Charterers call for huge rate cuts and threaten defaults

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David Osler - Wednesday 11 February 2009

 

THE economic downturn is pushing some charterers to demand that rates be slashed by up to 75%, with one top London shipping law firm now receiving an average of one instruction per day from owners seeking to avoid threatened charter default. 
In some cases, charterers flatly state that they cannot keep up agreed terms and will hand back the ship unless a sweeping reduction is granted. 
Banks are keeping a weather eye on the situation, in the awareness that if a charterer does not pay an owner, the owner may not then be able to keep up its mortgage payments. 
While market sources confirm that banks remain reluctant to foreclose given the precipitous plunge in secondhand vessel values, one leading shipmanager has indicated that it is involved in two potential foreclosures, and expects more such cases in 2009. 
Harry Theochari, head of the shipping group at Norton Rose, revealed: “We’ve seen one situation where a charterer has come to an owner and asked for a reduction in a small tanker from $30,000 per day down to $10,000.” He has also heard tell of requests pitched even higher in percentage terms, with one charterer reportedly asking for day rates to be dropped by 75%. 
Work of this nature began to trickle into the leading London law firm late in January, and has increased steadily ever since. As of February 10, a total of 10 instructions had been received in the current month. 
“Our clients will obviously say no,” he warns. “We act for banks and owners on the most part, and their answer is invariably no. A bargain has been struck and they expect that bargain to be honoured.” 
However, there are indications that where a good working relationship has been established, successful renegotiations of a moderate order may take place without lawyers getting involved. 
“Our perception at the moment — talking to people, talking to banks — is that everybody is trying to work things out. There is no incentive for people to kick each other in the balls right now. 
“If you are one of these big trading houses and you’ve taken 30 or 40 capes and you are paying on average $50,000 per day for those, you simply cannot make that a viable proposition if you are chartering out at between $3,000 and $10,000. You’re losing $40,000 per day times 50, and that’s simply not possible for an organisation to survive for any period of time.” 
Mr Theochari adds that banks are in no rush to foreclose on shipowners for loan defaults, because in most instances they will not recover the outstanding debt. Even conservative bankers who lent 60% on a capesize once worth $100m know that it is only worth $30m-$35m in the current market, making foreclosure pointless. Instead, they are willing to talk matters through with customers to see if a solution can be found. 
To date, Norton Rose has yet to receive any foreclosure instructions stemming directly from the downturn, although there have been a couple of cases involving shipowners who would have been high default risks whatever the economic climate. However, a prominent third party shipmanager reports involvement in two foreclosure projects that will see it running vessels on behalf of banks, and expects so-called ‘distress work’ to increase throughout this year. 
“From mid-January onwards, we’ve seen an increasing level of activity and conversations. It’s not just shipmanagers, it’s all those parties that need to be involved once a bank has to take action,” said a source at the company. 
“Actions are beginning to be taken, although I wouldn’t say it was widespread or commonplace at this stage. We’re certainly more engaged in projects now, albeit at an early stage in the majority of cases. There’s been an uptick in activity, real activity.” 
“The situation will get worse. The banks will slowly, slowly become more active and take tough decisions. I think there is more business for the lawyers, the work-out specialists, for service suppliers like ourselves. It’s a very difficult one to read, but the next few months will be busier and busier. We will have to make more resources available for distress work.”