Bankers: Fooling Themselves, Investors and Shipowners?

nordea dnb bankIt was reported on gCaptain last week, DNB ASA and Nordea Bank AB, two of the world’s largest shipping lenders, are seeing signs of an end to the maritime industry’s five-year slump as bets grow on a recovery in sea-borne trade. This was based upon the fact that these two financial institutions were experiencing lower loan losses in their shipping portfolio.

DNB, the world’s second biggest shipping bank, experienced a 43% decline in loan losses at its shipping, offshore and logistics division. Loan losses were 198 million kroner (US $33 million) in the second quarter of 2013 from the first quarter, the lowest level in a year. DNB has forecast loan loss provisions in shipping of 1 billion kroner to 1.5 billion kroner in 2013, compared with 940 million kroner in 2012. The shipping unit had provisioned of 545 million kroner for loan losses in the first six months of 2013.

The article further states that Nordea, the fourth largest shipping bank in the world expects its shipping loan portfolio to increase in 2013. Its shipping unit’s loan losses declined 15% in the second quarter of 2013, as compared to the first quarter, reaching the lowest level since the third quarter of 2011.  It was reported that Nordea Chief Executive Officer Christian Clausen stated, “They’re now coming down, they’re not that high. I don’t think loan losses in shipping are an issue anymore.”

Is the financial and shipping markets as it appears because loan losses are lower? Is the financial market being accurately reflected by loan loss provisions and banker comments?

On June 28th, Tradewinds reported that newly proposed accounting standards that have been delayed until at least 2015 and more likely until 2017, bring certain charters onto shipping companies’ balance sheets. Any shipping company that has a bareboat charter or time charter, chartered in for in excess of one year, or a one year time charter with options, will have to alter its corporate liabilities, impacting its debt leverage ratios and potentially causing breaches of loan covenants.

The proposed new accounting standards for shipping will have significant consequences impacting corporate liabilities, loan covenants and whether shipping companies with such charters may be in technical default on their outstanding debt. The change in accounting standards for shipping is the result of a coordinated effort by the International Accounting Standards Board (“IASB”) and the Financial Accounting Standards Board (“FASB”) in the U.S. This type of accounting is consistent with the methodology the rating agencies, Moody’s and Standard & Poor’s, employ when evaluating companies, including long-term leases into the balance sheet of companies.

If the newly proposed accounting standards were to be applied in 2013 to shipping companies, banks and shipping companies would be in a substantially worse financial condition than they are reporting today. Many more shipping companies would be in breach of loan covenants and loan loss provisions would be required to rise.

How much higher?  We can only speculate.  However, we are sure both DNB and Nordea would also experience a material increase in loan losses. Neither would be immune from increased loan losses due to covenant breaches caused by newly being applied currently.

The financial market may have improved. However, the financial markets for shipping is not as it appears. Bankers are not providing an accurate or REAL assessment of their financial position and shipping companies that charter-in long-term are not reflecting their financial positions in a manner that rating agencies currently employ or that are consistent with newly proposed accounting standards.