Tuesday, November 25, 2008
Britannia Bulk borrowed its way to quick demise
Tuesday, 25 November 2008
When Britannia Bulk, a London-based specialist in moving coal from the Baltic to the UK, listed on the New York Stock Exchange in June, its pros-pects seemed golden. The company's business model, under which it chartered vessels from other companies to add to the modestly sized fleet it owned directly, made it flexible and let it respond fast to changing market conditions, the prospectus said. However, on October 31, less than five months after the stock exchange listing valued its shares at $404 million, Britannia Bulk put its main trading subsidiary into administration. The model, it seemed, was no longer working; a slump in rates meant Britannia was paying about 30 times as much to charter some vessels as it could then earn by chartering them on to others.
Meanwhile, the value of its directly owned ships had plummeted, prompting its banks to demand extra collateral. To make matters even worse, it had also lost money speculating on shipping derivatives markets.
Much of the world's dry bulk shipping industry faces similar problems to Britannia Bulk, even if few have been so spectacularly wrong-footed. In particular, there is widespread market speculation that many shipowners could be facing severe losses after mistaken derivatives bets on the direction of dry bulk rates during October.
Charter rates are now so far below anticipated levels that many in the industry either cannot afford to honour previous agreements or are being tempted to break them, knowing vessels are available for a fraction of the agreed price.
Shipowners and shipyards are also scrambling either to escape now unsustainable contracts signed during the market highs to buy and sell ships or to hold unwilling counterparties to their obligations when they would rather escape.
Michael Bodouroglou, executive chairman of New York-listed Paragon Shipping, likens market participants' concerns to those in the financial industry at the height of the panic following Lehman Brothers' collapse in September.
"People are not sure whether their counterparties will perform, including the charterers and the big companies with successful histories of many decades behind them," he says.
Priorities
One of the top priorities is to halt the slide in charter rates and vessel values, an area where many believe banks could be crucial.
The financial industry has helped to push charter rates down by largely stopping financing trade.
Specialist shipping banks - the largest of which is HSH Nordbank - are also increasingly reluctant to lend either for ship purchases or any other purpose.
The vital question, according to Quentin Soanes, a director of London-based Braemar Shipping Services, will be whether banks now start calling in loans. Many would be justified in doing so according to their loan agreements.
However, even though many vessels' values are now well below the specified levels, widespread action by banks over such clauses could prove self-defeating. "If you start to exercise that clause it tends to fuel falling prices, because the implication is the owner has to put more cash in and, if he doesn't, you foreclose," Soanes says.
"Then, if you have a number of ships coming to the market at the same time, the value falls."
The next priority is to restore some confidence. Plans by Freight Investor Services, a freight derivatives broker, to set up a "netting" arrangement to pool the obligations of ship charterers, owners and operators to each other, should make it clearer which market participants are having difficulty meeting their obligations.
At present, the position is obscured by the extraordinary complexity of the chartering arrangements for many vessels. Many are chartered by an operator from an owner for several years, then chartered on to another operator for a shorter period for a slightly higher per-day rate.
Martin Sommerseth Jaer, an analyst at Oslo's Arctic Securities, says he has found chains of charters up to 15 contracts long. If only one party to such a contract defaults on its obligations, the entire arrangement - on which the owner may have based long-term financing plans - could collapse.
"We're trying to ensure the industry adopts new practices to try to solve these issues," John Banaszkiewicz, a director of FIS, says. Yet even if FIS's innovative scheme works and bank foreclosures are limited, it is unclear how soon the industry will return to normality.
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