Crisis Management for Mortgagees-Part III

This is the third and final article in a three-part series examining loan enforcement and judicial sale of vessels.  In the first two articles, Norton Rose (Asia) LLP partners, Ben Rose and Robert Driver looked at preparations and options for enforcement and vessel arrest and judicial sale. The third and final article is contributed by Manish Singh from ship managers V.Ships and focuses on certain practical matters which a mortgagee needs to consider when arresting a vessel. V.Ships is a highly experienced asset manager, having successfully supported mortgagees during the various recent crises experienced by the shipping industry.

Difficult operating environment, sustained drop in the freight markets, continued pressure by way of cost inflation and increased regulations all make shipping a particularly challenging business at this time. Add to that concerns around counterparty risks and failing contractual relationships and the instances of defaults, restructurings and recovery of assets from non-performing loan relationships is on the rise.

Lenders are concerned not only about non-performance in certain relationships but also cost pressures which may impact the committed standards of operations that are necessary for safety, asset preservation, trading continuity and environment protection. It is for this reason that V.Ships are working extensively with its principals not only to deliver turn-key asset management but also advisory and strategic support to optimize costs and enhance operational efficiencies.

As highlighted in the previous articles, there is no such thing as a normal set of circumstances surrounding a workout situation. The magnitude and dynamics can and do vary enormously. The scale and intensity of the problems faced can and are often adversely impacted by delay in decision making, disputes between stakeholders, poor information and a host of other reasons.  Irrespective of the factors specific to the case, every recovery project requires meticulous planning and co-ordination between various stakeholders. Often such takeovers need to be implemented within a short period of time. Due to the multiple stakeholders involved, this is particularly challenging as there are various liens that need to be recognized and managed effectively.

Any mismanagement of liens will surely lead to delays and disputes which may invite additional costs and liabilities or may even lead to subsequent arrest of the vessel.

Circumstances will also vary according to the type of asset owner and type of asset(s) involved. For example, further to the creditor risks, on cargo vessels that are in a laden condition, the recovery project must also anticipate the risks of cargo going off specification and what care is required during the transition to prevent this. Similarly on passenger carrying vessels there is an extensive stakeholder group and further commercial and reputational issues to consider.

Planning for recovery scenarios:

While circumstances vary and must be assessed and acted about on their own merits, there is no substitute for good process to manage a series of actions from the initial diagnosis of the problems faced, through scenario planning until successful completion of the desired outcome.

Considering these priorities, the table below depicts a simple five-stage process that we as asset manager adopt with parties engaged in a work out situation to develop a roadmap to be combined with disciplined project management.

Practical considerations:

In terms of various considerations, the earlier articles in this series have already touched upon the commercial review process. This will typically involve the latest valuation of the assets against the exposure of the enforcing parties and claims pending in relation to the asset. Other than the mortgages themselves, typical liens include outstanding crew wages, insurance payments, creditors including bunkers and Lube oil suppliers, fees due to class and disbursements pending to ship agents. Sums may also be due in terms of ship manager’s fee and other 3^rd party suppliers.

Careful consideration will be given to the review of charter parties in place and of the commercial outlook for the vessel to be traded.

In terms of the operational and technical considerations, at this stage, it is nessesary to carry out a physical inspection of the vessel and assesment of crew on board and how the vessel is being managed and cared for.

From an asset manager’s perspective, once a vessel has been located  in a favourable jurisdiction the takeover can be implemented. This involves co-ordination with the crew and various other liens involved. It will, in most instances, be nessesary to replace the existing crew with incoming crew.

Managing the situtaion on board involves gaining early access and deploying a project team on the vessel. This project team will not only gain the confidence of Master and crew but carry out a comprehensive inspection of vessel to establish actual condition and the scope of works involved to maintain or bring the vessel back into trading condition.

Lay-up scenarios:

It is possible that due to the depressed market conditions, in certain instances the laying up of the vessel may be the most effective strategy short or mid term. Different scenarios tend to play out depending on the type of asset, location, degree of the readiness desired for safety or commercial reasons and other relevant factors.

Risk Management:

It is important for the asset manager to use comprehensive risk assessment tools in order to anticipate all operational, commercial and reputational risks and have a robust management plan to respond to all associated issues. At V.Ships, we have an established and tested management system which anticipates and address all routine matters and contingencies. This provides us with the tools to employ measures to mitigate or manage all material risks.

Communications:

Given the wide range of stakeholders involved, a clearly defined and coordinated communications plan is imperative in instances where vessel recovery is involved. Such instances meet with close attention from trade press as well as the regional media in the location where vessel recovery is affected. Misinterpretation of information or uncoordinated communications could again result in adverse publicity.

Early engagement with an asset manager:

It is desirable to establish an early engagement with competent asset managers in order to carry out the assesment of the asset, development of a strategy and ensuring smooth implementation.

Such engagements could be by way of engaging a competent manager to carry our asset inspections. This can readily be done by exercising the right to carry out periodic inspection available to lender within mortgage
contract. Managers are also often tasked to carry out an audit and report on key operational and financial parameters as well as optimisation of costs and management as a lender’s representative.

