Shipping Industry Downturn Compounded by Banks' Financing Challenges
Banks have been pulling back from ship financing due to the downturn within the industry, exacerbated by the increased capital and funding pressures in the banking sector, according to Fitch Ratings. Opportunities for banks remain, particularly in stronger-performing shipping segments such as liquefied natural gas (LNG) transportation and offshore. Banks that can maintain market presence in the near term may also benefit from higher margins in the short term and fewer competitors once the industry recovers.
Fitch expects impaired loans and impairment charges relating to ship finance to continue at heightened levels or increase somewhat in 2012 and 2013. However, bank ratings already factor in this risk, so any ratings impact is unlikely.
The pull-back of ship financing availability is driven partly by banks looking to boost capitalisation. Shipping is a highly cyclical industry meaning that credit ratings for shipping companies tend to be sub- or low-investment grade and so absorb higher amounts of risk-based capital. Further deterioration in the credit quality of shipping exposures would increase the risk weightings of ship finance in banks’ balance sheets – and hence their capital charge.
In addition many euro-funded banks are finding US-dollar funding more costly and less accessible, making financing new business less attractive. Asian banks have increased their activity in ship financing in recent years but are mainly active in their home region, with a significant global expansion unlikely in the near term.
The low charter rates, driven by an oversupply of ships, has also caused a steep drop in the value of ship fleets, resulting in rising loan-to-value ratios. The difficulty in financing ships is exacerbated by the reduced availability of other lenders, which limits the scope for syndication and makes shipping loans more difficult to exit.
A particular focus of pull-back by the banks is pre-delivery financing, which carries a higher level of credit risk due to the potential effects of the borrower’s customer defaulting or facing difficulties during the period when the ship is being built. However, demand for this kind of financing is currently limited by the reduced level of new-build projects, triggered by the current fleet oversupply in many segments.
Significant new ship orders in 2008 mean that a large amount of new ships are expected to enter world fleets in 2012-2013. Combined with subdued growth in global demand, there is now significant overcapacity in the industry. Fitch expects industry overcapacity to continue until 2014, when increased scrapping rates, reduced ship order books and an improvement in global demand should bring the market closer to equilibrium.
The overcapacity problem is specific to particular segments, including the dry bulk, container and crude tanker sectors, for which the 2008 order book was exceptionally large. The oversupply of ships, coupled with lacklustre growth in world trade, has caused a significant drop in shipping charter rates.