[EN-SEA] Warning of Wave of Bancrupties to Come

By : Rajesh Joshi

A WAVE of bankruptcies, company failures, and possible mergers in the shipping industry will be upon us very soon, leading New York advisor Mark Friedman has said.

Mr Friedman, a well regarded expert whose current employer Evercore is a consultancy that specialises in restructurings, said lenders and creditors cannot stave off their own “day of reckoning” much longer, as they find themselves caught in the vicious cycle of asset prices that refuse to rise, cash flows that refuse to increase, and non-existent cash in the first place.

He suggested at Marine Money’s conference that clever companies might start using Chapter 11 bankruptcy filings as a tool to “threaten” lenders and shipyards, to wring concessions out of the two groups.

In the event, intransigent shipyards and beleaguered banks might be left with no choice but to accommodate some of these companies’ demands. This would mean that all parties at the table would absorb the same hurt.

Mr Friedman also maintained that company collapses are poised to increase of their own accord.
“Industry stress is rising, and phase two is about to start,” Mr Friedman said.

Phase one of the current downturn was the period to date, when banks were very liberal in granting waivers on covenant breaches.

Some experts have seen this alleged soft-pedalling as banks’ refusal to accept the reality that they had no choice to take the distressed collateral on their books.

“How can we carry on like this much longer?” Mr Friedman said. “The pain will need to be felt. Asset values are down, cash flows are dramatically down, and the threat of charterparty defaults is increasing. Just waivers may not be enough.”

He said the rash of charter defaults in the dry bulk sector seen earlier this year – something, ironically, that is now abating – would spread like a contagion, to the containership sector in particular.

Add to this a huge orderbook overhang – some 48% of the total world merchant fleet – some $300bn in unfunded newbuildings, as well as “weak underlying demand”, and increased bankruptcies appear inevitable.

Separately, Bank of America Merrill Lynch global industries director Matthew Thomson and FBR Capital Markets managing director Chris Weyers gave thoughtful talks on how raising cash through share offerings fit into the jigsaw.

Mr Friedman agreed that as “phase two” begins, more activity would be seen on three parallel fronts: attempts to modify bank debt; attempts to get shipyard concessions; and attempts to raise more capital, whether through shares or junk bonds.

Companies will even succeed in tapping public capital markets. However, bankers and shipyards will not have their own way for much longer.

Should companies use the Chapter 11 ruse to get automatic stays against lenders and legally break shipyard contracts, this could set in train “complicated restructurings” that lead to out-of-court settlements.

Mr Thomson and Mr Weyers provided an overview of the share issue market in the US. They said the environment is much better than it was even three months ago, and although shipping companies have not yet figured as major players, the portents are good.

Mr Thomson, nevertheless, said share issues by other transport sectors in today’s lean times were seen to reward shareholders better.

Experts in the audience, who agreed with his assessment, said this was partly because of shipping’s propensity to shoot itself in the foot, notably by ordering new ships in droves.

Mr Friedman refused a direct answer to the question as to when banks might start converting debt to equity, describing this as a “regulatory question”.

Source : Lloyd’s List, 16.10.09.