Although trade volumes and financing work remain at low levels, maritime and shipping law firms in Asia aren’t necessarily thrown by the stormy weather.
It’s the standard rule of economics: when supply outstrips demand, business will be slow. This is certainly the case for Asia’s shipping industry, which some say has been affected by the financial crisis more than any other sector.
Trade volumes have declined due to waning United States and European demand for Asian exports. From last year’s booming market, many of the new colossal-sized ships built to meet an expected boom in business are now left docked and unused in ports – and those vessels in use are running routes at minimum capacity and at lower charge rates. The industry is marked by an oversupply of vessels, a lack of demand for their use, and not enough capital to keep it going.
Yet while Asia’s law firms may no longer be largely working on the big-ticket deals financing new carriers, they are busy renegotiating contracts, resolving disputes and refinancing loans. Singapore-based shipping firm JTJB is handling more work than they had before the crisis, according to founder and managing partner, Dato´ Benny. “The word which best describes the market right now is buoyant,” says Benny. “It’s been like that for the last six to eight months. What we’re seeing is an increase in litigation and contentious work. It’s a different kind of work but it’s still reflective of a buoyant playing field.”
For the Hong Kong-based lawyers at shipping specialist firm Holman Fenwick Willan, the pace has settled back to normal levels, from a year aptly described as “frightful”. “2008 was the busiest in the firm’s 125 years,” says Holman’s Hong Kong managing partner, Paul Hatzer. “Our Asian offices all had a strong year and new enquiries were constantly being made. Since March, the level of work has slowed down a little, though we’re still planning to recruit young lawyers as they are vital for our long-term future.”
Before the financial crisis, optimism abounded in the shipping industry. Law firms were advising on deals that were financing new and bigger ships and on maritime-related M&As. However, those deals have now led to an oversupply of shipping assets whose values have dropped and culminated in the recent flow of work. “Three or so years ago, there was a lot of confidence and many companies ordered new vessels or agreed to buy existing ones, assuming they would have the financial means from some source at the time of delivery,” says ship finance specialist Martin Brown of Ince & Co in Singapore.
“Unlike previous downturns in shipping, this crisis was caused mostly by the illiquidity of the banks, and that caused difficulty for shipping companies to buy those assets they originally intended to. It also caused a collapse in charter rates … and as a consequence, vessel values. All aspects of the shipping market have been affected,” Brown adds.
Simon Spark, a shipping litigation partner in the same office, adds that many of the firm’s shipping clients have been affected by the downturn. “We have seen an increased volume of disputes as owners and operators are forced to re-assess their contracts of agreement, charter and building commitments,” he explains.“This has been accompanied by an increase in bank work-out work and restricts of loan commitments.”
The type of work around now is also reflected in the shipping industry’s financial losses suffered during this year. Hong Kong’s Orient Overseas International reported a first-half loss of US$232m, Singapore’s Neptune Orient Lines lost US$391m, and Korea’s Hanjin Shipping reported a first quarter loss of US$110m – all suffering from the decline in trade volumes and lower charter rates.
Parties in the shipping industry are defaulting on contractual commitments, as the value of assets has now dropped. The bulk of business that law firms have is on the contentious side of “dry work”– refinancing loans, restructuring contracts or litigating the defaulters. “Most active has been the dry shipping department which has been heavily involved in charterparty disputes,” says Bazul Ashhab, a partner at Singapore-based TS Oon & Bazul. “We’ve been very busy assisting parties [in] renegotiating terms and resolving disputes arising out of early re-delivery. Some of the disputes involved were very high-value and urgent. There was also a significant increase in the arbitration instructions coming from outside Singapore.”
It’s also lucky that the “wet work” side, which deals with collisions, casualties and admiralty matters, isn’t as exposed to the credit crunch. Holman partner Paul Apostolis describes it as the fortuitous side of shipping practice. “On the wet shipping side, the global economic downturn has not had a significant impact on the number of marine casualties,” he says. “Most casualties are caused by factors unrelated to the state of the economy, like human error and extreme weather. For example, a recent typhoon which struck Taiwan caused a number of shipping casualties.”
With work volumes at relatively stable levels, which firms are better positioned geographically to capitalise on future growth?
NEXT: Lion nations, fragrant harbours
Lion nations, fragrant harbours
It seems the decade-old rivalry between Hong Kong and Singapore has stepped up over the past few years, to gain the title as Asia’s shipping hub. Recently Singapore tried to lure more shipping firms by investing in arbitration centres, allowing foreign law firms to give advice on Singapore law in arbitration cases, and providing tax incentives. “In our view this is one of the primary drivers of growth in the shipping legal services market in Singapore at the moment,” says Gina Lee-Wan, partner in the maritime & aviation practice at global firm Allen & Gledhill. “We see more interest from foreign players to move to Singapore to take advantage of these incentives.”
