Shipping Failures Increase As Owners Run Out Of Cash

Soaring fuel costs, weak freight rates and tight credit conditions will force more shipowners out of business, but many are likely to disappear quietly rather than collapse in a blaze of headlines.

Commercial and financial shipping adviser Jean Richards expects to see an increase in the number of shipping failures over the coming year as a combination of adverse conditions finally drives some companies into bankruptcy. Others will have to be restructured.

However, most of these failures will be handled discreetly and go largely unnoticed in the wider world, said Mrs Richards, who is chief executive of SecondWind Shipping, which provides support services to banks and investors with problem shipping loans.

In the 1990s, Mrs Richards was involved in the repossession of Adriatic Tankers’ fleet of 49 vessels. That is still the largest ship repossession action undertaken to date, and one that was followed closely by the media, but Mrs Richards does not expect to see a repeat of the publicity that surrounded Adriatic Tankers’ spectacular collapse.

She is nevertheless pessimistic about prospects for many parts of the industry, with capesize bulker and tanker owners facing some of the biggest challenges.

Addressing a lunchtime meeting organised by the International Maritime Industries Forum, Mrs Richards said container shipping was the sector she was least concerned about, with the orderbook now back under control after the excesses of 2006-2007.

Elsewhere the future looked far more bleak, with cash flow requirements potentially crippling for very large crude carrier owners, and the “colossal” newbuilding programme for capesize bulk carriers pushing down daily earnings that are now well below breakeven for those who ordered ships at peak prices.

“Shipowners are running out of cash,” said Mrs Richards. Other factors, such as the failure of a charterer, were compounding matters for even first class operators. That could expose owners to volatile spot markets.

Much more money has been raised through syndicated loans in recent years and that, too, could pose a potential risk. Shipowners who have tapped this market may run into subsequent problems should bank syndicate members disagree with each other over refinancing requests. Owners could then be left struggling as they wait longer for a fresh cash injection.

Although some ship finance banks say they are now lending again after a two-year standstill, Mrs Richards said those in Organisation of Economic Co-operation and Development countries remained on the sidelines. Banks in the Bric countries of Brazil, Russia, India and China had resumed lending, but in most cases only to projects with a local flavour.

With shipyards ready to accept orders “at almost any price” to fill newbuilding berths, demolition activity having a barely noticeable constraint on fleet growth and lay-ups unlikely to reverse the freight rates slide, Mrs Richards said many shipowners “need to prepare for the next round of restructurings and, ultimately, failures”.

Likewise, bankers and investors should also to be braced for more payment defaults, as opposed to covenant breaches, as the restructurings agreed in 2009-2010 expire. Far from being over the worst, most sectors of the shipping industry face another difficult year because of the massive number of new deliveries and depressed earnings.