Friday, August 7, 2009

Banks may begin foreclosing on ship loans

Lloyd's List has a lengthy article regarding banks and ship loans.

Due to the decrease in ship values, apparently all ship loans have broken their covenants, and so far banks have let them.

I always wonder why there was cheering at companies when banks did so. Didn't they realize they were just postponing the inevitable? The banks would agree to these covenant breaches, but only after increasing the interest rate or fees.

Richard Meade - Friday 7 August 2009
BANKS are expected to foreclose on more shipping industry loans towards the end of the year as breaches of loan covenants become ubiquitous across the industry.

While most banks are willing to negotiate covenant waivers rather than pull the carpet from underneath owners in breach of loan agreements, ship financiers have told Lloyd’s List that the prospect of foreclosures and ship arrests will increase significantly as the year progresses.

Loan-to-value covenant breaches are becoming an issue of concern for many shipping banks as asset values plummet and available equity dries up, but according to finance experts this is just one part of a much larger problem.

“The loan-to-value issue is just one of many covenants being breached on a daily basis by a very large number of shipowners,” said Anthony Zolotas, chief executive of specialist finance boutique Eurofin.

“Most shipowners have already had some form of breach of covenant and as we come to the end of the year I believe that we will see more foreclosures.”
According to one senior Asian broker, banks have insufficient funds to finance the existing orderbook, even on some deals where they have already signed loan agreements, and as a result many are now looking for a way out.

“Of course no financial institution would admit such a thing, it risks another meltdown, so instead they dream up ways to dodge their obligations,” the broker said. “Invoking loan-to-value clauses is a great ruse. The shipowner is then left at the mercy of the yard.”

I particularly liked the last paragraph

“Shipping has always been a deep pockets game,” said one broker. “It is probably unfair to heap too much blame on the banks. Wiser and older shipowners have always known the banks would run for cover when things got tough. To expect otherwise would be like expecting a leopard to turn vegetarian.”

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