The Singaporean government’s initiatives have managed to lure a mass of shipping clients who have found a number of other service providers at hand, from the bankers and lawyers to insurers. Others will undoubtedly follow with the arrival of major shipping firms, says JTJB’s Dato´ Benny. “What we’re seeing on the ground is not just a migration from Asia, but from various parts of the world,” he says.
“Firms are seeing the benefits of being in a melting pot like Singapore, where there are so many other maritime business partners. And that shift to Singapore accounts for the number of shipping law firms that have come here – why would they if there’s not an available pool of clients?”
Ince & Co’s Singapore-based managing partner, Richard Lovell, says that the Hong Kong authorities have been slow to compete with Singapore’s development. “I have been here for over twenty years and the commercial rivalry between the two has always been there,” Lovell explains. “Through a cleverly co-ordinated program of incentives and promotional measures, the authorities here have established Singapore as the regional base for all key maritime services, and it is fast becoming recognised as the region’s arbitration and mediation centre.”
It’s a different story for lawyers in Hong Kong, who are adamant they remain in the heart of Asia’s shipping industry. While Singapore has recently seen more clientele, the industry’s major shipping lines, such as Pacific International Lines, IMC, and Tanker Pacific, don’t keep large fleets there. Shipping practices in Singapore firms are also relatively smaller compared to Hong Kong firms.
Although Singapore has invested in arbitration centres, Hong Kong lawyers also have access to the Singapore courts. But the main factor which tips the debate in favour of Hong Kong is access to the China market. China’s overwhelming demand for energy and resources has led to a number of major shipping deals in defiance of the downturn which is pinching other countries.
While many countries have largely put a stop on their shipping M&A deals, China and Taiwan have firmly bucked this trend. “This is a time where people are cancelling orders,” explains Holman’s oil and gas expert Richard Wilmot. “Chinese former state-owned enterprises (SOEs) are very cash-rich and it’s a very good time for them to go into new markets, because right now they don’t have to compete with more traditional buyers.”
The proximity of Hong Kong’s law firms to major shipping clients in China will be an issue for Singapore in the long term. “Hong Kong has increasingly become an acceptable jurisdiction in which Chinese shipping firms are happy to resolve their shipping and trading disputes in arbitration,” says Holman’s Hatzer. “Hong Kong obviously has one of the biggest markets in the world on its doorstep. Our Shanghai office is also busy, but I think Hong Kong is still the preferred choice for regional management offices and the providers of legal services, largely because [it] has successfully maintained the rule of law and a fully functioning legal infrastructure, with top level providers,” Hatzer adds.
Despite regional rivalries, however, the overall sentiment is that Asian shipping practices are situated exactly where they should be to capitalise on the boom.
Emerging markets
There will be an increase in infrastructure and port development work alongside the growth of developing Asian countries. Commodities work will also increase, especially in oil and gas markets, driven by trade between the Middle East and Asia-Pacific.
Demand for larger vessels may also drive more M&A deals. “The emerging market for shipping practices is the Asia-Pacific – these are where the big markets are going to be. Cash-rich Chinese companies will be buying large volumes of oil and gas and other commodities and will need to arrange transport back to China,” says Holman’s Wilmot. “The energy needs of China are set to rise, irrespective of the downturn, and that increase is going to be reflected in the fuel stock coming into Asia, which will mean that Asia’s shipping lines and its power producers are going to have to have increasingly large fleets of vessels,” he adds. “You’ve also got big manufacturers in Malaysia, Vietnam and Indonesia, and all of those places are also hungry for raw materials.”
As Asia’s other staggeringly fast-growing nation, India is also increasingly making footholds in Singapore as tax incentives and their respective energy needs are bringing more shipping clients to south-east Asia. “More shipping and offshore companies are relocating from their historical bases and setting up offices here in Singapore, and that trend will continue,” says Ince & Co’s Brown. “Good examples are the Norwegian and Indian shipping companies… all lawyers are aware of the restrictions on foreign law firms setting up their own offices in India, rather than operating joint ventures or best-friend relationships. As soon as [this] market opens, there will be huge interest in doing so.”
If recent growth trends continue, the future looks bright for the region’s shipping practices. Most of the firms interviewed for this feature say they will be expanding their practices in the near future. “Our Singapore practice has doubled in size in the last four years and we are planning to … bring out further specialists from our London office and train up our dual-qualified Singaporean lawyers to assist in this expansion,” says Ince & Co’s Lovell.
While some law firms are looking beyond the current circumstances, others may have benefited from the lessons learned in the downturn. “The financial crisis made companies pay more attention to whether they were getting value-for-money from their lawyers,” says TS Oon’s Bazul. “We made lasting relationships with the clients we assisted during the global financial crisis and we’ve also grown our dispute resolution practice in that time.”
For the team at Holman, the view looking out towards the Hong Kong harbour over the last year has not been as turbulent as expected.“The energy and activity here is just phenomenal,” says Wilmot. “In my perception the downturn really didn’t hit Hong Kong as hard as anywhere else in the world. It really is very buoyant and positive here.” ALB
