Lenders hold fire on ailing shipping firms
Banks are proving reluctant to torpedo struggling carriers as the global industry grapples with a downturn and lines seek out bankruptcy protection
Sanko Line, Korea Line and subsidiaries of Berlian Laju Tanker are among a steady stream of Asian and Western shipping companies that have sought bankruptcy protection in recent months, victims of weak freight rates and haemorrhaging cash reserves. But the expected surge in corporate shipping failures has yet to occur, despite mounting losses and the prospect of lower freight and charter rates this year.
Part of the reason, according to finance and restructuring experts, is an unwillingness by banks to seize ships or force firms into bankruptcy, especially with the current market conditions and ship values falling to pre-boom 2004 levels.
Ray Dombrowski, managing director of Alvarez & Marsal North American Commercial Restructuring, said: "From everything we see, banks have been reticent to take [action] against any shipping companies as long as they have cash."
Lee Soo-cheon, chief investment officer of Hong Kong-headquartered SC Lowy, said European banks had been the world's biggest lenders to shipping companies, including firms in Asia. And while banks such as HSH Nordbank, Commerzbank and Royal Bank of Scotland have either scaled back or stopped lending to shipping companies, Lee said they have been reluctant to enforce loan defaults.
"Banks are better off rescheduling debt with existing operators rather than [taking] over and [selling] the ships," he said. "A lot of banks can't afford to take a hit," especially with the ongoing European debt crisis and new liquidity rules impacting on banks.
Shinhan Bank, one of South Korea's largest banks, was left US$39 million out of pocket on a loan used to finance a supertanker after the ship was arrested and sold in Hong Kong for US$28 million in January.
The bank was part of a syndicate that advanced a US$120 million loan to Samho Shipping to buy the tanker, Samho Dream, for US$137.5 million at the height of the shipping boom in 2008. While Samho Shipping made some mortgage payments before the company went bankrupt, US$67.28 million was owed on the mortgage used to finance the ship. Dombrowski said there were also cultural issues involved that made European banks "slower to pull the trigger on bankruptcy than US banks".
But while banks might be reluctant to force shipping companies into bankruptcy, there has been a rise in debt restructuring and related work.
Dombrowksi said Alvarez & Marsal started to see a rise from late 2009 and 2010 when the shipping markets collapsed post-Lehman Brothers.
Dombrowski said the most recent deals included debt-laden dry cargo ship owner Eagle Bulk Shipping, which reached agreement in June with its lenders.
He said two other companies, Torm and Overseas Shipholding Group, would also finalise similar pacts in the "very near term".
SC Lowy, which specialises in creating liquidity in otherwise illiquid assets, including buying shipping loans and charter defaults, has also seen a rise in business.
Lee said when SC Lowy was launched in 2008, very little time was spent on shipping-related business, but now "pretty much 60 to 70 per cent of my time is spent on shipping".
None of the restructuring and bank experts see an early end to the shipping downturn.