Business World

Saturday 15 December 2018

European banks struggle to navigate losses in shipping sector

Shipping firms and banks are caught in a vicious circle of debt, causing a credit crunch that is hindering the industry's recovery. Stock photo: Bloomberg
Shipping firms and banks are caught in a vicious circle of debt, causing a credit crunch that is hindering the industry's recovery. Stock photo: Bloomberg

Jonathan Saul

Dutch shipowner Vroon is finding talks with banks tough going as it tries to navigate a way out of a long slump in the shipping industry. But it is not an easy time for the lenders either.

Vroon, a 127-year-old family-owned group which operates about 200 vessels and transports livestock, oil and other commodities, wants to extend its credit lines and adjust repayment schedules.

But European banks that lent heavily to the sector more than a decade ago have a heavy toxic debt burden following the 2008-09 global financial crisis and a shipping markets crash in 2010.

Shipping firms and banks are caught in a vicious circle of debt, causing a credit crunch that is hindering the industry's recovery.

Overcapacity - a glut of available ships for hire - is a big concern, and another is a lack of profitability caused by problems such as slower demand and global economic turmoil. One major company, South Korean container line Hanjin Shipping, has gone under. "We have difficulty in meeting all repayment obligations that we have and that is what we are in discussion with our banks about. Those discussions are constructive but are not easy - not for us, or the banks," Herman Marks, the chief financial officer at Vroon, told Reuters. Marks said Vroon was confident of reaching agreements with its financiers soon.

Shipping finance sources say the industry, which transports 90pc of the world's goods, has capital shortfall of about $30bn (€25.7bn) this year. Some banks are being driven out of shipping. Those that remain are now more conservative, Marks said.

Consolidation has begun, especially in container shipping. Denmark's Maersk is acquiring German rival Hamburg Sud while China's COSCO Shipping has bid $6.3bn for Hong Kong's Orient Overseas International.

Germany's Rickmers filed for insolvency in June, and firms that have filed for Chapter 11 bankruptcy protection since March include Singapore's Ezra Holdings Ltd and US-based Tidewater, GulfMark Offshore and Montco Offshore.

Banks were happy to lend to the shipping industry when it boomed in tandem with globalisation.

Even the 2008-09 crisis did not deter all creditors. Expectations that China's fast economic growth would revive the industry prompted a brief new wave of lending before many shipping markets crashed again.

This left European banks with a debt burden of more than $100bn and the value of at least 70pc of those loans has fallen, according to industry estimates. Banks are struggling to find ways to recoup their mounting losses.

"There is probably about $150bn of distressed bank debt stuck with mainly European banks - mainly German - that has still got to be de-gorged from the system," said Michael Parker, global industry head for shipping with Citigroup.

Large banks that once had a big role in the industry, such as Royal Bank of Scotland (RBS), are pulling out.

Some more specialist lenders, such as Germany's HSH Nordbank, are still working through their legacy loans.

European banks have stepped up efforts to sell portfolios - RBS has sold loans to buyers including Japanese financial services firm Orix Corp, but others have found selling difficult.

"Investors will want to see a bit more sustained profitability to the sector - there is some way to go before that," said Paul Taylor, global head of shipping & offshore with French bank Societe Generale CIB. (Reuters)

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business