Investments of $20 bn on hold as funds dry up for shipowners

Investments of $20 bn on hold as funds dry up for shipowners

Bangalore: The liquidity crisis in the US and now Europe is beginning to hit the shipping industry, with a $20 billion (Rs93,800 crore) investment plan by Indian shipowners to replace part of their ageing fleet and expand cargo capacity likely to end up being put on hold.

“Most of the European banks have closed their books for ship financing in 2008. There will be no new business in ship financing for the rest of the year," said Tobias Konig, managing partner of Hamburg-based shipping investment firm Konig and Cie GmbH, KG. He was speaking at the India Shipping Summit in Mumbai last week.

Barely a week after the US financial system was brought to its knees by the rapid unravelling last month of Lehman Brothers, Merrill Lynch and AIG, the contagion crossed the Atlantic, bringing down Belgian-Dutch bank Fortis NV, which required a three-nation rescue, and UK’s Bradford and Bingley Plc., which had to be nationalized.

Indian shipowners have so far relied heavily on European banks, particularly those located in Scandinavia and the Nordic region, for their financing needs, because funding from these specialist banks was much cheaper than local funds.

“Besides, Indian banks cannot lend money for longer periods. They can lend money only for two-three years, whereas shipping firms typically need money for tenures ranging between eight and 15 years," said said B.K. Mandal, director, finance, at state-run Shipping Corp. of India Ltd, or SCI, India’s largest shipping firm.

According to Konig, debt will be more expensive for shipowners than ever before because banks are looking to get their money back to get out of risk.

“Banks are extremely nervous and have started asking for more and more covenants from shipowners, including long-term contracts for new ships. Banks are also demanding that creditworthiness of charterers (those hiring the ships) be rated by Standard and Poor’s or Moody’s," Konig said.

Given the tight funding, the Indian shipping industry will likely have to raise part of the money for new ships. At an average age of 18 years, many ships in the Indian fleet will hit their use-by date over the next five years and will have to be dismantled, in line with global regulations.

Domestic shipowners will need to invest an estimated $20 billion to maintain the fleet at current levels and also to expand capacity to meet rising demand. SCI alone has plans to buy 40 new ships worth close to $2.6 billion over the next four years.

The domestic shipping industry has set aside a corpus of close to $600 million that will form owners’ contribution for buying ships, said S. Hajara, chairman and managing director of SCI. Typically, 20% of the cost of a ship is contributed by owners while the balance is financed with debt.

“So, how will Indian owners raise the debt portion of 80% of the acquisition cost? In the absence of funds, how will the domestic shipping industry grow?" asks Konig, talking specifically of European banks and their current inability to fund projects.

Admitting that funding would be difficult in the coming days, SCI’s Mandal said shipowners will have to look at bigger internal contributions to buy ships. “Loan availability is getting scarce and the quantum of availability is drying up. So, we have to rely more on internal resources to fund ship purchases compared to loans," he said.

“Shipping is coming off the hot market and, hence, banks have to manage their exposure to shipping," said Paul Chang, Hong Kong-based head of shipping (Asia) for HSH Nordbank AG, the world’s largest shipping bank. HSH Nordbank, owned by the city-state of Hamburg in Germany, recently opened a representative office in Mumbai to explore opportunities in India.

He added, however, that shipping would still be profitable for the bank. “It’s a long-term commitment," he said.

However, Konig said the situation will not improve until banks have cleaned up their books, which could take a while. “2009 will be much tougher than 2008," he warned, “because the financials of banks will be bad as they will have to do more write-down of their assets."

Given the difficulty in getting finance from traditional European banks, Indian owners need to look at new sources of funding to pull through the current financial turmoil, he added. “Asian banks need to step up activities to solve the problems which the shipping industry in Asia will face in the years to come," Konig said.

He also said that flexible and innovative structures have to be developed to fill the gap in financing and to compensate for higher financing costs to help the shipping industry through.