Shippers face financial shortfall as European banks cut funding
The shipping industry is facing more rough waters ahead as European banks cut funding while world trade slows.This will place additional pressure on the sector but analysts say private equity may plug the hole for some, CNA reports.
Singapore's Neptune Orient Lines (NOL) dismisses speculation that it wants a stake in Germany's Hapag Lloyd.
Analysts say NOL's debt is relatively high, thus the shipper is vulnerable in the current climate of tight credit.
Eric Ong, Analyst, Kim Eng Research, said: "We think it will be challenging for NOL to embark on any potential M&A given its stretched balance sheet. In our opinion, any potential acquisitions made will have to be financed by fresh funds raised from the equity market, probably through a rights issue. However, in that case, it may result in massive dilution for minority shareholders."
NOL's capital commitments include 34 new ships on order costing over US$1 billion, mostly funded by issuing debt in Europe.
But unlike NOL, other shipping companies may not have the financing to stay afloat.
European banks provide 75 percent of funding to the global shipping industry.
And with the downturn in the industry, ship valuations are under threat.
Adding turbulence to this are the tighter regulations for European banks to increase capital.
Katharine Cheong-Koh, Director of Research, Island Shipbrokers, said: "If dealt with a higher capital requirements, they will start pulling back from this non-core though profitable business. This could have a heavy impact on the global shipping industries, especially the container shipping sector which is heavily reliant on letters of credit as a form of insurance. For the smaller companies, they could be filing for bankruptcy."
Asian banks may fill some of the gap, while opportunities for new providers have also emerged.
Private equities and hedge funds could be the key to filling up the shortfall in funding (of between US$30b and US$50b) for the shipping industry over the next three years as banks restrain lending.
And analysts have observed a growing interest among private equity funds, especially in the US.
The lifeline, however, will not be be thrown to all, and analysts say casualties are likely.
Singapore's Neptune Orient Lines (NOL) dismisses speculation that it wants a stake in Germany's Hapag Lloyd.
Analysts say NOL's debt is relatively high, thus the shipper is vulnerable in the current climate of tight credit.
Eric Ong, Analyst, Kim Eng Research, said: "We think it will be challenging for NOL to embark on any potential M&A given its stretched balance sheet. In our opinion, any potential acquisitions made will have to be financed by fresh funds raised from the equity market, probably through a rights issue. However, in that case, it may result in massive dilution for minority shareholders."
NOL's capital commitments include 34 new ships on order costing over US$1 billion, mostly funded by issuing debt in Europe.
But unlike NOL, other shipping companies may not have the financing to stay afloat.
European banks provide 75 percent of funding to the global shipping industry.
And with the downturn in the industry, ship valuations are under threat.
Adding turbulence to this are the tighter regulations for European banks to increase capital.
Katharine Cheong-Koh, Director of Research, Island Shipbrokers, said: "If dealt with a higher capital requirements, they will start pulling back from this non-core though profitable business. This could have a heavy impact on the global shipping industries, especially the container shipping sector which is heavily reliant on letters of credit as a form of insurance. For the smaller companies, they could be filing for bankruptcy."
Asian banks may fill some of the gap, while opportunities for new providers have also emerged.
Private equities and hedge funds could be the key to filling up the shortfall in funding (of between US$30b and US$50b) for the shipping industry over the next three years as banks restrain lending.
And analysts have observed a growing interest among private equity funds, especially in the US.
The lifeline, however, will not be be thrown to all, and analysts say casualties are likely.
