Thursday, 15 December 2011

European crisis creating downward spiral in asset prices, experts warn.

Shipping finance companies are saying that the industry is facing the worst conditions in a quarter of a century as the crisis in Europe puts severe pressure on European banks. It appears that funding issues at some of the best-known banks in Europe are prompting them to pressurise shipowners to sell off their assets. Unfortunately, the vicious circle that exists today- a combination of falling ship prices and tumbling freight markets-  leaves shipowners with nowhere to hide. 

There are also few buyers. Jessica Maitra, Partner at international law firm Eversheds says that these are difficult to find. “The comments of the shipping financiers come as no surprise in circumstances where decreased global demand for goods and an oversupply of vessels in the market have seen freight rates in certain sectors nosedive in recent months." she says. "The downward spiral in vessel values follows the same trend in earning potential and therefore cash flow. Falling values may be prompting the banks to pressurise owners to sell off further ships, but the question is, will potential buyers be prepared to take the risk of capital values and freight rates continuing to fall?"

By all accounts, the fall in asset prices has been steep., a part of UK's Seasure Shipbrokers, claims that a typical five-year-old VLCC has fallen almost thirty percent in price since August this year, and is now available for just $58m. The value of a similar aged Panamax container vessel has fallen 32 per cent since summer. "Even in dry bulk shipping, where earnings have recovered after falling earlier in the year, a five-year-old Capesize – the largest class – has fallen 28 per cent from a year ago, to $39.4m," a report says.

Analysts fear that as the financial crisis in Europe deepens, greater pressure from banks on shipowners could force a new wave of shipping insolvencies. A Financial Times article claims that many well known shipping financiers privately have admitted that "liquidity problems are putting banks off financing potential purchases of ships that come up for sale, pushing down the values they achieve. That is prompting banks to worry about the value of similar ships pledged as collateral on their loans. A downward spiral in values is developing as falling values prompt banks to pressurise owners to sell off further ships".

Dagfinn Lunde, head of shipping at Germany’s DVB Bank, agrees with this analysis, adding that prices realised by vessels were falling fast, prompting more banks to push shipowners into selling ships. He says, “I don’t think we will have a normally functioning market for many years. In some markets, we will never have the equity returns we were used to.” Financiers say that funding issues are hitting demand even for ships that are in the market, resulting inevitably in pressure on asset values.

Shipping is facing testing times even without this financial crisis. The General Maritime bankruptcy, problems at Korea Lines, Torm and Frontline- and particular issues faced by the container industry beset by overcapacity- still have to be digested. Funding issues will make the situation that much worse. Harald Serck-Hanssen, head of shipping for Norway’s DNB, feels that things may well get worse. He expects more companies to go bankrupt. “There will absolutely be more bankruptcies,” he says. “That’s clear.”

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