It's a new day and age for shippers however efficiency is just the tip of the iceberg. Clearly when credit dried up in 2007, shipping rates plummeted and the shipping industry was in a world of hurt. Many losing over 90% of their market cap heavily indebted. Riddle me this: If potential new investors think their loans are at risk for large haircuts, then the market for bank debt would dry up again. Didn't we watch that movie in 2008-09? But what if the risk on the existing debt is no longer with the shippers.........but with the bank loans attached to old, outdated, fuel-hog, uneconomical ships? That puts shippers (and banks) in an whole different light. Checkout these excerpts from MauldinEconomics with link to full story below. My edits in in purple, underlined and bold. Read on.....
When the bottom fell out in the credit crisis as international trade financial banking collapsed, shipping came almost to a standstill, and ships were barely able to cover their operating costs, there was so little cargo. Remember the pictures of hundreds if not thousands of ships moored in the South Pacific islands, unable to find cargo? Story here. I wrote a few paragraphs about them at the time.
New shipbuilding quickly fell as well, with stories in the press of no new ship orders in 2009. But governments wanted to make sure workers had jobs, so subsidies and new ship designs soon came into play. Making a long and fascinating dinner story short, it turns out that you can now buy a container ship that sold for $40 million in 2008 for $23 million today. That, of course, is a significant operating-cost advantage for new ships. But new designs also make new ships 25-30% more fuel-efficient!
A ship is leased for a certain amount per day to cover operating expenses. Fuel costs are extra. Depending on the size of the ship, the savings can be up to $7,000 a day,
money that goes directly to the shipper. A ship that is 60% of the price and costs significantly less to operate can make money at far lower shipping prices, and not surprisingly gets more of the shipping market share. The result is that many container ships that were built pre-2009 are now simply uneconomical to operate. Depending on the ship, some cannot even generate enough income to cover their operating costs. (Please note that not all pre-2009 ships have issues; but a lot, if not most, of them do.) So those ships are clearly upside down on their loans. I was telling this story last week, and one trader said, "So the investors had to put in more money?" Good question.
As it turns out, the German banks, for the most part, actually make the capital guarantee part of their loan commitment. The investors lose 100% of their money but are able to walk away, kind of like defaulting US homeowners can in most states. The banks take the loss. Sure, they own the ships, but most are basically so much scrap metal, destined for dismantling in India, Pakistan, or Bangladesh.
How bad is it? Banks are taking control of ships, marking them down to a fraction of their cost, and then financing 100% of the cost of selling them to Greek shipping companies. Can we say irony? Greek shipping families basically operate tax-free (a point I wrote about some four years ago) and take a very long-term and conservative view. They sold ships to the Germans at the top of the market for very nice premiums and are now buying them back at significant discounts.
The critical point is that a "European bank health check may trigger additional provisioning as loans benefiting from remediation measures – such as covenant waivers or an extension of repayment schedules – may be re-classified as problem loans under the new standard of the European Banking Authority...." (Reuters)
As Evans Ambrose-Pritchards wrote in The Telegraph last year:
"Most of the 20 top banks for the shipping industry have stopped all funding…. Shipping is the biggest casualty of the new regulations. All the banks are reducing their portfolios, using any breach of covenant to get out of contracts. The second-hand ship market has broken down," said Mr Smith…. Both bulk ships and tankers are trading at lower levels today than during the worst moments of the 2008-09 crisis. The odd twist is that Greek shippers are the ones quietly snapping up bargains from distressed German companies.
"The Greeks are sitting on a pile of cash. They are in their own special cocoon completely removed from Greece's political troubles," said Dimitris Morochartzis from Lloyd's List Intelligence. "They played their cards really well during the boom, selling ships for a profit at the top of cycle. They are now buying them back for a fraction of the price," he said.... Giorgos Xiradakis from consultants XRTC said Greek firms are teaming up with Chinese banks. Chinese premier Wen Jiabao pledged $5bn in loans to the Greek shipping industry two years ago, part of a twin-headed plan to gain a stronger foothold in the EU market and to provide vendor financing for the Yangtze shipbuilding industry – currently in dire straits….
German shipping experts say that two-thirds of the country's marine fleet is in financial distress. If the crisis drags on much longer, the Greeks may leapfrog ahead to become world leaders in container shipping. The irony of prudent Greeks cleaning up after a reckless debt spree by the Germans is lost on nobody.
Fast forward a bit:
......if potential new investors think their loans are at risk for large haircuts, then the market for bank debt will dry up again. Didn't we watch that movie in 2008-09? Read the full indepth article here
Full disclosure long $NAT as a drawer stock as recommended here last Summer.
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