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Tuesday, April 07, 2009

Shipping finance: two sides to the story

Tuesday, 07 April 2009

The shipping finance and sale-and-purchase market is good or bad depending on which part you are in, sources say. From the perspective of banks and finance institutions, credit remains tight. Shipping finance will remain challenging in 2009, says Philip Clausius, president and CEO of FSL Trust Management, the trustee manager of First Ship Lease Trust. 'Most key shipping banks have been preoccupied with internal capital allocation and there was hardly any new lending in Q1 apart from previously committed financing,' he said.
'We think lending activity could start to recover in a very tentative manner, but pretty much restricted to existing bank customers. New loans will also come with much higher credit margins, tighter covenants and much lower advance rates than before. Essentially, the industry will have to compete fiercely for a limited pool of funds.'
On the other hand, Chris Lowe, partner at shipping specialist law firm Watson, Farley & Williams, believes banks, with a few exceptions, will start taking risks and lend again. And he expects to see this happen in the third quarter.
'What is more difficult to predict is when they start trusting one another again. Syndicated and even club deals are in danger of dodo-style extinction,' he said.
The market outlook depends on whether you are a buyer or seller, Mr Lowe said. In the short to medium term, the position for a seller is in the 'terrible to not-good range'. Buyers, however, have the run of the market and 'the prognosis is good to excellent for second-hand and newbuild tonnage'.
Mr Lowe expects to see an upturn in M&A activity toward the end of this year and the start of next year - and perhaps earlier - as weaker owners are taken over by stronger ones.
'This is yet another cycle in the shipping market, and although everyone agrees the reasons are different to last time, my view is that the same principles that applied in the last cycle will to some extent also apply here,' he said. 'So expect consolidation and some strong asset plays by investor funds over the next 12 months.'
But this is not bad news for everyone. Indeed, Mr Lowe relishes the months ahead. 'Watson, Farley & Williams - and all other lawyers - like any and all deals,' he quipped.
Both Mr Clausius and Mr Lowe will be speaking at the Finance for Asian Shipping session at the Sea Asia 2009 Conference.
Mr Clausius said: 'We are quite bearish on the overall outlook for the next 12-18 months. We think the downturn for shipping could last at least until the second half of 2010, and during this we may see increased consolidation.' He is most bearish on container ships among the three main sub-sectors, followed by dry bulkers and tankers. 'The container ship sector is a direct play on the Western consumer markets,' he said.
Consumer spending in the US and Europe has been hit hard by the economic crisis and he reckons it will take at least two or three years to recover in a meaningful way, leading to weak demand for container ships.
The dry bulk sector 'looks somewhat more promising, given the significant government infrastructure spending plans around the world, notably in China', Mr Clausius said.
He expects the tanker market, which has been holding up relatively the best, to decline in the near term also, although certain factors could soften the fall, such as the phasing out of single-hull vessels by end-2010 and the fact that newbuildings are not as great as in other sectors.
But the supply-side situation for container ships and dry bulkers is bleak, Mr Clausius reckons. 'The boom in the past few years has given many players reason to place massive orders for new container ships to be delivered over the next two years,' he said.
'This is going to exacerbate capacity over-supply. While we will see some corrections to order books via cancellations and delays, we do not think this will have a meaningful near-term impact.' On the dry bulk side, he sees over-supply prevailing until at least the second half of 2010.
For Mr Lowe, balance sheets are the most important indicator of how companies are doing. 'The dry bulk operators that are managing well are those with large cash reserves and holding the right assets (age and tonnage type),' he said. The market has a more optimistic view of the handy-size fleet in particular, he added. Mr Lowe also expects the tanker market to do relatively well at an oil price of more than US$60 a barrel.
Like many others in the industry, the one sector he is not optimistic about is container shipping. He points out though that big operators who have strong cash positions and have not over-committed to new orders will be in better shape than others.
The massive newbuilding order book in both the dry bulk and container ship sectors worries Mr Lowe and Mr Clausius. The latter is concerned not only about the over-supply of capacity but a huge US$300 billion funding gap associated with all these newbuildings.
And Mr Lowe said: 'For many yards, cancellations and insolvency or lack of financing for buyers is a ticking time bomb. Without government and Exim finance/refund guarantee support, yards will fail.'
But all is not lost. 'I think the industry will learn from this crisis, particularly from the perspective of capital and risk management,' Mr Clausius said. 'Obviously, events like Sea Asia will play an instrumental role in promoting the lessons learnt and knowledge sharing.'
Mr Lowe highlighted the need to keep to good business practices and sound values amid tough conditions. 'If any institution/company wants to be in the shipping business for the long term, it needs to be absolutely honest and transparent with counter-parties,' he said.
'Owner tricks such as hiving off of assets and absolute refusal to provide additional security or accept increased funding costs for certain financing facilities, while allowed within the four corners of the contractual documentation will not be forgotten by the traditional lenders to shipping.'
Mr Lowe also had some harsh words for the banks. 'Certain banks are also behaving badly by insisting on additional security and/or increased margins that will potentially cripple certain owners, and some are reverting to classic leveraging tactics to get other banks to take over commitments of certain facilities,' he said. 'They all know who they are and there should be no rewarding any bad behaviour.'
Slow going: Consumer spending in the US and Europe has been hit hard by the economic crisis and Philip Clausius, president and CEO of FSL Trust Management, reckons it will take at least two or three years to recover in a meaningful way, leading to weak demand for container ships.
Source: Linex Legal