[050412.EN.SEA] Fitch Gloomy About Prospects Of Global Shipping In Short- And Mid-term

FITCH RATINGS, one of the top three rating agencies with Moody's and Standard & Poors, says banks have been pulling back from ship financing due to the downturn within the industry, worsened by increasing funding pressures in the banking sector.

Low charter rates, driven by an oversupply of ships, has caused a steep drop in the value of ship fleets, resulting in rising loan-to-value ratios, said the report.

Fitch said it expects industry overcapacity to continue until 2014, when increased scrapping rates, reduced ship order books and an improvement in global demand should bring the market closer to equilibrium.

Overcapacity is specific dry bulk, container and crude tanker sectors, for which the 2008 order book was exceptionally large. The oversupply of ships, coupled with lacklustre growth in world trade, has caused a significant drop in shipping charter rates, it said.

"Asian banks have increased their activity in ship financing in recent years but are mainly active in their home region, with a significant global expansion unlikely in the near term," said the report, while "euro-funded banks are finding US-dollar funding more costly and less accessible, making financing new business less attractive".

The difficulty in financing ships is worsened by the reduced availability of other lenders, which limits the scope for syndication and makes shipping loans more difficult to exit, it said.

"Significant new ship orders in 2008 mean that a large amount of new ships are expected to enter world fleets in 2012-2013. Combined with subdued growth in global demand, there is now significant overcapacity in the industry," the report said.

"Opportunities for banks remain, particularly in stronger-performing shipping segments such as liquefied natural gas (LNG) transportation and offshore," said the Fitch Ship Financing Report.

"Banks that can maintain market presence in the near term may also benefit from higher margins in the short-term and fewer competitors once the industry recovers," said the report.

Fitch said it expects impaired loans and impairment charges relating to ship finance to continue at heightened levels or increase somewhat in 2012 and 2013. However, bank ratings already factor in this risk, so any ratings impact is unlikely.

"Shipping is a highly cyclical industry meaning that credit ratings for shipping companies tend to be sub- or low-investment grade and so absorb higher amounts of risk-based capital. Further deterioration in the credit quality of shipping exposures would increase the risk weightings of ship finance in banks' balance sheets - and hence their capital charge," said the report.

Source : HKSG, 04.04.12.