SHIPPING investors wishing to start new projects will have to inject “100% equity” for the foreseeable future and make do with significantly lower returns, as bank financing disappears under a “new paradigm”.
Leading shipping bankers and investment advisors were unanimous in delivering this stark message at Mare Forum USA 2009 in Houston this week.
The world has seen trade volumes and money markets collapse simultaneously – the “mother of all coincidences”. A huge overhang of ship supply and pending newbuilding deliveries across all ship types, alongside shrinking global cargo volumes, means the weak freight markets will probably continue for at least five years.
As if these bleak fundamentals are not enough, all major banks are in serious trouble. Having written off scores of billions in bad loans, they have seen their ability to sell off their troubles disappear as the syndication markets collapsed.
The spectre of bank nationalisation – already being officially seen in Britain, with many other jurisdictions following suit even if tacitly – would lead to “prioritised” lending under state auspices to domestic projects, or for more bail-outs.
International trade, and shipping in particular, is likely to find itself marginalised almost completely as a borrower from banks under this scenario.
AMA Capital Partners managing director Robert Bowers said his firm is promoting a “100% equity” model – which means only people with ample cash in their pockets need apply.
“You can still find these people, but without bank financing there are significant limitations,” Mr Bowers said. “Even these investors with cash to invest will have to overfund [with their own money] up front, and hope to refinance and put leverage on these investments only at a later date.”
First International chairman Paul Slater said this date could be as much as a decade away, as the banking industry works through its current crisis.
Two bankers corroborated Mr Slater’s pessimism. DVB managing director Geir Sjurseth said the banking crisis will “get worse before it gets better”. Fortis managing director Harris Antoniou said this is banking’s “worst crisis since the Great Depression”.
The $1trn in credit losses taken by the world banking network will make even the most ambitious bail-out recapitalisations inadequate and banks will remain reluctant to lend for a long time to come, the audience was told.
Mr Sjurseth agreed that shipowners which have not yet financed their newbuildings under construction – with the world orderbook estimated at anywhere from $200bnn-$350bn – will have a tough time getting bank loans now.
Seemingly letting the audience in on a trade secret, he said no bank would give a penny today to a company that has bonds maturing within the next 18 months.
“Do not order any ships,” he advised.
Mr Bowers, Mr Slater and Mr Sjurseth were unanimous in saying the days of high returns and high leverage were over. Mr Sjurseth said he still has to deal with clients who have the old “25% equity and 75% leverage” mentality and expect big returns.
Mr Slater said today’s reality makes it impossible to plac massive amounts of debt on small chunks of equity. When it came to returns, he saw a fundamental realignment in the offing. The days when investors routinely demanded 30%-50% returns are also over, he said.
A very large crude carrier purchased at $125m is not going to be economically viable in the rate environment expected into the foreseeable future. It is only after a considerable capital write-down – and an accompanying lowering of expectations on returns – that such assets will seem viable again, Mr Slater said.
Mr Antoniou said recessions were necessary, and were the safety valves created by nature to absorb value erosion.
“The deleveraging stage is yet to come,” he said. “Investors need to be happy with lower returns.”
Mr Sjurseth concluded: “Banks and equity providers will have to find ways together. The latter need to change their mindset. As for banks, the revival will only start when the interbank market regains its operability – and that could be a while coming.”
Rajesh Joshi, Houston - Friday 13 February 2009