Container shipping debt is said to have exceeded the US$80 billion mark as the rate of ship orders picks up the pace, with the most recent example being Maersk’s ten 20,000 TEU ship order exceeding $1 billion, and has opened questions as to how these container lines will be able to finance and pay back mortgages on their assets, according to a recent insight article published by Drewry.
The oversupply of vessels was exacerbated by the financial crash of 2008, which has not only led to slow growth in the shipping industry, but caused a miss-match between supply and demand of containerships, that could lead to the potential bankruptcy of global shipping.
Q3 of 2014 was the most profitable for the container industry since the same period two years earlier. More carriers were able to return a quarterly profit as peak season demand exceeded expectations, which helped to lift average unit revenues by around 2.5% against Q2.
However, according to Drewry, while the financial health of the industry is improving there is still a long way to go. Record losses in the past five years and constrained operating cash flows have seen the industry pile on excessive debt, not only to finance their order books but also to raise expensive short-term capital to finance their working capital needs.
Rahul Kapoor, Director of Equity Research at Drewry, said: “The industry financials have improved for better in recent quarters, however, a top-down analysis suggests that for some carriers even today business viability under strain on weak cash flows and spiraling debt.
“Industry debt continues to climb and has more than doubled in the past few years. Concerning for us is that capital structure remains skewed towards debt as equity financing remains scarce. High amounts of debt damages the industry’s long-term profitability.”
Carriers have resorted to selling stakes and raise capital not only in non-core assets but also profitable cash generating core businesses, NOL’s sale of APL Logistics being the latest example.
Such high amounts of debt are likely to damage the industry’s long-term profitability and put serious strain on shareholders, as they are deprived on any return on/off capital in the absence of certain dividend pay-outs.
Drewry View: Even as the industry is struggling to balance the need to repair the balance sheet and fund future investment requirements, we do acknowledge that there has been a marginal improvement in the industry’s financial health over the past two years. Still, not all are out of woods and we at DMER expect only strong players with healthy balance sheets both in carrier industry and non-operating owners are able to finance the bulk of the ULCV orders and the remaining will simply have to rely on long-term charters.