The shipping industry is famously a cyclical one, with upcycles and downcycles following each other over the decades. But even then, there could have been few trying times like the present. “The industry really is going through a financial crisis,” says Leong Kah Wah, the deputy head of Rajah & Tann’s admiralty and shipping practice. “Ship owners are still reporting huge losses. It is predicted that this year and next year, there will be no upturn in the market.” Matthew Lam, a partner with Clyde & Co in Hong Kong, names general overcapacity, poor freight rates, and high fuel prices as being among the factors affecting the shipping industry badly. “Some ships are being laid up and some shipping companies are struggling to make a profit and maintain a cash balance,” he says. “The difficulty in obtaining finance has also made the situation worse. There have been a number of liquidations and restructurings involving shipping companies.”
The fact that the shipping industry is in a depressed state is not new, but the fact that the situation has carried on for so long has made it particularly hard on the various players. During the global financial crisis of 2008, few had predicted there would be a double dip, says Leong. “So shipping companies decided to postpone their obligations, and even restructured their facilities, hoping for an upturn in 2010 and 2011,” he adds. “On top of that, they deferred taking delivery of new vessels that were scheduled for delivery in 2010 or later. So not only did the owners commit themselves to huge amounts of financing, they also committed themselves to new projects by building new vessels.” But as history has shown, the good times have not returned for either the global economy, or the shipping industry. “So it’s no surprise that there have been large losses for even the most reputable ship owners,” says Leong.
Along with mounting losses and depressed asset values, obtaining financing has become a major bugbear of the shipping industry, and Chris Grieveson, partner at Wikborg Rein, says it has much to do with the banks’ current approach to the shipping industry. “Following the 2000 Basel convention and the introduction of a number of foreign regulations on bank insolvency, banks have to be very careful about their debt to asset value ratios,” he says. “Shipping is a very capital intensive business, and additionally, with shipping not being a high return area for banks, we are seeing a lot of banks pulling away from shipping, and taking shipping out of their books when it comes to new lending.”
RESTRUCTURING, LIQUIDATION ON THE RISE
With the downturn in the market continuing, it is no surprise that restructuring and liquidation are on the rise in the shipping industry. “There have been a number of high profile ones in Asia in recent years. One example is the bankruptcy protection involving Sanko Steamship,” says Lam, whose firm is acting for the creditor in that case. Grieveson agrees: “I think the restructuring community has grown massively. Liquidators are now scheduling calls on weekends and at midnight; that’s how much work they have.”
One of the factors behind this surge in restructuring, says Leong, is that banks are stuck with bad loans on their books that they cannot afford to convert into bad debts. “The minute they enforce their rights under the loan, they will find they have a big hole in their balance sheets that they must account for to their shareholders,” he says. “So they are coming up with creative ways to postpone that by repossessing the vessels, and having management companies running the vessel. But my personal view is that this may not be a good idea: You are hoping that this management company can actually turn the operations of the vessel around, and give you a more positive return than the traditional ship owning company is doing for themselves. Plus, unlike good wine, ships depreciate with age!”
However, the main problem with restructuring, he says, is that with shipping being a global industry, distressed companies rarely get the space to try and turn things around. “Let’s say the company is based in Singapore, but has vessels operating worldwide,” he says. “We go to a Singaporean court and obtain a Scheme of Arrangement, which acts as a temporary reprieve for the company from being sued. But during that time, if a vessel makes its way into Hong Kong, a creditor there can have the ship arrested.” He notes that there is very little coordination between countries in this regard, with few having respect for the insolvency laws of others. “In that sense, while one country is giving its corporate citizen a break, creditors can still attempt to recover their debts,” Leong adds. “This means that there is very little time or space that can be given to that company to restructure and breathe, unless it is a purely domestic trading company without any foreign relations, which is hardly the case in shipping.”