V.Ships is the leading independent ship-manager and marine services provider globally and we focus on the marine, offshore and leisure markets. V.Ships group companies service a fleet of over 1,000 vessels and manage an international pool of about 25,000 seafarers drawn through the global V.Ships network that includes over 70 offices across the world in over 26 different countries.
www.vships.com

Dongfang Shipbuilding Hit by Cancellations

The lack of financing has hit the orderbook of London AIM listed Dongfang Shipbuilding, casting doubts on the future of the Chinese shipbuilder. Two of its largest contracts, worth USD 52.6 million,
were cancelled after the shipyard failed to secure the required banking finance and performance bonds. In a statement to the stock exchange, Dongfang says it faces increasing difficulty in securing the relevant banking finance for the execution of the contracts. Existing contracts to construct eight 6,700 dwt bulk carriers are also in jeopardy, after the buyer failed to make the required prepayment for work to commence. Dongfang now sits on an orderbook of USD 5.7 million, substantially down from USD 64.7 million in November 2011.

Wintermar Offshore Taps IFC Loan

On Tuesday, Indonesian offshore company Wintermar Offshore Marine signed a USD 45 million with IFC for the expansion of infrastructure services in the country’s oil and gas industry. IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector.

IFC’s loan to PT Wintermar Offshore Marine Tbk, the largest Indonesian provider of support vessels to the domestic oil and gas industry, will assist in funding the company’s plan to add 15 supply vessels to its fleet over the next two years. The expanded fleet will support the exploration and development of new offshore oil and gas fields, particularly in eastern Indonesia, to help the country meet growing energy needs. The gradual implementation of cabotage regulations and rising activity level in the Indonesian offshore energy industry have led to higher demand for Indonesian-flagged offshore support vessels. Continue Reading

Wallenius Wilhelmsen JV Builds and Finances in Japan

Norwegian operator Wilh. Wilhelmsen ASA has recently signed a new USD 55 million buyer’s credit agreement with Japan Bank of International Cooperation (“JBIC”). The Norwegian operator will use the proceeds to finance the construction of a pure car/truck carrier (“PCTC”) ordered at Mitsubishi Heavy Industries (“MHI”) in 2010. JBIC will commit USD 27 million to the facility, with the remaining amount to be co-financed by Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corp. Nippon Export and Investment Insurance (“NEXI”) will provide the commercial lenders buyer’s credit insurance of USD 27.4 million that covers 97.5% political risks and 95% commercial risks.

The vessel is one of the two PCTCs that Wilh. Wilhelmsen and partner Wallenius Lines ordered in 2010. Wallenius Lines’ Singapore subsidiary secured similar funding agreement with JBIC and NEXI for its PCTC back in September 2011. BTMU was the sole arranger in that particular transaction. Each vessel has a capacity to transport 6500 car equivalent units and will be sister vessels of ten PCTCs delivered from MHI in the period 2004-2009. Continue Reading

Shipbuilders Get Domestic Support

China Rongsheng Heavy Industries (“China Rongsheng”) has proved to be a clear favourite among Chinese banks, after securing (yet again) another massive facility with China Development Bank (“CDB”). On 22 December 2011, the Hong Kong listed shipbuilder signed a USD 100 million loan facility with CDB, Hong Kong branch. The offshore USD dollar loan marked a significant milestone for CDB Hong Kong that was set up in 2009 as the bank’s launch pad to serve Chinese enterprises
internationally.

One of Taiwan’s largest private shipbuilders, Jong Shyn Shipbuilding, had also found similar success with the domestic lenders, having inked a TWD 1.2 billion (USD 39.7 million) five year syndicated facility through joint bookrunners and mandated lead arrangers – Taichung Commercial Bank, Taiwan Business Bank, and Taiwan Cooperative Bank. Agricultural Bank of Taiwan, Bank of Kaohsiung, Bank SinoPac, Chang Hwa Commercial Bank, Cosmos Bank Taiwan, Hua Nan Commercial Bank and Shanghai Commercial & Savings Bank took part as participants.  Continue Reading

Hanjin Heavy Industries Mulls Bond Offering

Bond markets in Asia continue to serve as a major source of funding for many shipping and shipbuilding companies. Bonds do not dilute existing equity, mostly sold on an unsecured basis, and more importantly offer longer repayment periods at lower costs compared to bank debt.

This week, Korean shipbuilder Hanjin Heavy Industries & Construction is hoping to sell KRW 120 billion (USD 103.3 million) three year domestic bonds. The bonds are expected to be priced at 6.1%, marginally higher than the company’s KRW 150 billion corporate bonds issued in November 2011. Meritz Securities, Korea Investment & Securities, Woori Investment & Securities, Korea Development Bank, Daewoo Securities, Shinhan Investment Corp and Hyundai Securities are reportedly participants in this offering.

