Monday, January 20, 2014

Shrinking credit markets?

The Eurozone crisis has taken a new turn for the shipping industry this year with more stringent ECB rules on asset quality control. This process may further restrict shipping credit from European banks, which still remain today a major source of senior debt financing for the shipping industry. The new rules may restrict bank options in working out the non-performing loans on their books, warehousing shipping assets and selling off portions of their loan portfolios to hedge funds and distressed asset investors. Auditors are unsure of the impact of these new rules on their banking client’s balance sheets. 

German shipping banks have been the largest source of senior debt for the Greek fleet. DvB Bank last year was one of the few major banks still expanding its shipping loan portfolio and a leader in putting new shipping loans on their books. 

There was considerable discussion about the ship finance deficit at the annual ICS Forum in Athens last December. The Greek banking system is in very poor shape. Speakers like Michael Bodouroglou and Ted Petropoulos are estimating a huge funding deficit for needed fleet renewal. The facts from their presentations are that whilst there has been a rise in non-conventional funding sources like private equity and capital markets, it is still small comparatively to the bank lending and does not come close to filling the finance gap. 

Old timers like Petropoulos are still quite hostile to private equity partnerships in shipping, emphasizing non-alignment of interests, but events and times are overtaking them out of necessity to deal with the pressures of the funding gap. Petropoulos himself admits Greek SME shipping companies face presently a bleak future due collapse of the local banking system and there will be immense pressure for consolidation. Petropoulos also made the point that Greeks for the first time in decades are beginning to fund vessel purchases on a cash basis. 

There is another dimension to this as well. The EU/ ECB is the home of austerian economics thinking and aggressive use of deflation to lower domestic prices by ‘internal devaluation’. They are challenged by poor results from these policies in weak economic growth and increasing bad debt as well as massive social cost. The more successful Anglo-Saxons have fared better – by comparison – with QE due their distaste for economic depressions that Europeans seem more willing to accept. 

These kinds of AQR (asset quality review) policies are a direct result of EU thinking. Presumably, the ECB is trying to shore up EU banks for all the government NPL’s that the Eurozone system produces by the way that they work. Greece is a textbook case. Five years of recession, 20-30% of GDP destroyed, 30% unemployment/ 60% unemployment, bankrupt local banking system, bankrupt pension system and a major private creditor PSA+ restructuring, yet still extremely high level of public debt that the IMF wants restructured with the EU/ECB balking. The present Greek government turned down an IMF proposal to help them pursue an OSI (public sector debt restructing with their EZ partners), claiming that they are an EU success story. 

Politics is likely driving this AQR thinking because of the debt deflation situation and this is creating a negative feedback loop. Contracting bank credit means most likely more recessionary drag and deflation. In any case, it is far from certain in any way that the Far East, particularly Chinese banks will be able ultimately to fill the slack for shipping. Likely they have, however, plenty of their own NPL’s to Chinese SOE’s that are catching up with them. Their existing shipping loan holdings are small compared to the major European banks. It is certainly easier to fund new building because of the available export credits over purchase of older tonnage, where credit is virtually non-existent for non-Chinese shipping companies from Far East banks. 

On this basis, these EU/ ECB policies are likely to contribute to more anemic sub-par recovery. The credit deficit and deflationary climate bodes badly for asset prices. On the other hand, the present climate has opened significant opportunities for listed shipping companies like Navios and their deals with HSH. 

Ship finance is very much an increasing case of ‘haves’ and ‘have-nots’. Those shipping companies who presciently and successfully established themselves in capital markets have access to financial resources thgat their their private competitors, who are heavily reliant on bank finance, do not have.  Further industry consolidation seems a direct consequence.

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