Banks are facing the prospect of being forced to write down loans to the shipping industry worth more than $90 billion (EUR62 billion) next year.
The write-downs would be a delayed response to a crash in ship values of more than 50%, which has fatally undermined loan cover.
Pressure on the industry has ratcheted up following a renewed drop in the cost of shipping goods since June.
This fall, measured by the Baltic Dry Index, suggests heavily geared shipowners are under particular pressure. The fall in the index is seen as a leading indicator, which suggests the prospects for equities are also set to worsen following a recent rally.
Tim Coffin, asset manager at M2M Management, is raising $250 million from institutions for a fund which plans to buy ships at distress prices. He believes he can achieve returns of 20% from current cargo rates and arbitrage opportunities in the futures market.
Coffin said he had come across dry cargo ships once valued at $90 million, and 80% leveraged, whose market worth had slumped to $30m. He said: ???This has done no good at all to funding ratios.??? Reports suggest funding shortfalls for ships under construction exceed $90 billion.
Banks are using small print in their contracts to escape from funding commitments, leaving shipyards and those who commissioned ship construction to fight it out. Coffin said the scrapping of ships and construction projects should stabilise the situation, once the next period of write-downs was under way, but he said short-term prospects were poor.
A shipping analyst said: ???Should vessel values drop below certain thresholds then banks will lose out as a result of shipping companies breaching covenants.???
The number of ship seizures accelerated over the summer. They included 70 ships owned by bankrupt Eastwind Maritime. One bank said it had taken possession of six ships worth $22.7m, significantly below outstanding mortgages totalling $54.7 million.
A fleet of six Russian cargo vessels securing mortgages worth $20 billion was seized in Hong Kong last month. Public bids have been invited.
DVB Bank director Dagfinn Lunde said 10% of container shipping had been laid up and because of an oversupply of vessels, the bulk market had gone back into decline. He added that financial commitments were being broken. ???Just walking out, closing the door and saying ???Sue me ??? I can???t pay??? does not offer the potential for a solution,??? he said.
Morten Arntzen, chief executive of Overseas Shipholding Group, said the shipping industry was facing ???very tight ship finance markets and the weakening financial condition of less well-capitalised shipowners.??? OSG, a financially strong group, later stepped in to help resolve ???certain liquidity issues??? disclosed by Aker Philadelphia Shipyard over a commission to build 12 vessels.
By Mike Foster
Of FINANCIAL NEWS
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