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European banks struggle to solve toxic shipping debt problem

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by July 24, 2017 General

European banks struggle to solve toxic shipping debt problem

LONDON: 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 when it boomed 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 of the major companies, South Korean container line Hanjin Shipping Co Ltd, 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.

“It is the lack of profitability for the industry that is causing the lack of availability of finance.”

Marks said Vroon was confident of reaching agreements with its financiers soon.

Shipping finance sources say the shipping industry, which transports 90 percent of the world’s goods including oil, food and industrial products such as coal and iron ore, has an estimated capital shortfall of $30 billion this year. Some banks are being driven out of shipping and those that remain are now more conservative in their financing, Marks said. “It is an industry that requires consolidation,” he added. That consolidation has begun, especially in container shipping. Denmark’s Maersk Line, the global leader in the sector, is acquiring German rival Hamburg Sud and China’s COSCO Shipping Holdings Co Ltd has bid $6.3 billion for Hong Kong peer Orient Overseas International Ltd.

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 firms Tidewater, GulfMark Offshore and Montco Offshore.

Banks were happy to lend to the shipping industry when it boomed after the surge in trade that accompanied globalization.

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 $100 billion and the value of at least 70 percent of those loans has fallen, according to industry estimates. Banks are struggling to find ways to recoup their mounting losses.

“There is probably about $150 billion 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 Britain’s 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.

Ratings agency Moody’s said in June it expected further losses as problem shipping loans continue to mount, possibly affecting banks’ profitability and capital in 2017 and potentially beyond.

The European Central Bank said in May it would be carrying out on-site inspections at banks with a view to possible “remedial actions”.

Regulators want banks to shore up their balance sheets and comply with stress tests, which assess whether a bank has enough capital to cope with adverse developments. 

Published in Daily Times, July 25th , 2017.

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European banks struggle to solve toxic shipping debt problem

Closed
by July 24, 2017 General

European banks struggle to solve toxic shipping debt problem

LONDON: 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 when it boomed 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 of the major companies, South Korean container line Hanjin Shipping Co Ltd, 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.

“It is the lack of profitability for the industry that is causing the lack of availability of finance.”

Marks said Vroon was confident of reaching agreements with its financiers soon.

Shipping finance sources say the shipping industry, which transports 90 percent of the world’s goods including oil, food and industrial products such as coal and iron ore, has an estimated capital shortfall of $30 billion this year. Some banks are being driven out of shipping and those that remain are now more conservative in their financing, Marks said. “It is an industry that requires consolidation,” he added. That consolidation has begun, especially in container shipping. Denmark’s Maersk Line, the global leader in the sector, is acquiring German rival Hamburg Sud and China’s COSCO Shipping Holdings Co Ltd has bid $6.3 billion for Hong Kong peer Orient Overseas International Ltd.

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 firms Tidewater, GulfMark Offshore and Montco Offshore.

Banks were happy to lend to the shipping industry when it boomed after the surge in trade that accompanied globalization.

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 $100 billion and the value of at least 70 percent of those loans has fallen, according to industry estimates. Banks are struggling to find ways to recoup their mounting losses.

“There is probably about $150 billion 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 Britain’s 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.

Ratings agency Moody’s said in June it expected further losses as problem shipping loans continue to mount, possibly affecting banks’ profitability and capital in 2017 and potentially beyond.

The European Central Bank said in May it would be carrying out on-site inspections at banks with a view to possible “remedial actions”.

Regulators want banks to shore up their balance sheets and comply with stress tests, which assess whether a bank has enough capital to cope with adverse developments. 

Published in Daily Times, July 25th , 2017.

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