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.

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

Crisis Management for Mortgagees

By Ben Rose and Robert Driver, Norton Rose (Asia) LLP

In recent months the shipping markets have witnessed an increase in the number of troubled loans. Some owners and mortgagees have managed to agree terms for rescheduling. Where this has not been possible, mortgagees have considered enforcement. In the past, they have favoured judicial sale but various factors, notably cost and substantial write offs, have obliged them to seek alternatives; but with time running out for many owners, mortgagees, finding alternatives more elusive than before, are again reconciling themselves to the prospect of judicial sale. In a series of three articles, Norton Rose (Asia) LLP partners Ben Rose and Robert Driver examine three successive stages in the judicial sale process, beginning, in this article, with the preparations and the common options for enforcement. The next article will focus on ship arrest – what are the main issues to consider when deciding whether or not to arrest a vessel and the final article will look at practical issues once a ship has been arrested.

Early warning signs

Signs of an owner’s financial difficulties usually manifest themselves in a breach of financial covenants, an inability to refinance and the occurrence of various other events of default. If owner’s the business is viable, debt rescheduling may be feasible. In previous cases debt rescheduling has sometimes been successful and the owner has been able to trade its way out of difficulty. In other cases rescheduling has merely been a prelude to enforcement, often made more difficult and costly for the mortgagee by the accumulation of third party debt during the moratorium. Continue Reading

Notes from Japan: Sailing into Sunset Waters

Three years of bullish yen have exacerbated the woes of Japanese shipowners who are already struggling with the weak shipping market and soaring operating costs. In the aftermath of the earthquake and tsunami, yen has soared to near record highs amid Europe’s debt issues and uncertainties around United States’ economic recovery. While it may appear counterintuitive that the currency of debt-ridden Japan is treated as a safe bet in times of crises, investors take comfort that 95% of the nation’s debt is consumed domestically, interest rate on it is extremely low and inflation is non-existent. Furthermore, Japan’s very large debt burden has traditionally been financed by very strong household savings, even though the country has seen a significant decline in savings rates over the past decade.

We recently visited several shipping companies, trading houses and banks in Tokyo and found the general mood surprising bleak. The market is bracing itself for a spate of foreclosures in 2012 if the situation does not drastically change. And nobody is confident of any positive change. As yen hovers around JPY 76/dollar, there are increasing doubts that private owners will be able to sustain another year at these rates. A stronger yen bites into the balance sheets of Japanese shipowners who borrow in yen to take advantage of the low interest rates, but earn cash flow in dollars. To make things worse, during the heyday of the shipping boom, most cash flow projections were prepared on the basis between JPY95–100, but this has changed dramatically. As pointed out by a veteran ship financier, “Yen used to hover around JPY110/dollar and reached JPY 90 only twice in history. But now, it is trading around JPY 70/dollar. The impossible has happened.” Continue Reading

Shipping in Australia: A Level Playing Field?

Contributed by Jacqueline Bell and Andrew Hopkins, Norton Rose (Asia) LLP

The Australian government has recently announced an ambitious set of policy reforms aimed at reinvigorating the dwindling Australian shipping industry. At headline level the reforms are certainly promising and appear to have been generally well received by the players in the Australian shipping market.  Whether the reforms will be sufficiently far-reaching to attract significant international investment in the Australian shipping industry however remains to be seen.

In a shipping market dogged by plunging spot rates and rising fuel costs, shipping companies must limit costs wherever possible merely to stay afloat. Australia’s current cabotage rules are unforgiving, requiring crews working Australian-registered vessels to be paid Australian rates of pay to comply with the country’s Fair Work legislation – cited figures show that a typical Australian container ship pays A$4.06 million in crew costs per year compared to A$1.65 million for a foreign equivalent vessel.  In addition such vessels attract the Australia’s standard level of corporation tax on their trade income of 30% and must suffer the added price increase on coastal shipping fuel under the Australian carbon tax regime. It is unsurprising that shipping companies are looking elsewhere to benefit from the cheaper labour expenditure, tax breaks and less stringent regulation of other flags of convenience. Continue Reading

