Thursday, January 08, 2009
Thursday, 08 January 2009
Although events have escalated since the collapse of Lehman Brothers in September last year, financial markets have been turbulent since the sub-prime crisis started to rear its head in the first half of 2007. As far back as the third quarter of 2007, there was considerable speculation about possible bank losses, mainly stemming from the sub-prime crisis. It was widely thought at the time, however, that these losses would not have a material impact on the solidity of financial institutions, and that once the actual 2007 figures were published in the second quarter of 2008, things would more or less return to normal.
During the first half of 2008, it became clear that the crisis was deeper than originally thought, and increasingly it became a worldwide issue. In March 2008, Bear Stearns was dramatically taken over by JP Morgan.
By year-end, growth in the world economy had come to a halt and recession was evident in leading nations, despite strenuous efforts by governments to support banks and spark an economic rebound.
After several hectic years, the underwriting activity that produced a large market for syndicated shipping loans - and bank loans in general - had come to a near-standstill. Activity was surprisingly high in Q2 and Q3 last year but is now very limited.
So what are the banks doing these days? Well, as liquidity in the medium and long-term interbank markets is almost non-existent and as economies continue to cool, they are focusing almost exclusively on existing clients rather than on growing their loan books. The few transactions that are taking place are on a club deal basis, with many banks taking much smaller stakes than previously.
Because capital has become tight, the price has increased, the tenor has been shortened and covenants have been strengthened.
As in most industries, there are cycles in financial markets. Although they usually reflect the global economic situation at the time, the situation today is unique insofar as the banks have been hit so early and so strongly in this downturn.
Things deteriorated extremely quickly - from a borrower's market in the first half of 2008 to a lender's market before the year was out.
The shift resulted from funding and liquidity issues caused by the failure of the financial markets to function properly. Banks have had to become more restrictive about lending as they grapple with higher loan-loss provisions.
Standard & Poor's is forecasting that global corporate default rates across all industries will increase dramatically, which will put added pressure on the banks.
There is speculation now about how many tens of billions of dollars of the order book for merchant vessels have not yet been financed. Unless orders are cancelled, about US$70 billion a year needs to be financed over the next four years.
What will happen? This year, we expect that most newbuildings will be delivered as planned, since the building process has gone a long way. In 2010 and beyond, the big question is how many orders will be delayed or cancelled.
Some sources reckon that about 25 per cent of the total order book will be cancelled and that many other orders will be delayed. The fact is, it is much too early to say, although we have already seen cancellations and delays.
Due to different market outlooks, it is clear some segments will be harder to finance than others. According to Norwegian shipbroker RS Platou, up to 40 per cent of orders in the dry bulk sector will have to be cancelled, or the market will be destroyed for several years. The impact of this statement is that financing in the dry bulk segment is likely to be more challenging than financing in other shipping segments.
As things are now, commercial banks alone cannot fill the approximate financing need of US$300 billion over the next four years. And even though this need is likely to be reduced by cancellations, other financing sources will have to be used. These sources are more equity from shipowners and a bigger but more costly bond market. In addition, we expect that export credit agencies in the main shipbuilding nations will become more active than in the past, to shore up shipyard employment.
Doubtless, come April 2009 when the Sea Asia conference and exhibition takes place in Singapore, we will have a clearer picture of how the market is likely to develop in the rest of the year and beyond. And these issues will no doubt be discussed fully by Sea Asia participants.
As adapted from Business Times Singapore