ASIA: SAME BUT DIFFERENT
Grieveson of Wikborg Rein says that his firm is seeing a lot of restructuring happening to companies in Asia. “Most people thought Asia had a soft landing, but as far as shipping is concerned, it’s really starting to bite,” he says. Lam of Clyde & Co agrees that shipping companies in Asia are facing tough times as their global counterparts. “Overcapacities, poor freight rates, and high fuel prices are affecting shipping companies across the globe,” he says. “In Asia, the industry was kept working with the demand from China, but that is now on the wane. This has affected dry bulk shipping in the main, but lower demand for finished goods has also hit the container trade as well.” Leong, however, believes that Asian shipping companies are losing less money than the European ones. “They are pretty much banking in two or three regions: China, India and Indonesia. These are energyrich and resources filled; there’s a demand for all these things,” he says adding that while the container trade is “dead”, the bulk cargo business is keeping owners afloat. Another factor he mentions is the inclination of Asian ship owners to work together. “They’re probably not keen to open up routes to go into Europe and America. So what we are doing is consolidating among themselves by having more cooperation agreements,” says Leong. “It is a lot easier for them to share routes so as to beat falling market returns.”
Additionally, Leong notes that Asian shipping companies can compete on freight prices, which are generally 10 to 15 percent lower than what a big European owner like Maersk would traditionally offer. However at the same time, he notes that the Asian shipping companies that are doing slightly better are the ones that have diversified into businesses like hotels, serviced apartments and real estate. “The Asian family owned companies that put their eggs into one or two baskets are all gone,” he adds. “You can’t survive by just being a shipping company these days.”
Frans van de Bospoort, Singapore based managing director of the Chemical, LPG & Product Tanker Group at DVB Bank, notes that Asian banks are in much better shape than Western ones. “That, of course, implies that owners in Asia still have relatively good access to funding with their banks,” he says. “However, we are actually doing much more business now in the West, in Europe, and the States than we are in Asia. It’s because the terms and conditions, the margins we can get in Asia are much more competitive, so it makes more sense to focus more at this time on Europe.” Leong notes that while all banks,whether Asian or European, face the same problems, “banks somehow find it easier to say to an Asian owner, ‘I will tolerate your defaults or delays in payment’ compared to, say, an European owner, of course with the crisis in Europe in mind.”
NEW TRENDS
According to van de Bospoort, one important trend that he has seen is that the void created by the lack of traditional bank finance has led to private equity money making its way into the shipping industry. “You can see the increased appetite of a lot of private equity firms, particularly in the U.S. for shipping,” he says. These are multibillion funds targeting specific segments of the industry.” Additionally, he notes the growing role of export credit agencies in stimulating the shipping industry, particularly those in countries like the Republic of Korea, China and Japan.
Lam notes that due to the general overcapacity issue, it is becoming more difficult for shipping companies to make a profit in traditional shipping business, particularly in the liner and dry bulk segments. “Some shipping companies and yards are trying to diversify their businesses.” Grieveson sees a move towards offshore. “Many of the big name Greek owners have been putting money into drill ships, into rigs and into LNG, where there’s still good money,” he says. “Lot of cash-rich Greeks are moving into the offshore market.”
However, Lam says this is not always the easiest move to make. “The offshore sector does not appear to be facing the same overcapacity issue at the moment. However, the cost for entry into the business is usually high, and it is not always easy to succeed,” he adds. Leong agrees: “It’s not only the shipping companies and banks, but we are also seeing insurance companies that traditionally insured only classic shipping – moving into energy and offshore,” Leong says. “However, not many shipping companies have the knowhow to go into these areas, and the guys that are wellentrenched in oil and gas and offshore projects; they have been there for a long time. The newcomers can open up windows for themselves to trade, but I think it’s tough breaking into that market.”