AIM – an alternative means of raising capital

Contributed by Nicholas Hanna, Watson, Farley and Williams Asia Practice LLP

In the current market conditions, shipping companies are struggling to obtain much needed debt finance. Banks are undoubtedly more inclined to lend to large, less-risky companies with strong track records. This results in a gap in the funding of small to medium sized companies which require a certain level of financial backing as well as an injection of capital to withstand the present uncertainties – this is particularly true for companies in the shipping industry.

One way to plug this gap is via private equity houses, seed financing or venture capitalist houses but the cost in equity dilution can sometimes be very high. Another way is by raising funds via capital markets. According to the London Stock Exchange, the most successful of the capital markets is the Alternative Investment Market also known as “AIM”. Arguably, a listing on AIM may be perceived as a pragmatic alternative to debt finance. A listing of this type enables shipping companies to raise funds on admission to market and provides a global platform on which to access further capital in the future. Continue Reading

Best Time to Order Ships: It’s a Matter of Perspective

One of the most frequently discussed subjects in most, or if not all of Marine Money’s conferences is on whether the shipping industry’s messes are of its own making, largely due to the irrational behavior of shipowners, who are prone to ordering vessels at the peak of the market and creating a capacity glut. During the shipowner panel discussion in Singapore, President at Taiwan listed U-Ming Marine Transport Corp Mr. CK Ong blatantly pointed out that the shipping market will never be in equilibrium so long as shipowners continue to have a “short term memory” and are infatuated with ordering new vessels. “Even among liner companies where the top 20 players take up 60% of the market share, they behave in the same manner. What hope is there for the highly fragmented dry bulk market?” he reasoned.

A different perspective was presented by Mr. Graham Porter, Chairman of Tiger Investments and Ms Zheng Luoheng from China Ship Fund. Both argued that there are legitimate reasons for owners to order ships in a depressed market during Marine Money’s 2^nd Annual China Ship Finance Conference held in Shanghai last week. Mr. Graham Porter remained strongly convinced that the impact of the fuel-efficient ships will be felt in operations, the charter market and vessel resale values. “The economic efficiencies of larger ships with the new generation of engines and hull designs are dramatic for container ships and to a lesser extent, we are going to see that effect on other ship types that people never thought would get touched,” he said. Pointing to statistics from in house research department, Ms Zheng highlighted that China is heavily dependent on foreign shipowners in the transportation of dry bulk commodities into the country, unlike other nations such as the United States and Japan. Presently, 78% of the dry bulk imports, or an equivalent of 1.25 billion tons, are carried by foreign shipowners and the country is paying a heavy price for this
over-reliance. Continue Reading

Recent Developments in LNG Market and Opportunities for PRC Players

Contributed by Fei Kwok, Of Counsel, Norton Rose LLP

An Overview of Current LNG Market

After more than 60 years of effort by innovative industrialists, liquefied natural gas (LNG) has become one of the dominant clean fuels in the global energy market. By the end of 2010, there were 12 LNG producing countries and 11 LNG importing countries. In 2011, however, the number of LNG producing countries increased to 18 and the number of LNG importing countries increased to 25, with Qatar alone supplying 26% of the LNG traded globally.

Asia is a major destination for LNG exports. In 2010, Asia consumed 70% of the LNG exported. According to a recent report, 60% of global LNG exports in 2011 was taken up by buyers in Asian countries, among which Japan remains the most important market, absorbing 50% of the LNG sold to Asia. Korea and Taiwan are currently the other two leading Asian LNG buyers. Each competes for LNG supplies and has been more successful than China and India because of their ability to afford relatively high LNG prices. China has increased its long-term LNG SPAs from one contract in 2004 to twelve by the end of 2010, although since 2010 Chinese buyers have been focusing on scooping up LNG spot cargoes.   Continue Reading