The banks appear to be facing a similar crunch among their shipping clients as they do their clients with sub prime mortgages. That is to say loans taken out in the boom markets of 2005-2007 have resulted in plummeting ship values, burdensome debt and disappearing equity. Most vulnerable is HSH Nordbank, which is exposed to the industry’s weakest segment, container ships. It has $50 billion in shipping loans, or about seven times its equity.
The exposures of other major ship lenders include Commerzbank, with $37 billion; RBS with $25 billion; and Lloyds TSB with $23.9 billion, according to estimates made by ING Bank in a NY Times article. HSH Nordbank, set aside close to $800 million in provisions for its shipping-related loans this spring, and it has already received $19.4 billion in support from its owners, the regional German states of Hamburg and Schleswig-Holstein. Cato Brahde, an analyst at Tufton Oceanic, a hedge fund that specializes in the shipping industry, is quoted as saying that history shows that the stronger the trade-driven boom, the longer the down cycle that follows, with the slump possibly persisting anywhere from three to ten years. The current bust began in the summer of 2008. And after what he called the “biggest order book of all time, that suggests that most of the pain for the shipping industry is still to come. “We estimate that there will be a 50 percent oversupply in container ships, he is quoted as saying. “And in the next five or six months you will see more banks repossessing ships.
The issue here is not that there will be bank failures as a result of shipping line bankruptcies; the banks debts to shipping companies are modest compared to toxic mortgages, but rather the risk of failure to shipping lines particularly the small to medium sized fleets that may have expanded rapidly via debt in the boom of the middle decade. A New York based carrier with 55 vessels called Eastwind Maritime went bankrupt this summer. The vessels and their cargoes were stranded all over the world, often without enough money to pay for fuel, crew salaries or harbor dues. As shippers, companies need to extend due diligence into their logistics supply chain as effectively as they have traditionally done into the material supply chain. Do not rely on the 3PL providers assurances; seek clarity on who will be carrying the cargo, their relative size and financial strength. The larger 3PL’s have this data available and should be able to share it.
Logistics Management recently wrote in their November edition that the carriers comprising the Transpacific Stabilization Agreement were raising rates on Asia-US services and had so far managed to stick to them. Not normally advocates of raising costs to manufacturers, in this case we would support a modest rise in freight rates and the imposition of monthly adjusted bunker surcharges if it wards of failures among the major shipping lines. As global trade has slumped, container rates have fallen by some 45% and with the massive oversupply of capacity there is little chance of a major turnaround in shippers’ fortunes for a year or two. Some failures are inevitable and certainly fleet rationalization is desirable if it can be achieved in an orderly way that doesn’t strand shippers’ cargoes in transit.