag among shipping companies: related-party transactions.
The company paid $22.4 million in full-year 2019 for charters of Ofer-controlled ships and $19.4 million in the first nine months of 2020. During these periods, it paid $41.4 million and $22.5 million respectively for charters to shareholder Danaos.
The company also has risks related to being Israeli. The state of Israel holds a special or “golden” share in the company, which imposes various restrictions. Provisions of Israeli law impede a potential sale of the company. Israel has the right to requisition ZIM’s vessels. ZIM’s employees could be required to perform military services, impairing operations.
ZIM conceded that its status as an Israeli company “may limit our ability to call on certain ports and therefore could limit our ability to enter into alliances or operational partnerships with certain shipping companies, which has historically adversely affected our operations and our ability to compete effectively within certain trades.” It confirmed that “certain carriers … are not willing to cooperate with Israeli companies.” Click for more FreightWaves/American Shipper articles by Greg Miller
MORE ON CONTAINERS: Trans-Pacific rates just popped to a new all-time high: see story here. Container shipping 2021: hangover or party on? See story here. Liner capacity control and the future of container shipping: see story here. Container rates are on fire. How can you invest in that? See story here.