NOT EVERYTHING IS GLOOMY
Despite the downturn, it is not all bad news in the shipping industry. Restructurers aside, shipping lawyers have also seen their disputes’ practice pick up. “While things may look bleak for the overall industry, on the legal side, (and I’m embarrassed to say) we are kept very busy,” says Leong. “Because of the difficulties that these parties are in, there’s bound to be a lot of opportunities for legal advice, restructuring and then disputes, because it’s just so difficult to write off claims. Downward cycles naturally bring upturns for lawyers.”
Lam agrees that on the shipping litigation side, there has been an increase in disputes. “The exiting of unprofitable charter arrangements by charterers has been a major source of work for lawyers and one can expect, when the upturn eventually arrives, a similar spate with owners trying to rid themselves of low revenue charters in the hope they can capture something more lucrative,” he says. “Foreclosure work for banks has been a busy sector, although given vessel values, it is not an easy decision for a bank to make as they may get more out of keeping the client afloat than by pulling the plug and realising a limited return on their security.”
As for Grieveson, the move towards offshore has had an impact on the kind of work done by his firm. “There’s been a lot of new investment in offshore work since 2008, with plenty of rig building in particular,” he says. “Now, there is a lot of restructuring work going on, which is quite interesting. I predict a huge amount of recovery work in the future; it is slowly gathering momentum now.” He adds that he expects to see more restructuring and refinancing work in the future, which will be of a more sophisticated kind.
Meanwhile, van de Bospoort of DVB says that things have not been all bad for banks either. DVB is one of the few banks that are stepping up their lending instead of pulling out, and van de Bospoort says this is a result of reduced competition. “That means the terms and conditions under which we can finance are much better than a couple of years ago,” he says. “Asset values have come down tremendously for all sectors, which means that nowadays, the 60 percent of a vessel that we finance is much less than what it was a couple of years ago. So this is a good point to enter into new transactions, and the terms and conditions under which you can do finance are much better than they were.”
An iteresting development, says Lam, is the new building orders placed by some shipping companies. “Obviously, they have the funding to take advantage of all time low prices for newbuilds, as well as sense to go for greener and more fuel efficient ships,” he says. “A bold strategy when there is still huge overcapacity, but one that will undoubtedly pay dividends if the upturn arrives in the next few years as their fleet will be the most cost effective on the water.”
SURVIVAL OF THE FITTEST
Looking to the future, Grieveson sees more companies going bankrupt. “A lot of people will be around to pick up the tonnage, and the biggest will grow bigger. Some big players will disappear, while others will be restructured,” he says. “When the global economic recovery starts, it’ll be good for Asian shipping, particularly those operating intraAsia in the container business. And the offshore market will really pick up. There’s huge demand for oil and gas.”
Clyde & Co’s Lam believes that it will be a battle to survive. “With the current market situation, some shipping companies and yards are facing huge losses and increasing cash flow problems. If the current downturn remains for some time, it may be difficult for some companies to survive. Those companies with a diversified business or with the support of their government will probably find themselves in a relatively better position to cope with the situation.”
Leong agrees that it has certainly become a case of “survival of the fittest” in the industry. “Companies with deep pockets, and companies with state entities backing them will stay afloat,” he says “Take for example, China’s Cosco: it has the state behind it. It will survive. For the others, we are not so sure.” He cites the example of the Malaysian national line MISC, which had to sell off portions of its fleet, effectively stripped itself of its container business. “They are doing tankers, they are doing bulkers, but they are no longer in the container industry,” says Leong. “We are seeing drastic things like this.”
Finally, Bazul Ashhab, the head of dispute resolution at Oon & Bazul, says that as in times like this, there will be market cleansing, with weaker players and those without solid reputation being forced out of the market. “However, this crisis is causing problems to even the reputable and serious players,” he says. “This effect of the crisis is likely to have a long and lasting effect in the industry. With cheaper vessels coming into the market, the ship owning companies who purchased vessels in 2008 will find it difficult to compete with rates in the foreseeable future, and I do not see the depressed market changing in the next few years.”
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