The views of the Publishers do not necessarily correspond to the views of Lambos Maritime Overseas Ltd.

Republished by kind permission of: A&A Thorpe, 131a Furtherwick Canvey Island, Essex SS8 7AT Tel: +44 (0) 1268 511300 Fax: +44 (0) 1268 510467 shipaat@aol.com

 

Today’s disastrous shipping markets may be the immediate cause of sleepless nights for owners and operators but not far behind is serious concern over the size of the orderbook. In all of the major sectors, there are still hundreds of ships on order, due for delivery into markets already awash with tonnage as the world fleet is now larger than it has ever been. About one third of the existing bulk carrier fleet remains on builders’ books – close to 2,400 ships; almost 18% of existing tanker tonnage remains on order; and 28% of today’s containership fleet is due to be commissioned over the next couple of years.

Owners may be largely to blame for recent ship-contracting madness but had they not had ready access to bank debt, many newbuilding contracts would never have been signed in the first place. It would seem, therefore, that shipping bankers – many of them charged at the time “growing the shipping book” – played a key role in landing the industry where it is today.

A recent feature in a Clarkson report by Martin Stopford suggests that the value of new ships delivered in 2011 was $138bn, down slightly on the peak figure in 2010 of $145bn. This compares with a value for new ships in 1996 of $13bn. Based on a debt to equity split of 60:40, this would mean that shipping debt would have risen more than ten-fold over the 15 years between 1996 and 2011 – from around $8bn to $88bn.

However, many shipping banks, notably in Europe, have already announced their intention of “de-risking” their shipping portfolios, by which they mean reducing their exposure, where possible, on existing loans, imposing far stricter lending criteria, and in some cases ceasing new business entirely, even for existing creditworthy clients.

Clarkson believes that with deliveries running at $130-140bn a year, demand for ship finance is at the peak of a cycle which is inevitably due for a downturn. “Three quarters of the ships delivered in 2010 were ordered in 2007/8 when a VLCC cost $160m and a Capesize $100m,” writes Stopford. “Today, prices are 40-60% lower.” Banks which agreed to fund 60% of a $160m VLCC in 2008, therefore, are now financing all, or nearly all of a VLCC valued today at $100m. Loan to value covenants have gone out of the window.

The orderbook has shrunk, to some extent, as a result of owners cancelling orders. Many have reluctantly decided to forego the instalment they put down on contract signing and cut their losses. Others have walked away later in the process. But not everyone fixed their finance arrangements when they signed the deal in the first place, and it is not known how much of the orderbook remains still to be financed today. This is critical, not only for shipowners who still want to build the ships they ordered, but also because it will be a key determinant in how long this shipping downturn lasts.

Admittedly, ship lending makes up only a small percentage of the loan portfolios of even shipping largest banks. But at a time when all banks are under pressure – and those in Europe face the prospect of writing off billions in the Eurozone crisis – every dollar will count. Banks may have helped to push the industry into the mess in which it finds itself today but, perhaps involuntarily, their likely reluctance to lend new funds could also just help to pull it out.