Sunday, December 13, 2009
Banks and Boats
"The collapse of Eastwind Marine, analysts say, while small, could well be a harbinger of more carrier failures to come. ... In Britain, for example, where the economy shrank a further 0.4 percent for the third quarter, the government had to put an additional Pound 43 billion ($71 billion) into the Royal Bank of Scotland [RBS] and Lloyds, both essentailly under national control, because of continuing trouble with their real estate loans. ... Banks with large shipping industry portfolios--among them [RBS] and Lloyd's, and HSH Nordbank and Commerzbank in Germany--could face meaningful write-downs as ship owners confront plummeting charter rates from a 25 percent drop in global trade. ... And while global trade appears to be gradually on the mend, a glut of previously ordered ships due in the coming years is expected to limit the extent of a meaningful price recovery. ... Banks in Europe have stubbornly resisted taking write-downs for their shipping industry debts. They concede that the global cargo sector is troubled, but as long as companies continue to pay interest on their loans--which most are still doing--the banks contend that there is no need to write them off. ... But as competition for business drives cargo revenue well below what it costs to send a ship across the ocean, analysts say that ship owners may soon be the next group of borrowers unable to manage their debts. ... Although the pile of shipping industry debt does not compare to the trillions of dollars in toxic mortgage securities that infected balance sheets worldwide, the essential dynamic of plummeting ship values, burdensome debt and disappearing equity is much the same. ... The current bust began in the summer of 2008. And after what [Carl Brahde] called the 'biggesrt order book of all time,' that suggests that most of the pain for the shipping industry is still to come. ... Like all carriers, Eastwind built its fleet of 55 ships by relying on the generous terms of its eager bankers. At the top of the cycle, when the average five-year old vessel was valued at about $88 million as of June of 2008, the company seemed a pretty good bet. ... But the fact that shipping industry debts are concentrated in some of Europe's weakest banks suggests that the loans may well cause more problems than bankers are now willing to admit", my emphasis, Landon Thomas at the NYT, 12 November 2009, link: http://www.nytimes.com/2009/11/12/business/global/12shipping.html.
Excepting insurance company executives, bankers are our dumbest businessmen. They almost always lend at the top of a cycle. Bankers generosity with credit is a sign a sector will soon collapse. In 2-3 years you will have good opportunities to buy shipping stocks. Be patient.