Why is it essential for shipping companies to maintain liquidity? Dr Anna-Mari Antoniou explains
The maritime sector is a challenging industry to be in. One of the main concerns of any shipping company should be its ability to maintain adequate liquidity and it should thus have appropriate planning for restructuring its business and its debt before it is in distress. Measures taken during a crisis will often mean tough negotiations with lenders, stricter terms in any loans and increased costs. Restructuring and refinancing is something to consider on a regular basis. It could be the difference between a successful restructure on a pre-planned basis or filing for insolvency.
Perhaps the best solution is monitoring certain key indicators so that when specific points are reached, internal procedures kick in to evaluate and address potential issues. For example, reaching a certain percentage of unused vessels could be an indicator that fleet management procedures need to be re-evaluated. The key is attempting to predict potential issues so that the company can minimise negative effects.
We must also consider that a shipowner’s most valuable assets are by their very nature mobile, moving between jurisdictions. Vessels can be registered in countries that do not have a connection to the company and some favoured flags, such as Liberia and the Marshall Islands, have no insolvency laws. Coupled with rights for some creditors to arrest the vessel, shipowners may find themselves between a rock and a hard place: in need of restructuring but their moneymaking asset under arrest. Maintaining adequate liquidity would allow the ship-owner to provide security for the release of the vessel with a controlled impact on revenue generation.
Since the 2008 financial crisis many shipping and oil companies have undergone some form of restructuring. Some recent examples include SK Shipping, the latest Korean line to announce in February 2017 a major restructuring of its business including splitting its shipping and non-shipping units and cancelling the period charters of 20 ships.
Hanjin Shipping is also a prime example – the company applied to its creditors for debt restructuring to avoid formal insolvency proceedings but by February 2017 it was declared bankrupt with assets being confiscated by creditors or abandoned by the company. Rickmers Maritime is currently facing similar difficulties. The trust has USD 197.7 million due to HSH Nordbank on 31 March but sought debt restructuring. Its latest restructuring proposal was declined, and an April 15 deadline imposed to produce another revised plan.
JSC Latvian Shipping Company had better news when in February 2017 it completed the refinancing of its HSH Nordbank loan facility. The initial amount was USD 360 million due in June 2017. At the time of refinancing the outstanding value was USD 121 million but it has successfully agreed this under a new loan with a June 2022 repayment deadline. One assumes that the refinancing and restructuring of different companies in the industry will continue to be a common phenomenon for the next few years.
The industry slump is affecting most parts of the sector and shipbuilding is obviously hard hit – the core example is Daewoo Shipbuilding & Marine Engineering which has been struggling for some time. It now has a USD 2.6 billion bailout package from South Korean state banks – simply because it is too big to fail. There will also be debt restructuring and a revision of its loss-making offshore businesses. However, it does not seem likely that the firm can recover; it reached only 10% of its target ship orders in 2016. This is not unexpected, given that overcapacity is one of the main reasons freight rates have dramatically reduced. The shipping industry is cyclical – if one sector has problems there is a domino effect. It is very much like survival of the fittest and at the end of the day, those with solid monitoring procedures are likely to weather the storm.
At the core, we must remember, is the quest of maintaining liquidity and there are several processes shipping companies should have in mind to best secure fluidity. Firstly, cost optimization; for example, considering whether investing in oversized vessels reduces operating costs. Secondly, strengthening revenue; perhaps considering value added services to obtain strategic advantages over competitors. Thirdly, efficient fleet management; it may be time to reduce the number of vessels whether by scrapping or sale, postponing delivery time of new builds or looking at sale and lease back arrangements. Lastly, focusing on financing options including debt restructuring or issuing shares. It has become essential in the current climate to re-evaluate the business and make sure that costs are minimised, extra revenue generated, good reputation is maintained and close relationships with key players are developed.
This article was originally published in the Marine Trader, IMPA’s official journal for maritime procurement and supply chain management, in issue 03 of 2017. Head over to www.impa.net to find out more or simply read new issues on the go with the MT Journal app.
