The outlook for 2012 and beyond in terms of ship financing seems to be directly linked to the ongoing process of European banks' recapitalization. Its outcome will determine the banks' willingness to renter more risky, but equally rewarding segments like shipping finance. In its latest annual report, Petrofin Research Bank noted that as 2011 has evolved, an increasing number of European banks entered into a ‘shut down’ mode. As a consequence, new loan production has reduced substantially and only offered by an ever dwindling small number of European banks.
The same does not apply for the Far Eastern banks, which have continued to lend with a heavy emphasis towards local clients and / or in support of local newbuildings. Those Hellenic owners, which fit into the above category, have fared better in terms of ship finance.
Export credit finance has become more popular and necessary for all newbuildings including European built vessels, primarily linked to the offshore or specialty sectors.
According to Petrofin Bank Research "if large Greek private and publicly listed companies have struggled to obtain satisfactory finance on acceptable terms, the position for small to medium Greek owners has become dire. If even a medium financially robust and performing Greek owner finds himself in search of a new bank (where his existing bank(s) may have stopped lending) the available choice of banks is very limited and the terms offered rather steep. Hence, many Hellenic owners have started to acquire vessels for cash or have turned to private capital providers to cover the funding gap.
Interest in Hellenic shipping by international private capital has increased and there are a number of Joint Venture funds in existence with Hellenic owners. However, the annual rate of return sought by private capital is in excess of 20% and this can only be achieved primarily via capital gains by investing counter cyclically. In addition to international private equity, individual private equity providers have been attracted by the upside potential of shipping, as vessel values have plummeted" said the report.
It went on to state that "despite the above, second hand vessel demand remains relatively weak, as it is not supported by an active ship finance market, which for shipping is the life blood of the industry. European banks have been adversely affected by a large number of factors, all acting collectively to limit their fresh ship lending capability. The main reasons rest with the European banks’ capital adequacy problems in the light of the Basle III requirements and having taken into account provisions and losses, the effects of sovereign risk including the Hellenic PSI and their previous over-leveraged position. Coupled with the above, are the liquidity issues for European banks finding themselves unable to fund their requirements via their deposit base or the interbank market and, therefore, needing central bank support. The slowdown in global GDP growth, international trade and the European recession has not helped either" mentioned Petrofin Bank Research.
Finally it added that "lastly, shipping itself, with notable exceptions, is facing severe vessel values, cashflow and liquidity problems, affecting many owners who have been caught with expensive purchases and / or n/b commitment. As more and more shipping loans are in need of restructure, often, time and time again, shipping banks have become wary of fresh lending at a time of weakening loan portfolios and individual loan provisions and losses. It is self-evident that of the remainder lenders, most have perceived the opportunities offered by a low market with well-structured loans to the best clients and on high yielding terms.
For Hellenic shipping and in particular Hellenic banks, lending conditions have become even more acute following the Hellenic state crisis, the PSI and the difficult financial conditions of Hellenic banks. The Hellenic economy is now in its fourth year of continuous recession and the non-performing loans (as distinct from shipping loans) have increased leaving Greek banker with mounting loan provisions and losses. The Hellenic crisis has also had an effect on ‘Hellenic lending’ by non- Hellenic banks, even though Hellenic shipping is not directly impacted by the Hellenic crisis. Whereas all banks with a shipping presence may be affected by a possible Hellenic exit from Europe and / or the Euro, an unlikely event, the fear of such an upheaval is affecting all Greek related business" concluded the report.
Attempting to unlock the secrets that the future holds and more specifically when will this bleak picture be changed, Petrofin said that "the re-capitalization of European banks is expected to take place from 2012 onwards and this shall have a positive effect on European bank liquidity and risk taking. Moreover, it is anticipated that, slowly, interbank confidence shall return, thus, restoring liquidity. Having raised equity, banks must generate profits and this will not be done by continuing to be risk-averse. In addition, the capital increase, together with the de-leveraging process, should bring about a new financial platform, capable of providing fresh loans and enjoying shipping’ considerable yields.
A relaxation of the European deficit minimisation policy is now widely expected and this should reduce the recessionary effects in Europe and hopefully restore European growth.
Shipping, as well, is expected to recover in the next 1-2 years and a change of sentiment towards shipping risk shall also be a helpful development. Of course, such recovery is linked not only to the increased demand for shipping but also to the swift curtailment of newbuilding deliveries and orders.
Lastly, although too early to call, should Greece achieve the EU/IMF public deficit targets and a way is found to reduce state debt, as well as carry out all the structural changes, it is possible that Greece shall stop from being a de-stabilising factor for Greek ship finance.
All in all, we remain reasonably optimistic of a gradual return of confidence and strong future growth in Greek ship finance, even though 2012 may well turn out to be a most difficult year" it concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide