Credit crunch hitting shipowners

Shipping companies are experiencing a tightening of lending conditions because of growing market uncertainty and a weakening of banks’ ability to lend, senior officials have revealed. The ambitious building programmes announced around the world when the market was strong have created a huge demand for financing.

The shipping sector is highly cyclical as orders for vessels are placed years ahead of delivery and many shipowners and yards face restricted liquidity, leading to delays and even cancellations that in turn could restrict tonnage growth. Owners seeking financing may have to wait up to three years for the bank credit market to return to normal, say analysts.

Some banks were in worse shape than others and cost funding capacity and capital would be crucial in deciding their futures. Harald Serck-Hanssen, head of Norwegian bank DnB NOR’s shipping and offshore unit, said: “There has been a further tightening in lending conditions over the summer. Some banks have shut their books for the year and the already limited banking sector specialising in shipping and offshore lending is becoming smaller.”

German banking group Westdeutsche Landesbank closed its shipping unit a month ago following restructuring measures, and Serck-Hanssen added: “This creates uncertainty. Things are happening on the bank side that may mean that the capacity will be further weakened. The takeover of Dresdner Bank by Commerzbank is an example.”

In June several industry players said they were being buffeted by “stormy weather” and that financing looked increasingly difficult. Dry-bulk carriers have recently seen freight rates drop from record highs largely because of falling demand from economies such as China, which accounts for a large part of the market, and a general economic slowdown. With new shipping tonnage lined up to enter the market from 2009 rates were expected to fall next year. But the recent drop has raised questions whether it is short-term volatility or if the correction is starting earlier than expected.

Eivind Grostad, DNV Senior Vice-President and Regional Manager for DNV Maritime, said the shipping sector had been relatively unaffected by the credit crunch to date but warned that the situation would deteriorate during the second half of the year as financial markets would be unable to finance the current order books of shipyards. He advised shipowners to react to the current difficult situation by strengthening their relationships with their banks.

“I am sure that the loan market will continue to support shipping but on different terms,” said Grostad. “They will be more selective on who they lend money to. So borrowers need to nurture strong relations with their banks and offer plenty of side business.” Jonathan Hill, Managing Director of shipping funds at Tufton Oceanic in Dubai, said banks would increasingly turn to Asia as a consequence of rising costs when looking to syndicate, as Asian banks have not been hit as hard as American or European ones.

“I think that unless there are hidden problems in Asian banks, they will be important syndicate partners moving forward,” he added. He said if the shipping market remained “reasonably strong” the banks would provide enough credit to cover demand.