Rough waters ahead for shipping industry
Published November 21, 2011
Rough waters ahead for shipping industry
Banks’ selective lending policy adds to shipping firms’ woes caused by low freight rates
By LYNN KAN
(SINGAPORE) The shipping sector is set for further bankruptcies and restructuring exercises as it battles challenging operational conditions. Industry watchers predict tougher times ahead with the ongoing shipping downturn – thanks to depressed freight rates – claiming its latest and most high-profile victim last week.
New York-listed General Maritime, the United States’ second-largest owner of tankers, sought Chapter 11 bankruptcy protection on Nov 17 after securing a rescue package from key creditors to allow its operations to continue.
First Securities ASA analyst Erik Folkeson said: ‘If the market stays at this level for a long time, many companies will go the same way. They will have a need to deleverage and increase their liquidity. We will see a lot of restructuring.’
Karnan Thirupathy, partner at legal firm Kennedys, agreed. ‘With charter rates falling, we’re probably going to see more owners getting into financial difficulties. In a falling market, owners will find it increasingly difficult to charter their vessels at sustainable rates.’
Freight rates for oil tankers are now at challenging 14-year lows. Single-voyage rates for very large crude carriers averaged US$7,627 a day this year, compared with US$32,006 in 2010. Other segments of the shipping market show a similar drop-off in rates. Spot rates for capesize bulk carriers were as high as US$230,000 at their peaks in June 2008 but have since fallen to US$30,000 in October this year.
As for General Maritime, or Genmar as it is known, it reached agreements with its key lenders, Nordea Bank and Oaktree Capital Management. Oaktree will inject US$175 million of fresh funds and convert US$200 million of secured debt committed in April to equity. A group of lenders led by Nordea also agreed to extend up to US$100 million of debtor-in-possession financing to Genmar, which racked up US$1.4 billion in debt.
All of Genmar’s units, except those in Portugal, Russia, Singapore and certain inactive ones, have also started Chapter 11 cases.
Said Genmar’s CFO Jeffrey Pribor: ‘Our operations are strong, but continued macroeconomic weakness and reduced tanker rates have diminished our cash flow and our ability to comply with certain covenants.’
The downturn also claimed one of Korea’s largest bulk ship operator, Korea Line Corp, earlier in the year. And Danish tanker operator Torm is now negotiating to reschedule its US$1.84 billion debt and planning to raise US$300 million in a rights issue.
The situation of beleaguered shipping companies is not altogether unexpected. Due mainly to an oversupply of ships, as companies put in a flurry of orders during a seven-year shipping boom that ended in late 2008, vessel values and freight rates have since nosedived. Earnings have similarly been dented, which has affected ship owners’ abilities to shoulder their financial obligations.
In Singapore, mortgage enforcements resulting in ship arrests have been on the rise – hinting that ship owners are finding it difficult to pay their banks.
From January to August, the Sheriff’s Office arrested 64 ships, up from 49 last year. Some law firms estimated that about 50 to 60 per cent of these are enforcements by banks.
Explained Alastair MacCauley, partner at law firm Mayer Brown JSM: ‘The current situation is that owners have ships whose values have diminished substantially, and they are required to provide additional security or partially pre-pay their existing loans. And charter rates are depressed, often to a level which barely meets operating expenses with little left over for debt service obligations.’
Adding to these companies’ financial woes are banks growing far more selective in their lending to the shipping sector. ‘For the banks that are still lending, the level of financing, pricing and security will reflect an inevitably conservative attitude to shipping risk at the present time,’ Mr MacCauley added.
But not all shipping firms are indiscriminately affected. Mr Thirupathy said: ‘Owners that have entered into long-term charters with the more reliable charterers, including the large trading houses and the trading arms of the large banks, are likely to be less vulnerable.’
Also, those operating LNG tankers may be spared, as demand – particularly from Japan after the Fukushima earthquake – has soared.
LNG tanker spot rates are now at US$110,000 a day compared to north of US$38,500 a year ago, estimates Jayendu Krishna, senior manager of Drewry Maritime Asia (Singapore).
Singapore’s own Neptune Orient Line experienced wider-than-expected losses during the peak period in Q3, along with other listed container lines.
Said DBS Vickers analyst Suvro Sarkar: ‘We remain pessimistic on the container liners’ outlook in the near term. Unless we see a coordinated effort by the liners to lay up capacity to the tune of at least 5-6 per cent of fleet or clear signs of inventory restocking activities in the US, we are unlikely to call for a bottom.’
Still, to some funds and private equity firms, distressed companies and pummelled vessel prices pose a good investment opportunity. In August, a consortium consisting of First Reserve Corp, WL Ross & Co and sovereign wealth fund China Investment Corp pumped in US$1 billion of equity to acquire 30 tankers.
However, not all investment ventures within shipping may be worthwhile.
Mr Thirupathy cautioned investors to consider the risks of vessel underemployment, low charter rates and unreliable charter parties as operators are at the moment chopping voyages.