Saturday, October 25, 2008

JOC article "Sinking Feeling"

There is a very good article in the Journal of Commerce, updated Oct. 22nd, entitled "Sinking Feeling". I read it only today. It's rather lengthy, and the following 2 paragraphs I had to read twice to comprehend.


"The deceleration of container volumes also is causing problems at container terminals in the U.S., which were hot targets for acquisitions in 2006 and 2007. Some of the financial institutions that bought into the market borrowed heavily and are struggling to comply with debt covenants, or milestones of volume levels, revenue or returns on equity that the borrowers guaranteed.

When a borrower misses one of those covenants, it is in technical default, even if it has made all the required interest payments on the loan, which may have been syndicated to other lenders or banks. With container volumes slowing, there are reports that one of those borrowers has breached its covenant, and that the financial institution behind the fund that owns the terminal has moved the terminal asset onto its balance sheet in order to protect it. In ordinary times, this might not cause alarm, but with credit being scarce and trust in equally short supply, the creditors are said to be seeking recourse."


Unbelievable.

My first reaction is to say who in their right mind would borrow money on these conditions! But, then I realized it's the same people who said the price of houses will keep going up.

Good grief. No wonder things are in such a mess.

2 comments:

Gary Carson said...

There's nothing special about such covenants. It's a pretty standard part of negotiating a commercial loan.

Violation of the covenants usually just means the terms of the loan get renegotiated. Maybe they'll require some paydown or increase interest rates, etc.

Lynda Applegate said...

Thanks for the clarification