Sunday, August 9, 2009

Will there be any distress deals in shipping?

Since the fall 2008, public policy response to the financial crisis has to reinflate asset prices by flooding the markets with massive central bank liquidity. Banks have not been aggressive in covenant breaches. Some major shipping players feel that asset prices are artificially high. ATM share offerings have enabled public companies to bail themselves out. All eyes are presently on the quality of the future recovery in 2010 and beyond.

Last fall shipping markets plunged with the outbreak of the financial crisis. Shipping had enjoyed unprecedented boom times, riding globalization, outsourcing and the rise of China as an economic superpower, following the footsteps of Japan in the 1950's and 60's.

This year's notable recovery of the BDI - mainly in the Capesize sector - is due to a new surge in Chinese inventory building in coal and iron ore after several months of market penury with rates below breakeven levels. Chinse importers were renegotiating supply contracts down to the lowest possible prices and drawing down stock. There is a great deal of debate whether this is the beginning of a new bull market for dry cargo or it is simply temporary inventory hoarding for speculative purposes and concerns of more US dollar weakness ahead.

After a period of relative out performance, the tanker markets took a nose dive. Early in 2009 there was big demand for storage due the extreme premiums in forward oil futures over prevailing spot prices. The rise in oil prices changed this situation. Clean petroleum markets have been hit the hardest. Chemicals are somewhat better off with a surge in Chinese feedstock imports, but most other routes are slack with significant drop in cargo volume. Containers continue very weak, often below operating costs, except some feeder trades.

Despite substantial fall in asset prices and high senior debt leverage levels of many publicly listed companies from the popular fleet block vessel acquisition/ merger deals at the top of the market, few companies have gone into serious default, leading to liquidation. In the relatively few cases of foreclosures, banks have tried to transfer assets to new entities, hoping to position themselves for recovery.

The financially weaker companies have been aggressively issuing new shares, mostly sold slowly in small lots over the market. George Economou has pioneered in this technique raising nearly US1 billion for DRYS. Initially there was brisk investor enthusiasm until the market started to perceive the massive increase in share count. Lately even some of the worst performers like TOPS with a bad record in share value and continuing restructuring negotiations with senior lenders have found ready new money from a standby facility that Yorkville - a New Jersey-based financial firm - offered them with open arms.

For these reasons, Peter Georgiopoulos argues that "While that's [sic governments have supported the banks and banks essentially have returned the favor by supporting clients] good in some ways, it has kept the market artificially high".

So far, this downturn in the shipping markets has been different from some of the historic collapses. Meanwhile the war of attrition continues and the issue ahead will be the quality of the recovery as well as the sustainability of the Far East growth model (see my accompanying article: "The China Conundrum").

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