Six years into the shipping crisis, the debate still rages whether there is light at the end of the tunnel. There have been market gyrations among market segments and asset classes that have been performing better on occasion, but still many doubt whether we are anywhere closer to a structural market recovery. There are factors to flame a doubter’s soul under any circumstances (large outstanding orderbook, excess shipbuilding capacity, equity and debt investors still seeking to enter the market, etc) but there are also artifacts of the excesses of the industry that are still present in the market.
While on an extensive European tour and after having talked to many financial players, shipowners, bankers, vessel managers and shipbrokers, we have noticed a few trends that have been permeating the shipping industry.
It’s well known that the shipping finance seascape, especially as traditional shipping lenders are concerned, has tectonically changed since the inception of the crisis.
Many shipping banks have straightforwardly sold their shipping loan exposure and many more are well into their process of divesting their remaining shipping positions. There are a few banks that still have a mandate to lend in shipping and selectively do so (despite that many more bankers would say that their banks are still actively in shipping).
So far, so bad.
Many of the traditional shipping banks, primarily in Europe, have been preoccupied with their capital ratios and the so-called Asset Quality Review (AQR) until very recently; capital ratios will keep being of constant concern going forward, especially given the new regulatory environment expected to come into place (Basel III, etc).
The European Central Bank (ECB) has aggressively been working on ‘motivating’ European banks to stop hording deposits and cash, and rather utilize ECB’s ‘liberal’ state of policy of low (possibly negative interest rates) to start lending and stimulate local economies. Given the circumstances, therefore, one would think that European banks would be selectively forthcoming with new shipping business, at least with corporate clients, ‘balance-sheet-lending’ supported by cash flows and that smaller owners seeking asset-based-financing (ship mortgages) would have a harder time to access financing. At least that would have been a rational assumption to make.
While discussing with traditional shipping lenders, we have noticed an increased concern about ‘spreads’ (margins over LIBOR) and maintaining market share or relationships with shipowners versus maintaining proper, healthy margins and return on equity for the banks themselves. We have heard stories of a French bank in Greece providing asset-based financing (ship mortgages) to good clients at 190 bps spread, and many Greek banks (and certain UK or German banks) feeling obliged to provide competitive debt financing at no more than 300-400 bps for clients ranging from good in quality to long term in reference to the relationship.
Again, we are barely out of the crisis, if at all, with the ink on the AQR report still wet; yet, many of these banks fighting for market share today were bailed out by their governments, had their original shareholders highly diluted, and, quite frankly, a few of these banks were left for dead at the rage of the European banking and sovereign crisis a few years ago. And fighting for market share over spreads probably it’s an uncalled-for price war, as many shipping banks have left the industry, thus there is effectively less competition in terms of active, competing banks, and the few banks still competing do not have the capacity to lend as much money as the market demands (actually much less than that) since lending supply is much lower than demand; also importantly, a great deal of the bankable borrowers in shipping are anticipating (and prepared to pay) higher interest rates as a result of the developments in the banking sector over the last few years. Thus, fewer banks with lower limited lending capacity are fighting over spreads in a market where most borrowers are prepared to expect higher spreads. Probably that’s ‘bad’.
Of course, a great deal of borrowers and shipowners are not highly bankable any more, having burnt much cash reserves in the bad years or having to restructure on their super-expensive tonnage. For many of such owners, traditional lending from banks is not effectively an option, and thus they have been looking for alternative sources of capital, such as borrowing from private equity and hedge funds, credit funds, etc usually at interest rates ranging from 8% for relatively plain vanilla mortgages to as high as 12% and possibly equity participation (convertible) for any ‘projects with hair’.
There is an active market for such financing where our firm Karatzas Marine Advisors has been highly active, as there are borrowers needing working capital to drydock vessels or cover operating expenses or some time to buy. This is true for projects in traditional shipping countries like Greece and Germany, where paying interest rates close to the double-digit mark were an anathema even a couple of years ago. How times change when there are borrowers in shipping (often with legitimate projects) prepared to pay 8% interest for a plain vanilla ship mortgages!
Probably, that’s the ‘ugly’.
And of course, there are the major shipowners with consolidated financial statements, economies of scale by owning an operating more than hundred vessels, and having access to cargoes and strategic charterers. Usually such owners have access to the capital markets and also can borrow at slim thin interest rates, fully exploiting the strength of their balance sheets in a low interest rate environment. Usually such borrowers can access the international banking system, including international US and UK banks (not always traditional shipping lenders), but also borrowing from Norwegian lenders, who have been traditionally in the market, but they have more and more focusing on corporate and balance-sheet lending, with a preference for offshore and energy associated shipping projects, and preparing for the new regulatory banking framework (Basel III, etc).
Probably, that’s the ‘good’.
In a bifurcated market where big, solid shipping companies can access debt inexpensively, there is a debt funding gap in shipping for the vast part of the industry including the competitive local markets (Greece and Germany). However, a great deal of concern is about spreads and pricing, when really there should not have been an issue. As good, bad or ugly as all these seem, one has to question whether the artifacts that generated the crisis are still in place even at the trough of the market.
After all, one of the biggest Greek shipowners during a Posidonia panel discussion in June 2014 placed the blame for the shipping crisis squarely at the door of the shipping banks! Too much cheap money made too many shipowners buy too many ships! Simply just that!
And, a banker from a major bank admitted during our recent European tour that in 2008, the bank’s cost of funding was 35 bps and after including 15 bps overhead, any loan (irrespective of covenants, leverage, asset class, credit, etc) was fair game.