Carriers’ insolvency risk comes under the spotlight
The deteriorating global economic outlook, which pushed container shipping lines to withdraw an unprecedented amount of capacity in April and May, will hurt carriers’ operating cashflows and further weaken their fragile balance sheets. According to Alphaliner’s survey of the main carriers’ Altman Z-Scores as at the of 2019, seven out of the eleven carriers have Z-Scores of less than 1.3, indicating a ‘very high’ likelihood of potential insolvency. The other four carriers (Hapag-Lloyd, Maersk, OOIL and Wan Hai) had healthier Z-Scores of 1.72 to 1.92 points, but could also come under pressure if the demand contraction is stretched over a prolonged period. Carriers with elevated leverage ratios are especially vulnerable, in particular those with high levels of short term debt that are due this year. Of the eleven carriers surveyed, six have negative working capital (current liabilities exceeding current assets) - including CMA CGM, Hapag-Lloyd, HMM, PIL, Yang Ming and Zim. Carriers with poor track records of negative earnings are also particularly at risk, with three carriers’ Z-scores lowered due to their negative retained earnings (HMM, Yang Ming and Zim). Since the of March, credit rating agency Moody’s has changed the credit outlook for several carriers from ‘s’ to ‘negative’ (Hapag-Lloyd, Maersk, MOL and NYK) and placed CMA CGM’s credit ratings under review for potential downgrades. Moody’s highlighted the high depency that container carriers have on world trade, as well as industrial and consumer demand which would all be negatively impacted by the lockdowns and quarantine measures being implemented around the world.