S&P Thinks Dry Bulkers Face Significant Refi, Default Risks (DRYS) (EGLE) (GNK)
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Global ship operators face significant refinancing and default risks as a result of tight bank funding, enormous industry overcapacity, and depressed global trading conditions, says Standard & Poor's Ratings Services in the report: "Global Ship Operators Scramble For Liquidity To Stay Afloat."
In an industry that's highly sensitive to economic conditions, ship charter rates have fallen to between 30% and 80% below their 10-year historical average in parallel with declining economic activity. High operating costs, particularly for fuel, are also depressing their earnings. What's more, a lack of supply discipline in this fragmented industry means that ship operators accelerated ordering new vessels in years when shipping markets flourished so that these vessels are now hitting the water at a time when trade demand is subdued. Over the past 10 years, the global container ship and dry bulk fleets have more than doubled, while the tanker fleet has grown by more than 50%.
Adding to these difficulties, ship operators are now finding it increasingly difficult to raise capital for new ships and to refinance existing loans. Banks, faced with their own financial difficulties and a riskier shipping industry, are imposing tougher conditions for lending and charging higher premiums. Last year, Germany's Commerzbank AG, one of the largest lenders to shipping industry holding a $20 billion loan portfolio exited ship finance, raising concerns from industry experts that other banks with shipping portfolios might follow.
"We expect asset values and the performance and credit quality of shipping companies to remain weak in the coming quarters, which will further exacerbate banks' reluctance to lend," said Standard & Poor's credit analyst Izabela Listowska. "As a result, we think further shipping company defaults and financial restructurings are likely over the next few quarters." This would follow defaults by previously rated U.S.-based tanker operators Overseas Shipholding Group Inc., General Maritime Corp., and Indonesia-based PT Berlian Laju Tanker Tbk. High-profile ship operators, such as Denmark-based Torm A/S and U.S.-based Eagle Bulk Shipping Inc. (Nasdaq: EGLE), both not rated, have also fallen victim to the protracted industry downturn. Both companies were forced to restructure their debts last year to carry on operations.
"We believe a shipping company's ability to gain access to funding at an affordable cost will be key to their success over the coming quarters," said Ms. Listowska. "Distressed shipping companies may find it difficult to obtain financing to roll over maturities or to meet their ongoing operating needs. For those that can access financing, we believe pricing will likely be substantially higher than in the past few years, which will put further pressure on already reduced cash flows. Yet, a company's ability to maintain adequate liquidity will be critical to withstanding the difficult industry challenges."
"Nonetheless, we believe most shipping companies that we rate are relatively well placed in a global context to navigate the tightening funding conditions this year," Ms Listowska added. We calculate that most have liquidity sources (operating cash flows, unrestricted cash balances, and committed bank financing) that will exceed liquidity uses (mainly capital spending and mandatory debt repayments) by more than 1.2x in 2013.
On watch today include names like Genco (NYSE: GNK), DryShips (Nasdaq: DRYS), Praragon Shippning (NYSE: PRGN), Eurosea (Nasdaq: ESEA), FreeSeas (Nasdaq: FREE), and others.
In an industry that's highly sensitive to economic conditions, ship charter rates have fallen to between 30% and 80% below their 10-year historical average in parallel with declining economic activity. High operating costs, particularly for fuel, are also depressing their earnings. What's more, a lack of supply discipline in this fragmented industry means that ship operators accelerated ordering new vessels in years when shipping markets flourished so that these vessels are now hitting the water at a time when trade demand is subdued. Over the past 10 years, the global container ship and dry bulk fleets have more than doubled, while the tanker fleet has grown by more than 50%.
Adding to these difficulties, ship operators are now finding it increasingly difficult to raise capital for new ships and to refinance existing loans. Banks, faced with their own financial difficulties and a riskier shipping industry, are imposing tougher conditions for lending and charging higher premiums. Last year, Germany's Commerzbank AG, one of the largest lenders to shipping industry holding a $20 billion loan portfolio exited ship finance, raising concerns from industry experts that other banks with shipping portfolios might follow.
"We expect asset values and the performance and credit quality of shipping companies to remain weak in the coming quarters, which will further exacerbate banks' reluctance to lend," said Standard & Poor's credit analyst Izabela Listowska. "As a result, we think further shipping company defaults and financial restructurings are likely over the next few quarters." This would follow defaults by previously rated U.S.-based tanker operators Overseas Shipholding Group Inc., General Maritime Corp., and Indonesia-based PT Berlian Laju Tanker Tbk. High-profile ship operators, such as Denmark-based Torm A/S and U.S.-based Eagle Bulk Shipping Inc. (Nasdaq: EGLE), both not rated, have also fallen victim to the protracted industry downturn. Both companies were forced to restructure their debts last year to carry on operations.
"We believe a shipping company's ability to gain access to funding at an affordable cost will be key to their success over the coming quarters," said Ms. Listowska. "Distressed shipping companies may find it difficult to obtain financing to roll over maturities or to meet their ongoing operating needs. For those that can access financing, we believe pricing will likely be substantially higher than in the past few years, which will put further pressure on already reduced cash flows. Yet, a company's ability to maintain adequate liquidity will be critical to withstanding the difficult industry challenges."
"Nonetheless, we believe most shipping companies that we rate are relatively well placed in a global context to navigate the tightening funding conditions this year," Ms Listowska added. We calculate that most have liquidity sources (operating cash flows, unrestricted cash balances, and committed bank financing) that will exceed liquidity uses (mainly capital spending and mandatory debt repayments) by more than 1.2x in 2013.
On watch today include names like Genco (NYSE: GNK), DryShips (Nasdaq: DRYS), Praragon Shippning (NYSE: PRGN), Eurosea (Nasdaq: ESEA), FreeSeas (Nasdaq: FREE), and others.
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