February 24, 2012 / 4:48 PM / 7 years ago

Shipping firms face bank debt mutiny

LONDON (Reuters) - Troubled shipping companies face the threat of seizures of their vessels as banks lose patience with an industry struggling with overcapacity and falling demand, industry players say.

Banks have been fairly supportive until now, providing extensions such as last week’s lifeline to Danish shipping company Torm A/S TORM.CO which was given a deferral on $1.8 billion of debt until March 1.

But lenders are under pressure to cut their exposure to risky and dollar-denominated assets such as ship and trade finance to meet tougher capital rules.

“With all the other problems that many European banks have, and the tightening noose of regulatory and capital adequacy rules, they have no choice left other than to face their demons,” said Nigel Prentis, head of research, consulting and advisory with HSBC Shipping Services Ltd.

“An increase in arrests, foreclosures and forced asset sales appears inevitable.”

An arrest occurs when a ship is detained by a court order to secure a maritime claim. The arrest may ultimately result in a judicial sale of the ship to pay the claim.

John Dalby, chief executive of ship asset recovery firm Marine Risk Management, which was active in arresting ships in the 1980s, said his firm is talking to six financial institutions over repayment options, including arrests.

“Our intel shows that this number will increase as this year goes on. Just like the Greek debt, there’s only so much patience and debt accumulation that can be sustained,” he said.

Dalby, whose team includes former navy special forces, has seized vessels in the past on behalf of clients and sailed them to other jurisdictions, with a letter of authority from an admiralty court.

Industry sources say many banks are looking at finding other ways to recoup loans, which include working with the owners to sell vessels. Private equity firms could also step in.

In December, Greek shipping company Newlead Holdings Ltd NEWL.O agreed to sell four of its oil tankers as part of a restructuring plan with its bank syndicate. Separately, leading Riga-based tanker firm Latvian Shipping Company said last year its banks had requested the group sell three older tankers due to falling cash balances.

“Shipping banks may increasingly start to lose their patience with any companies in breach of their existing covenants,” said Spyros Polemis, chairman of the International Chamber of Shipping.


Shipping companies, especially in the oil tanker and dry bulk sectors, already hit by worsening economic turmoil, weak earnings and an oversupply of vessels ordered in the good times, now face a growing funding squeeze.

France’s two biggest listed banks, Societe Generale (SOGN.PA) and BNP Paribas (BNPP.PA), plan to exit or shrink non-core businesses such as shipping, according to bank memos, while UniCredit (CRDI.MI), Italy’s largest bank by assets, is scaling down its ship finance operations to boost capital reserves.

“Everybody was expecting a large number of foreclosures in 2011, but it didn’t happen. Most ship owners are now exhausting their cash reserves, which means more foreclosures will eventually happen,” said an industry executive.

Bankers say foreclosures and forced asset sales come with a risk, given depressed ship values.

“If you seize a ship not only are you crystallizing a loss but you’re also going to have to hawk the ship to other companies as a forced seller,” a Paris-based banker said.

Brokers say the value of a new very large crude carrier (VLCC), a supertanker capable of carrying 2 million barrels of oil, has slid to an estimated $98 million from $162 million in 2008. The value of a new capesize dry bulk vessel, which transports cargoes such as iron ore and coal, was estimated to have fallen to around $47.5 million from $99 million in 2008.

The second-hand shipping market has also witnessed a slump in values. A five-year old VLCC is valued at just under $60 million, down from more thank $160 million in 2008, while a five-year capesize has dropped to $35 million from more than $150 million in 2008.

“Some banks do have past experience, particularly in the 1980s, of taking control of ships, then appointing commercial and technical managers, and riding out the downturn as an alternative to poor realisations from distressed fire sales,” HSBC’s Prentis said.

“This managed process creates the possibility of recovering losses in future. It is preferable to auctions which will only undermine values, reinforce the downward spiral and transmit problems to a larger universe of owners and banks.”

For most, ship arrests remain a last option.

“Ship arrests are not the preferred model to deal with a loan that isn’t being serviced anymore,” said Oliver Faak, NordLB”s Global Head of Shipping, which has outstanding shipping loans worth some 18.5 billion euros.

“Usually we would always try to restructure the loan or talk with the ship owner about a voluntary sale.”

Additional reporting by Lionel Laurent in Paris and Arno Schuetze in Frankfurt; Editing by Alexander Smith

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