Record drop sparks fears for dry bulk owners

Jamie Dale - Thursday 30 October 2008

DRY bulk owners could find themselves in breach of their loan conditions and some may face bankruptcy after a record drop in secondhand values.
 
The issue of falling asset values that are linked to loans is now a big problem according to brokers. 

“As long as secondhand vessel prices continue to fall, which seems likely in the short-term, and equity prices fall or at the very least remain at current levels, our industry has a serious problem,” Imarex frieght options broker Jeffrey Landsberg told Lloyd’s List. 

“As the weeks and months progress, I expect more companies will have problems paying back their loans.” 

In the last 12 days there has been on average one bankruptcy every three days, which is “just the start”, according to Tufton Oceanic research director Andreas Vergottis. 

Mr Vergottis told Bloomberg that a fifth of the world’s listed dry bulk companies may soon have a “negative net worth,’’ based on fleet value compared with outstanding debt. 

“Maybe by some fluke, these 20% of companies will find money from somewhere, but then there will be others,” he said. 

While companies such as Industrial Carriers and Svithoid Tankers marked the start in a chain of bankruptcies this month, Britannia Bulk Plc’s recent problems are being seen as the first signs of the effects of falling ship prices for many listed dry bulk companies. 

On Wednesday, Nordea Bank Denmark and Lloyd’s TSB Group asked dry bulk operator Britannia Bulk for immediate repayment of $158.7m outstanding on a loan due to a default on the terms. 

By today the New York Stock Exchange had suspended trading of Britannia Bulk Holdings and said that the company was in the process of de-listing. 

“The Company is currently in ongoing negotiations with the lenders regarding a sale of certain of its operating assets to settle this bank default, which if consummated, would not be expected to result in any return to the Company’s common shareholders,” the NYSE explained in a statement. 

Britannia Bulk had previously warned of the high risk of it breaching the terms as the asset values of the five ships used to secure the loan had plummeted. 

Loans agreements normally include a loan to value clause that states the loan should only be 70% of the value of the ships used to secure it, and if the value falls then the bank can ask the borrower to repair it. 

The secondhand cost of capesize carriers has dropped to $68.8m, from an all-time high of $153.8m in July, according to the Baltic Exchange. 

DVB Bank board member Dagfinn Lunde told Lloyd’s List that he expects the larger dry bulk listed companies will be OK, as many are “cash rich and should be able to repair” the loan. 

Repair can include providing extra cash or security and also if the owner finds additional income for the ship that makes it look “OK for the bank”, said Mr Lunde. 

“If you have bought a ship in last two years and leveraged it very high or done newbuildings at higher prices then that is where the big issues will come up from. 

“For the moment it will be only the marginal players that leveraged up recently [that are most at risk]. I would expect that to be the smaller players,” Mr Lunde added.
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