COSCO Holdings Raises RMB 4 billion Domestic Bonds

Investors have appeared to leave China COSCO Holdings’ recent fiasco over charter party disputes behind them, as evident from the successful closing of company’s latest jumbo bond offering. The listed flagship and subsidiary of China Ocean Shipping (Group) Company sold RMB 4 billion (USD 626 million) seven year medium term notes (“MTN”), with lead manager China International Capital Corporation and co-lead Bank of China, just a month before 2011 came to a close.

Investors might be forgiving, but the terms of this piece of new debt were less favourable, compared to a similar MTN issue the company concluded in 3 September 2010. The RMB 5 billion MTN issue in 2010 was not only larger in size, but also offered investors a much lower coupon of 4.35% for a longer 10 year tenure. The latest unsecured notes offer investors an annual coupon of 5.45% for seven years, suggesting that even large state-owned companies in China are not immune to the wider difficulties in the capital markets. Proceeds of the latest bond issue will be set aside for working capital and the key terms of the issue are shown in the Guts of the Deal table accompanying this article. Continue Reading

Counter Cyclical Lending

Subscribers and friends of Marine Money will long have heard bankers talking about counter cyclical lending. That great opportunity that comes along during each down cycle where banks can lend against depressed asset prices and then sit back and relax as the market improves and the loan to asset ratio reduces and reduces. What bliss.

So here we are in early 2012. Surely this is the time to lend with a severely depressed shipping market and vessel values limping downwards, indeed to a fraction of what they were only a few years ago. Some commentators are suggesting that on an inflation adjusted basis new vessels are now cheaper than they have ever been. Granted, cash flow is not very exciting and the outlook for the rest of the year is decidedly limp, but can asset values fall that much further.

So where are all the counter cyclical lenders? Well, as always happens most ship lenders are just too preoccupied looking after their troubled shipping portfolios to be able to even consider new lending. The depressed market has become the nightmare rather than the fairy tale opportunity. What seemed like a harmless 60% loan a few years ago is now unfortunately a 120% loan and with no solution in sight. Shipping bankers are very busy for the wrong reasons.

But there are some banks which are able and willing to lend in 2012, and they can cherry pick the deals they choose to do.  Banks such as DVB Bank, ABN AMRO, Nord LB, NIBC, Standard Chartered, Nordea, DNB and precious few others appear to be bucking the trend and devoting capital to shipping. Not a lot, in the whole scheme of things, but enough to make an adequate return for the banks, and only to carefully selected clients. And it is truly counter cyclical – loan to asset
ratios of close to 50%, usually a requirement for a period of fixed employment to a high calibre charterer, often a parent guarantee, and more than likely a margin hovering around 300 basis points or more. Have those banks ever had it better?

What of the Chinese banks? Though not very experienced in shipping, are they going to be smart counter cyclical lenders? Well, curiously enough, Chinese banks were too expensive for most top European owners in 2011. The margin of 400 basis points and north was simply too hard a pill to swallow. But with those few European banks still in play increasing margins and with the shortage of shipping liquidity likely to increase as the year goes on, the pricing requirements of the Chinese banks may well become competitive. We may well see funding for top European owners coming from the Chinese and, without having planned it, the Chinese banks will sit pretty during the next upturn in the market and watch their ratios get rosier and rosier as their counter cyclical lending bites.

Shipping needs capital and shipping banks have to lend to make money. Perfect timing is a luxury that few plan for or even execute. But this year, and next, may be as close as you get to the ideal lending climate for those few banks able to stay in the game.

Crisis Management for Mortgagees—Part II

This is the second in a series of three articles examining loan enforcement and judicial sale of vessels. In the first article, Norton Rose (sia) LLP partners Ben Rose and Robert Driver looked at preparations and common ptions for enforcement. This article looks specifically at vessel arrest and judicial sale, focusing in particular on the factors which need to be taken into account when deciding whether arresting a vessel is the appropriate course of action and, if so, where such action should be taken.

Historically, mortgagees have favoured judicial sale as a method of enforcement but in recent times, they have appeared reluctant to arrest vessels and have sought to restructure loans wherever possible, notwithstanding the inevitable financial haircut. Indeed, vessel arrests in Singapore have fallen in 2011 as against the figure for 2010. However, with time running out for many owners, mortgagees are again looking at judicial sale. But what are the key questions a mortgagee needs to ask himself before deciding whether to arrest? Continue Reading

Unitholders Approve PST Delisting

Pacific Shipping Trust (“PST”) is a step closer to making history as the first shipping trust to be listed and delisted from the Singapore Exchange. In early October, parent company Pacific International Lines proposed to buy up the remaining 40 percent shares in PST. PIL offered 43 US cents in cash per unit, representing a 14.7 per cent premium over the last-traded price of 37.5 US cents at the point of the announcement.

On December 16, 2011, PST unitholders voted in favour of the delisting that was conditional upon an approval of at least 75 per cent of the total number of issued units held by the unitholders present and voting, on a poll, either in person or by proxy at the extraordinary general meeting (“EGM”), with not more than 10 per cent objecting. At the time of offer, PIL was already holding in excess of 75% of the total number of units at the time of offer. The challenge was to convince minority unitholders that the offer price was fair and the delisting was to their interest. Continue Reading