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Declining Asset Values Are Putting International Shipping Companies At Risk Of Breaching Loan Covenants
Primary Credit Analyst: Funmi Afonja, New York (1) 212-438-4711; funmi_afonja@standardandpoors.com Secondary Contacts: Izabela Listowska, Frankfurt (49) 69-33-999-127; izabela_listowska@standardandpoors.com Manuel Guerena, Singapore (65) 6239-6332; manuel_guerena@standardandpoors.com Per Karlsson, Stockholm (46) 8-440-5927; per_karlsson@standardandpoors.com Jatinder Mall, Toronto (1) 416-507-2544; jatinder_mall@standardandpoors.com
Table Of Contents
What's Behind The Decline In Tanker Market Values? Most Lenders Are Reducing Their Exposure To The Industry The Struggle To Generate Liquidity And Avoid A Covenant Breach Ratings Implications For Companies At Risk Of Covenant Breach Related Research
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Declining Asset Values Are Putting International Shipping Companies At Risk Of Breaching Loan Covenants
Plunging tanker values and weak rates are unleashing a litany of problems for international shipping companies and their financiers. Many ship owners have loans with collateral maintenance covenants that require the amount they've borrowed against a vessel to remain within a specified range of its fair market value. Thanks to prolonged weak rates for ship owners, tanker values are dropping, and many companies are on the brink of breaching those covenants. Where breaches occur, ship owners may have to pay part of a loan early. And if covenant cushions merely shrink, shippers' access to bank lines may decrease also, damaging their liquidity and financial risk profiles. We think that companies will continue to struggle until there is a meaningful and sustained increase in tanker shipping rates--and we don't expect that before the end of 2013. (Watch the related CreditMatters TV segment titled, "Plunging Asset Values And Weak Rates Threaten Global Shippers' Financial Covenants," dated Dec. 7, 2011.) The damage to individual shipping companies will vary. In many cases, the shipping industry's financial distress is forcing lenders to agree to covenant waivers and amendments--or risk loan defaults. But banks are also tightening the lid on already limited debt financing, with many scaling back their ship loan portfolios. This has contributed to our decision over the past 12 months to downgrade five of the 10 international tanker companies we follow. Over the next 12 months, we could take more negative ratings actions if market conditions do not improve. Overview Falling tanker values are putting shipping companies at risk of breaching their loan covenants and possibly defaulting. This is causing mounting cash flow and liquidity problems. We don't expect that tanker values will improve until rates recover. We have already downgraded five operators this year, and more could face a similar fate.
Standard & Poors | RatingsDirect on the Global Credit Portal | December 7, 2011
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Declining Asset Values Are Putting International Shipping Companies At Risk Of Breaching Loan Covenants
Chart 1
Collateral maintenance covenants in credit agreements may require that the fair market value of a vessel that serves as collateral for a loan not fall below a certain level, or not fall below a multiple of the loan balance. The idea is to protect the lender in the event of a loan default--by making sure that the proceeds from the sale of a vessel would be sufficient to cover the outstanding loan principal. Currently, asset values are falling faster than loans balances, leading to many loan-to-value ratios well above 100%. What this means is that in a loan default, proceeds from the sale of vessels would not be sufficient to cover the outstanding loan principal.
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Declining Asset Values Are Putting International Shipping Companies At Risk Of Breaching Loan Covenants
Chart 2
Standard & Poors | RatingsDirect on the Global Credit Portal | December 7, 2011
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Declining Asset Values Are Putting International Shipping Companies At Risk Of Breaching Loan Covenants
levels, by the end of 2014. Banks are also seizing ships--or arresting them, in industry terminology--and forcing asset sales to cut their loan losses. For example, earlier this year, the Royal Bank of Scotland arrested a tanker owned by Ocean Tankers Holdings (not rated) because of outstanding loan payments. By contrast, Asia-based state regulated agencies, such as the Export-Import Bank of China, the Export-Import Bank of Korea, and the Japan Bank for International Cooperation, have continued to provide financing to existing borrowers and are still investing in new ship financing, in part because shipbuilding is important to their economies. Still, these agencies provide only a small fraction of the financing the industry needs and thus can't fix the credit problems of most shippers. Media reports suggest that Chinese shipping companies could be building as many as 80 very large crude carrier tankers over the next few years, as part of the government's goal to transport about half of oil imports on Chinese-owned ships. If the reports are true and China builds new vessels (a process that will take several years), we believe this will alter the seaborne international crude oil trade significantly. Non-Chinese international tanker operators will suffer sustained capacity overhang that will cause crude oil tanker rates to crash and asset values to take a deeper nosedive.
