Transport Finance Hits Treacherous Waters.
Peter T. Leach
COPYRIGHT 2009 All Rights Reserved
BYLINE: Peter T. Leach
Journal Of Commerce
When the CMA CGM Christoph Colomb pushed out of a South Korean shipyard early this month, the massive vessel set several records for its scale, but nothing was quite as breathtaking to the transportation industry as the equipment financing woes the container ship displaced on its way out to sea.
The 13,300-TEU behemoth stands out not just because of its enormous capacity but because the container ship is one of the very few new freight carriers of any kind, in any mode, to enter a shipping world in a year of sharply shrinking capacity. With more eyes turning toward 2010 and beyond, there are growing signs the capacity retrenchment may leave deeper, structural changes to shipping in its wake as the business of financing transportation equipment manufacturing and sales copes with its own pain and consolidation.
There are signs the extensive international financial network that underpins the manufacture of ships is starting to buckle under the weight of a demand downturn stretching into its second year. It's a phenomena spreading across transportation, including the dance under way in the United States between lenders and cash-short trucking companies that continue to operate only because banks foreclose because they don't want to end up owning deeply devalued assets.
With new container ships costing more than $150 million each, carrier balance sheets battered and the equivalent of 40 percent of the existing worldwide fleet now on order, the international financial web that supports ship purchases sees a growing gap between orders and cash.
"If you look at the order book today, there is a financing gap of somewhere between $300 billion to $400 billion of new vessels coming out," said Tobias Backer, head of the ship finance unit at ICON Capital in New York. "That exceeds the amount of capital that was raised for the shipping market in the last five years. There's no way we can fill that gap, and the only way to deal with that is to have asset values fall to the level where it will clear the available capital capacity from the market."
Some industry executives expect the growing gap will lead to major changes in the financial apparatus behind the business if a turnaround does not arrive early in 2010. "Ship financing is probably going to change fundamentally," Ron Widdows, chairman of Neptune Orient Lines, told Transcomp, the annual meeting of the shipper-focused National Industrial Transportation League, this month. "That is probably going to affect capacity."
you keep making slow steaming seem trivial. It`s not. The entire industry is changing the way they ship. A reduction in a speed of 5 knots, saves 50% in fuel. As you said before, there are plenty of ships out there, so why not utilize them.
<<<<<<<The pain in the market is showing up at charter ship owners such as Seaspan, Danaos and Rickmers Maritime Trust, where problems were evident in results for the quarter ended Sept. 30.>>>>>>>>>
<<<<<<<Maersk Line recently notified Seaspan it is returning one of its charter ships early.>>>>>>>
Not exactly accurate....... Seaspan`s operational earnings have not been hurt yet. The earnings are actually increasing (except for interest rate swaps of course). Also I have not been able to find any proof of any customer announcing they are returning a vessel early. I appreciate any news that could help my investment decisions, but when this author is saying things that are inaccurate, I have a hard time taking it serious.
Interesting read and thanks for posting. Not sure where APMM early return of ship info comes from. Nov. 2011 ends the 5 year original term based on current SSW ship inventory.
Rocky economy ahead but long term leases and strength of customer base keeps me in this name.
The world's largest ship financier, with a $45 billion portfolio, Germany's HSH Nordbank, sent a shudder through the industry last week when it posted a $1.1 billion net loss on its shipping holdings in the first nine months of 2009 and said it had doubled its loss provisions at its shipping unit to nearly $1.5 billion. The bank said greater stability that has helped the tanker and dry cargo ship market has not helped container shipping.
"Here, the stabilized demand had not yet led to a noticeable upturn in charter rates and ship values as fleets have continued to grow at the same time," the bank said.
The pain in the market is showing up at charter ship owners such as Seaspan, Danaos and Rickmers Maritime Trust, where problems were evident in results for the quarter ended Sept. 30.
Rickmers said this month it was unable to take delivery of a ship it had ordered for charter to Hanjin Shipping in the third quarter and may not take delivery of two more on order. Rickmers is negotiating with lender banks about financing and breached covenants.
Maersk Line recently notified Seaspan it is returning one of its charter ships early. And Danaos was hurt when Zim Integrated Shipping Services imposed a unilateral 35 percent cut in all its charter payments for three years. Danaos renegotiated the terms with Zim, but the company also started new negotiations with shipyards to defer payments and give Danaos time to come up with new financing.
But the traditional financing structures behind the shipping industry themselves are under siege.
The biggest impact now appears to be to the limited German limited partnerships known as Kommanditgesellschafs, or KGs, which have seen their holdings deteriorate and banks increasingly unwilling to prop up the partnerships.
Hamburg is the epicenter of German ship finance and the KG market, which accounts for between 60 and 70 percent of all new container ship orders and a third of the existing container fleet. Because of the massive overcapacity of the existing fleet and the enormous capacity on order the value of the ships has fallen, and as their value falls, the KG model is crumbling. The partners in the KG groups won't send more money into the partnerships, so the finance banks have all but stopped lending for ship orders that have already been placed or for any new ship orders going forward. That leaves a huge gap in the financing of ship offers.
"The KG market for now is dead," said Peter Shaerf, managing director of AMA Capital Partners, a New York investment bank that specializes in maritime deals.
If the KG groups can't pay for all the ships they have ordered, that spells big trouble because banks that routinely prepaid for those orders aren't extending credit to the KG groups any more. Shaerf estimated some 350 of the 2,500 new ships KG groups have ordered are in question, with the groups that ordered them unable to raise the equity to pay for loans from ship finance banks.
Over the years, some 1,400 different KG investment partnerships were created to finance the bulk of new ship orders because they received favorable treatment under German tax law.
Typically seen as conservative partnerships — the stereotype is that they are made up of wealthy dentists and doctors — the KGs invested in what for years has been a dependable and steadily growing international shipping business. Most are organized by specialists in Hamburg who piece together an investment group, secure a loan for about 65 percent of the value of the ship being ordered from ship finance banks that then prepay the shipyard where the ship is ordered. The organizers then raise equity from investors to pay the remaining 35 percent of the ship price. The partnerships repay the bank loans out of the revenue stream generated by chartering the new ship to liner companies.