NEW YORK, May 11 (Reuters) - Fending off the distressed investors currently circling the sector, bank lenders continue to extend lifelines to several shipping companies trying to weather an industry-wide downturn.
These lenders face the difficult dilemma of either cutting losses and writing down portfolios in a capital-constrained environment, or betting that borrowers can survive long enough to overcome industry oversupply. And though bankers recognize that it might be a long while before these companies can right themselves, they remain leery of damaging longstanding client relationships.
“Shipping is a very small world where everyone knows everyone. As a result, reputation and accountability within this tightly knit community are of paramount importance over the long term,” said Daniel Rodgers, a partner specializing in shipping finance at Watson, Farley & Williams. “As long as there is trust in management, and a well-founded belief in their commitment to find a mutually agreeable solution, banks prefer to work out a reasonable plan, which may include restructuring amortization schedules and extending maturities, to give breathing room to borrowers and avoid marking down the loan and moving toward foreclosure.”
A number of borrowers have successfully sought or are pursuing financial covenant holidays and principal amortization deferrals to buy time. Over the last six months, Eagle Bulk Shipping, Excel Maritime Carriers, and Genco Shipping and Trading have obtained bank waivers. However Eagle Bulk and Genco remain in discussions with banks to secure further financial relief, while Overseas Shipholding Group continues to explore “liquidity enhancing transactions and initiatives” as covenants tighten in upcoming quarters.
While continuing to grant waivers, banks have recently adopted a more aggressive approach towards borrowers by pushing for additional equity contributions. These equity infusions provide liquidity runway and capital cushion beneath bank loans. In February, Genco’s lenders reduced fees on a $1.2 billion credit facility only after the company raised $53 million of equity. Excel Maritime’s $1.4 billion credit facility lenders stipulated that the company raise $20 million of a total $30 million year end equity target by April before agreeing to an amendment.
Within a bankruptcy context, General Maritime bank lenders effectively re-committed to the prepetition 2010 and 2011 credit facilities after receiving a $75 million par paydown and junior creditors exchanging their claims for equity.
Besides harming client relationships, banks would face material mark downs if they foreclosed on troubled loans, which are primarily secured by mortgages on vessels. Sources said many shipping lenders continue to mark their debt at par on the books, even though market bids suggest significant impairments. Foreclosing on a loan would not only write down that particular loan to currently depressed values but could also reprice other loans in the shipping portfolio.
Banks extended these loans to fund new ship construction before the financial crisis in late 2008. However the glut of new ship deliveries, which have long lead times, has caused collateral values to plummet.
According to Drewry Maritime Research, second hand prices for five-year old oil tankers with 150,000 deadweight ton capacity have fallen from a peak of $103 million in September 2008 to $44.5 million this March. Second hand prices for five-year old dry bulk ships have fared no better, as 55,000 deadweight ton capacity ship values have dropped to $22 million in April from $75.5 million in July 2008.
The combination of collateral value decline, capital scarcity, particularly for European lenders, and reputation management creates a dynamic of mutual dependency for borrowers and lenders that is forestalling a deeper distressed cycle.
“Bank groups, especially foreign lenders, are reluctant to break ranks. Distressed investors may have trouble sourcing enough paper to get to a required lender vote to shape the outcome of the situation,” said Robert Burns, a bankruptcy partner at Bracewell & Guiliani.
Some bank debt may eventually hit the secondary market, as several large European shipping lenders intend to reduce sector exposure. HSH Nordbank has publicly announced plans to shrink its shipping loan portfolio to 15 billion euro from 19 billion euro by 2014. Another major lender, WestLB, is being wound down and will transfer unsold assets to a government owned “bad bank” on June 30. Meanwhile Lloyds TSB identified shipping as a non-core area of its portfolio in an analyst presentation last July.
“Unlike prior shipping cycles, you not only have a weak industry but also some weak banks,” said one prominent European shipping lender. “If a bank is winding down its shipping portfolio, the client relationship may no longer matter so that the lender can act more aggressively to encourage the client or possibly other lenders to take out their loan.”