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Declining Asset Values Are Putting International Shipping Companies At Risk Of Breaching Loan Covenants
Standard & Poors | RatingsDirect on the Global Credit Portal | December 7, 2011
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Declining Asset Values Are Putting International Shipping Companies At Risk Of Breaching Loan Covenants
rated debt issues if our simulated default scenario leads us to believe that lenders will recover lower principal and pre-petition interest due to falling asset values. In evaluating the recovery prospects associated with the underlying assets, we typically use a discrete asset valuation methodology because most vessel financings have a security interest over specific vessels, giving lenders a strong incentive to seek recovery upon default by repossessing and disposing of their respective collateral. We only assign recovery ratings to companies with speculative-grade corporate credit rating. Our recovery ratings when viewed together with the company's corporate credit rating can help investors evaluate a debt instrument's risk/reward characteristics and estimate their expected return. General Maritime ('D') is one of several international shippers we rate that has defaulted. If the world economy stays weak long enough, more shippers eventually could find that there are too few life preservers to go around.
Table 1
1 2 3 4 5 6 7 8 9 10
*MISC Bhd.s rating reflects application of Standard & Poor's criteria for rating stand-alone credit profiles within our group methodology. We assess MISC's stand-alone credit profile to be 'bb+'. Stena AB is not a pure-play tanker company; it is a conglomerate with interests in shipping, offshore drilling, ferry operations, real estate, and other investments. Ship Finance international Ltd. and First Ship Lease Trust Ltd., though not tanker operators, own tanker fleets that they lease to operating companies. They are therefore exposed, albeit indirectly, to the underlying issues in the industry.
Table 2
3,769.5 562.8
4,078.7 1,058.7
1,108.7 451.6
774.6 685.3
1,932.3 657.9
105.3 82.2
1,023.8 121.1
648.7 198.1
382.9 52.3
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Declining Asset Values Are Putting International Shipping Companies At Risk Of Breaching Loan Covenants
Table 2
787.3
1,060.9
388.3
553.1
396.7
56.1
43.5
16.2
(26.4)
1,497.4 (919.0)
2,047.8 (980.0)
164.7 204.9
357.6 207.3
596.5 (233.4)
94.7 (33.8)
598.9 (561.8)
280.7 (320.0)
148.2 (186.9)
(1,461.6) 469.8
(1,024.4) 158.5
144.0 176.0
90.2 88.5
(513.8) 497.5
(56.5) 28.5
(615.4) 182.1
(320.0) 194.7
(187.8) 37.9
4,644.5 7,543.6
8,912.6 4,673.5
2,032.1 3,183.0
3,646.9 857.9
5,152.5 3,335.5
481.5 342.8
3,449.6 1,603.6
2,276.5 1,018.5
1,345.3 305.7
8.3 38.1
8.4 65.6
4.5 39.0
5.3 81.0
7.8 60.7
5.9 58.4
28.5 68.3
11.5 69.1
25.7 81.5
Navios Maritime Acquisition Corp. does not release its financial statements publicly.
Related Research
Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Dec. 23, 2010 Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009 Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009
Standard & Poors | RatingsDirect on the Global Credit Portal | December 7, 2011
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Declining Asset Values Are Putting International Shipping Companies At Risk Of Breaching Loan Covenants 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
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