Banks are being forced to take over ships as shipowners default, reports say, with the situation made more complex because of the plunge in second hand asset prices. And, although this state of affairs is not new- a similar situation prevailed in the eighties- what is new is that bankers are finding it difficult to lay up, sell or scrap ships since their financial exposure is hugely greater today. Many of them are cash strapped anyway, thanks to the Euro zone meltdown.
“The biggest difference to the 1980s, which was the last major crisis, is the value of the assets could be up to 10 times higher, which is why banks have been reluctant up to now to force anything in the hope that the market was going to recover. Clearly that’s not going to happen, and banks are looking at taking other action now,” MRM’s chief executive John Dalby told Reuters.
Shipmanagement companies are trying to capitalise on the opportunity presented; many banks are in a corner, forced to contract with these companies to operate the seized vessels. The alternatives- selling or laying up seized ships- mean huge losses running into tens of millions of dollars for each ship. Amongst the many companies that are offering technical, manning and chartering services are Germany's Oldendorff Carriers and UK's Bibby Ship Management. Bibby is also collaborating for this purpose with Marine Risk Management (MRM), a recovery company that is employed by banks to seize a defaulting vessel.
“What we do is come in and provide technical management of the vessel and provide a full crew to run the vessel and get it to a standard where it is fit for resale by the bank or whatever they want to do,” Bibby’s business development manager Brian Williams says.
Oldendorff Chairman Henning Oldendorff says, “These days we are offering banks to ‘park’ the ships with us - where we effectively take care of the technical and commercial management. It is very straightforward and transparent. If the banks want to sell the ship, we can terminate the charter.”
Amongst the banks that have recently seized ships are Credit Suisse and others who took over seven tankers from a Singapore yard in lieu of $250 million in debts. Others are more tight lipped but, says HSBC's Nigel Prentis, “Many banks are thought to have contingency plans to take over ships and run them through the cycle rather than further undermine values with an auction process. The correction in values has been enough to wipe out equity in many cases, meaning that many ships will be worth less than the outstanding loan: negative equity. Hence, this is a problem for many European banks. Faced with big writedowns, on top of haircuts on peripheral euro zone bonds, they have generally chosen forbearance.”
ABN Amro's MD Harris Antoniou told Reuters that the present situation is likely to continue. “There is still pain on the horizon because of the deliveries and because of the slowing economy,” he said.
Just a few days ago, U.S. bank Citigroup had said in a statement that it had reached an agreement with Societe Generale to buy a portion of that bank's shipping loan book. “Societe Generale Corporate & Investment Banking and Citi have today confirmed an agreement for the sale of a portion of Societe Generale’s shipping portfolio to Citi,” it said.
This trend- bankers seizing ships and passing them on to shipmanagement companies, even as a stopgap measure, may well continue. Says Keith McRae of DVB Bank, “Banks are not ship owners, and therefore do not want to own lots of ships. You may have to warehouse a ship for a period of time, but that’s not a business plan for a bank — it’s an expedient measure.”