Loans on a 'knife edge' as owners bid to delay repayments

FINANCIALLY pressed owners are increasingly escalating their negotiations with banks, from seeking waivers on covenants to pleading for moratoria on the repayment of loan instalments as cash-flow drains away, according to senior banking sources.

The sources said that owners in the containership and product tanker sectors were especially prominent in these talks, although owners with expensive vessels in crude tankers and dry bulk were not immune.

“Covenants were the first phase,” said one leading Scandinavian banker. “We have now moved on to discussing the deferral of instalments.”

Banks would prefer to live with interest-only arrangements rather than crystallise losses by calling in loans, another banker observed.

“But the whole thing is balancing on a knife edge,” he said. “One big bankruptcy could bring the whole edifice tumbling down.”

Banks were doing “everything they can to avoid write-downs”. However, a bankruptcy would result in ships being repossessed and loans written down in value, potentially exposing the rest of the banks’ portfolio to similar impairment charges.

“In my view, this is inevitable,” said one investment banker. “But the banks are doing their best to delay it.”

Negotiating instalment deferrals can be relatively uncomplicated in bilateral loans. However, in syndicated loans, with many banks involved, the process can be arduous because of majority voting provisions or a requirement for 100% consent.

This can result in banks with a small slice of the overall loan blocking progress.

“Banks with a large exposure are giving in and banks with a small exposure are being difficult,” said the investment banker.

A similar sentiment was recently expressed by another leading lending bank.

“It can’t be hidden that we see today a lot of restructuring where we deal with banks that actually don’t understand the business, or have a secret agenda of just wanting to exit the business, and that is pretty frustrating.”

Some banks may be angling to be bought out by other members of the syndicate but lenders are generally not keen on increasing their exposure to the industry, even by modest amounts.

In exchange for granting a grace period on instalments, banks could again increase loan margins, which the investment banker said were still low compared to spreads for other industries.

There was also the possibility that banks could claim most of the upside in terms of income and asset values.

Banks are expected to suffer record losses in their shipping portfolios in 2009 and 2010, at a time when many have already been dangerously weakened by deficits in their exposure to the sub-prime mortgage industry in the US.

Earlier this year, Standard & Poor’s calculated that that annual losses could “surpass the previous peak loss levels, which rarely exceeded 2% of shipping loans”.

But foreclosing on non-performing shipping loans is an unattractive option as it could help accelerate the downturn in asset values as banks dispose of unwanted tonnage.

(Source: Lloyd’s List)