In further signs of the financing pressure facing the shipping industry, DryShips , an Athens-based commodity-focused operator owned by Greek shipping tycoon George Economou, announced late on Tuesday it had signed a waiver agreement with Deutsche Schiffsbank on $117.5m of outstanding debt.
The firm added it would be issuing $300m convertible senior notes at the same time.
Shares in the Nasdaq-listed company, fell 5.7 per cent after the bell on Tuesday following the news, according to Reuters.
Meanwhile, it was only on November 4 that DryShips inked a deal with Commerzbank and West LB on another waiver deal for $70m of outstanding debt.
The spree of waivers is an example of how covenant practices in the industry — tied to the value of shipping assets — are putting additional pressure on shipping operators already struggling with low fleet coverage ratios (the proportion of vessels charted) and a weak freight rate market.
In DryShips’s case, the operator announced amortisation and depreciation of $50m for the third quarter on October 27. As its statement read (our emphasis):
EBITDA represents net income before interest, taxes, depreciation and amortization. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined by United States generally accepted accounting principles, or U.S. GAAP, and our calculation of EBITDA may not be comparable to that reported by other companies. EBITDA is included herein because it is a basis upon which the Company assesses its liquidity position, it is used by our lenders as a measure of our compliance with certain loan covenants and because the Company believes that it presents useful information to investors regarding a company’s ability to service and/or incur indebtedness.
Economou’s other venture, meanwhile, crude oil transporter TopShips, saw its third quarter earnings slump by 99 per cent on November 9.
The firm also announced it was in breach of loan covenants due to depreciation of assets. As the company reported at the time:
As of the date of this release, we have received waivers and signed amendments to our loan agreements with all five of our lending banks in relation to certain loan covenant breaches that have taken place since December 31, 2008. However, as of September 30, 2009, we were in breach of additional covenants with all of our banks, which have not been previously waived. These breaches relate to EBITDA, our overall cash position (minimum liquidity covenants), adjusted net worth and the asset value cover of our product tankers with certain banks. We expect that our lenders will not demand payment of our loans before their maturity, provided that we pay loan installments and accumulated or accrued interest as they fall due under the existing credit facilities.
The ability of DryShips to secure waivers while it goes about tapping alternative financing via the debt market is certainly good news indeed for the industry.
But it still leaves open the question as to whether it’s all a bit of an unnecessary exercise? The shipping companies are, in effect, being penalised despite not having defaulted.
Paul Newman, managing director of commodity and shipping brokerage Icap Energy, raised the point earlier this year in an unpublished letter to the Financial Times, which he subsequently passed on to FT Alphaville.
As he highlighted at the time:
The article “Surplus ship costs fall on Germany“, highlights how the container market is suffering from the collapse in bank lending. Trade credit restrictions have also paralysed industrial shipping. However, the solution to the problem may not lie with the banks but elsewhere — the audit process.
The current audit opinion process is binary– unqualified/ qualified = bad/good. This was suitable in the past where investors had less access to information, and as such a Qualified Opinion was quite rightly a very red flag. But has this black-and-white approach perhaps become part of the problem?
Shipping relies heavily on longterm debt — loan to valuation covenants are commonplace. Banks provide funding under the condition that the value of the underlying collateralised asset should not fall below, say, 125% of the loan. If it does, or is perceived to have done, a technical breach has occurred and the auditor will either press upon the bank to call in the loan, provide bank capital against it or accept a qualified opinion. .
Since calling in the loan is unpalatable, and few credible organisations can realistically operate with qualified accounts, the bank has no choice but to provide, capital. However every £1 tied up in provisioning is £7 or £8 not available for new loans or new trade credit, further holding up new lending. Shipping is not the only industry that could benefit from a revised approach to this issue.
Although the flip side to that argument is that banks do need protect themselves, especially when loans tied to the industry in Europe equate to some $350bn according to the New York Times.
Related links:
Prepare for a junk-bond deluge in shipping- FT Alphaville
Welcome to the sub-marine crisis - FT Alphaville
An AP Moller-Maersk ouch for global trade – FT Alphaville
Who’s in the wake for shipping losses? – FT Alphaville