First International

Putting the squeeze on ship finance

THERE have been many messages over the holiday period relating to banking and its future in today’s world.

The primary concern has come from the sovereign-debt crisis faced by all countries in the eurozone and related losses from the Greek default, and from the huge funding problems that other eurozone countries face.

As the credit ratings of many of these countries have been downgraded, so the value of their bonds held mainly by eurozone banks has declined and the cost of any new borrowing has risen.

Unfortunately the major lenders to the shipping industry are European, although not all are in the eurozone, and they face serious problems in all their portfolios.

The German banks led by HSH Nordbank and Deutsche Schiffsbank have large levels of non-performing loans and although some have been moved to ‘bad banks’, they remain a huge negative influence.

The new Basel rules bring another issue into play. Shipping is classed as high risk and therefore to be avoided in any new lending. This will severely constrain all banks despite some still claiming that they are looking to lend to shipping.

Shipowners will have to work hard to differentiate themselves from the shipping masses — or should that be messes? — facing demand for more equity and needing to fix employment for ships under charter contracts with reputable cargo owners.

Ordering new ships with no charter cover or buying existing ships to trade in the spot markets is a high-risk gamble costing billions of dollars that equity investors and bankers will not recover in rising markets.

In much the same way, the sovereign debts of Greece, Portugal, Spain, Italy and Ireland will not be repaid in full, however long they stretch out. This will affect the balance sheets of banks in stronger eurozone countries such as Germany and France, impairing their lending capabilities.

Shipping companies need to make major corrections, writing their asset values down to current market levels, and their banks will need to convert some loans to equity. Otherwise, shipping companies will go bankrupt, their assets sold for a deep discount on book values. This will see the banks take huge losses and wipe out equity.

Some of the major European banks have effectively closed their doors to shipping and tried to sell their portfolios without success. This has reduced the active banks to a handful focused on high-quality customers that do not fund newcomers. Private equity and hedge funds are looking to fill the lending gap, but on terms that the industry cannot afford.

A large number of undelivered ships are not fully financed, their cost price higher than their market value. Banks face the choice of funding the delivery or losing the instalments they have funded thus far.

There have been numerous delays in this process but the shipyards too need payment. It is likely that the banks will end up owning the ships, with the equity lost, then selling them into the markets.

With no hope for any meaningful or lasting recovery in any markets, it is time for shipping companies to shrink themselves to levels where the ships can trade profitably on contracts and for the banks to convert some of their loans to equity.

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