Central bank policy may have successfully pushed down Libor rates following the Lehman blow-out, but banks still appear rather reluctant to pass on those lowered costs to commercial and retail clients.
Nowhere is this more gravely the case than in shipping.
Icap’s latest monthly shipping report attempts to shine a light on just how difficult circumstances are. According to the broker’s analysis banks are charging clients a premium over Libor that is significantly higher than during the peak of last year’s crisis. A large proportion of the industry, meanwhile, can’t get credit at all.
And if you thought low Libor rates would at least benefit financing agreed before the crisis, that’s not the case either.
As Icap explain, many loans will have been issued with maintenance covenants such as loan-to-value tests. This means shipowners already struggling with falling revenues are, in many cases, also being slapped with bulky margin calls due to their depreciating assets, a development which Icap say “could prove particularly painful” for the market.
Meanwhile, Icap suggest the family-owned nature of the industry won’t see owners enthusiastically embrace alternative financing options like IPOs. Specifically, they note:
IPOs are an alternative method of raising finance, but obviously involve ceding ownership of at least part of the company, something which may not be popular in an industry with a large number of family-owned companies. Genco has announced a recently formed subsidiary has filed for a proposed IPO, to further provide finance, but already being a listed company, a further IPO is less of an issue for ownership.
Which, of course, leaves only the issuing of high-yield bonds — currently seen as cheap due to the very low interest rate environment — as a viable financing alternative. Icap’s analysis in fact predicts a rush on this front in the coming months. As the report notes:
…bond finance is likely to gain momentum into next year as owners look to alternative methods of finance as the traditional sources remain restricted. This will be needed to pay down debt, re-finance, meet margin calls or other cash flow requirements, or simply to take advantage of lower asset prices to expand operations. Historically shipping downturns spur interest in non-bank finance due to its relative scarcity, and given the severity of the contraction in the financial markets this time, more companies than usual will likely be tapping the high-yield bond markets.
Related links:
The bulk penetration myth – FT Alphaville
Prepare for shipping wars – FT Alphaville
Maersk hit by ‘crisis of historic dimensions’ – FT