Interview: Investors Bearish as Appetite for Risk Drops
With the shipping industry embarking on yet another tough year and owners rushing to preserve their financial stability which had been severely hit by the industry slump and overcapacity, the topic of finance is given a central role.
As a result, the recent period has seen owners negotiate new and renegotiate exiting loans to defer payments, sell vessels and restructure operations to maintain liquidity and avoid bankruptcy.
World Maritime News spoke with Simon Petch, Partner – Asset Finance Group, Watson Farley & Williams, Singapore to find out more about how the conditions related to shipping finance in Asia are affecting the industry and potential direction investors might take moving ahead.
WMN: How would you asses the current situation in Asian shipping finance and what would you say are the key challenges the sector faces at the moment?
Petch: There are many challenges currently facing the shipping sector in Asia, and indeed the rest of the world: oil price, commodities prices, reduction of movement of raw materials and other goods – particularly in relation to China, the slowdown in the world economy generally, the oversupply of tonnage in most sectors, etc. Of course, ‘Asia’ is itself an enormous and diverse area with a host of regional influences and variations.
WMN: Is the shipping industry facing lack of assets/interest in investment at the moment and if (not) so, please explain?
Petch: In general, I would say not on either front. There is an oversupply of assets (ships) across almost all sectors. There is no lack of interest in investment, but execution is challenging: the right deals are hard to come by and investors and financiers are cautious in the current climate.
WMN: Given the current situation in the shipping market, have the preconditions for securing a loan changed and if so, in what way? Is it more difficult to ensure financing for certain sectors and what are those sectors?
Petch: With a few exceptions, it is harder to secure financing. It is not so much that the preconditions have changed, but the fundamentals have, and the appetite for risk has. The banking regulatory environment is also having an impact, as have the various sanctions regimes. No sector is finding it easy, and that goes for offshore as much as shipping at the moment.
WMN: Seeing that the shipping industry, especially the dry bulk industry is facing tough times, with China’s SISI predicting more bankruptcies in the sector what does this mean for investors who already invested heavily in these companies and direction they plan to take in the future?
Petch: It will depend upon who is involved and their circumstances – are their plans strategic or more speculative, for example? There may well be casualties given the climate, but there will also be survivors. There will always be a need for dry bulk shipping, and one would hope the survivors will be the stronger for it. And shipping does have a habit of surprising people.
Look at the VLCC spot rate on Monday, or the shipping share price rises in New York; these may well be short term fluctuations but they show the unpredictability.
WMN: We have seen a number of shipping companies renegotiate terms of their loans as they struggle to cut costs and delay payments. Are creditors in Asia willing to amend repayment terms or can we expect more asset freezes/seizures? What has been the strategy so far in ensuring returns?
Petch: We do see financiers willing to sit down and renegotiate. Again, it depends upon the parties involved and the relationships between them. We tend to see those who have been involved in shipping for longer, with greater experience, and more established relationships, taking a more pragmatic approach. A consensual approach is, in our experience, a better way of preserving value, but it is not always possible.
WMN: A number of Asian shipbuilders are experiencing major losses, with some on the verge of bankruptcy due to a slowdown in ordering activity. How are investors dealing with this situation and how will this affect future investments?
Petch: We see a lot of consolidation and restructuring; some diversification. Times look set to be tough for most yards for the foreseeable future. There are options available – deferring and downsizing construction projects and delaying deliveries, for example, but again so much of it is built on relationships; the parties need to talk and face their issues head on.
WMN: Speaking of the strategy investors may take to ensure acceptable returns in the shipping industry for the next five years, what direction do you see them taking? Are they bullish or bearish?
Petch: Bearish for the majority, but there are always some bulls in shipping. For the more established investors with a strong footprint in shipping we do see a desire to ride out the storm and support the industry and those they have ties with within it. They understand the vital role shipping plays in international trade and commerce and the long-term, strategic nature of it.
WMN: Looking ahead, what is needed to keep sustainability of investment in shipping and what will be investors’ role in keeping the shipping industry on the right course?
Petch: Fundamentally, there are few, if any, alternatives to shipping. However, it is subject to the rules of supply and demand; it is very cyclical, but the assets are long-lasting and capital intensive. That is the background against which investors have to make their decisions. I do not often envy them.
* Simon will be moderating a panel discussion on the Asian Shipping Finance landscape at Asia Pacific Maritime (APM) on 17th March 2016.
World Maritime News Staff