The development of a two-tiered lending market made of "the haves” and “have-nots” among shipowners has in the last few years morphed from a trend into what many see as a permanent reality.
With everyone but “Tier 1” owners pushed into a growing field of “alternative” lenders offering debt at margins ranging from the mid-single digits to the low double digits, much attention has focused on the outcasts’ ability to compete and even survive.
But some are now questioning whether even the Tier 1 elite — still able to win loans at 200 to 300 basis points over the London Interbank Offered Rate (Libor) — are themselves heading for a rude awakening if banks are forced to reprice risk for the entire sector.
“Yes, there is a two-tiered market today, but I can’t see the banking world continuing to give underpriced capital to non-investment grade shipping companies for too long,” says Morten Arntzen, senior shipping advisor at Australian lender Macquarie.
“I think the landscape will shrink. Regulators and pricing models will punish these positions and that will make these shipping companies today less entitled.”
Macquarie is one of those lenders seeking returns of what it says are “mid-single digits” from those priced out of the top tier.
Arntzen does not hesitate to name names as he makes the case that despite past failures that have seen heavy write-offs and the collapse of nearly the entire German banking sector, traditional shipping lenders still have not learned their lessons.
“They prefer larger companies and public companies over smaller and medium-sized private companies — the problem with this strategy is that they are still offering mispriced credit,” Arntzen says.
“Offering loans to a ‘CCC’ credit like Scorpio Tankers at 240 bps over Libor doesn’t work on any bank’s pricing model.
"The reality is that it makes no mathematical sense for any bank to lend at less than 350 bps to a non-investment grade shipping company.
“Is a 65% [loan-to-valuation] loan to Scorpio — a company over 70% debt-financed — safer that a 50% LTV loan to a small, private company with 30% fleet-debt finance?”
Arntzen alluded to a refinancing package announced last month in which Scorpio received $195.9m in loans under three separate facilities with margins ranging from 240 to 260 bps over Libor.
The lenders were ABN Amro, Skandinaviska Enskilda Banken (SEB), ING Bank and a fourth bank that was not identified. The facilities are at 65% loan-to-value and are part of a financial restructuring that has boosted Scorpio’s liquidity by $334m.
Scorpio president Robert Bugbee offers a brief response to Arntzen’s observations. “Scorpio cooperates closely with each of our lenders. We are fully aware that the banks face tougher capital requirements, that confidence and creditworthiness have to be earned every day, and that at no time are we taking our current privileged position for granted," he says.
While Arntzen chose the Scorpio case, other examples of relatively cheap debt for top owners abound.
Tanker owner DHT Holdings, in which BW Group is now the largest shareholder, sealed a $485m refinancing deal in April at 240 bps over Libor, saying the facility was 60% oversubscribed. Lenders included ABN Amro, Nordea, Credit Agricole, DNB, ING, Danish Ship Finance, SEB, DVB and Swedbank.
John Fredriksen’s Golden Ocean in late May announced it had refinanced debt on 10 ships with a $120m loan priced at 225 bps over Libor.
Oslo-listed BW LPG in February revealed it had refinanced a $150m credit facility at just 170 bps over Libor, with ING Bank and Danish Ship Finance leading the way.
Arntzen’s argument draws support from veteran restructuring and advisory specialist Randee Day.
“There is a Tier A and the group is small — top Greeks, a few public names — and they still have some degree of a relationship with certain banks and can borrow between 200 and 300 bps,” she says.
“The problem is that the covenants and liquidity restrictions attached to those loans are not appropriate for an industry that has moved from an era of fixed employment to that of spot trading with [freight forward agreement] coverage. The risks have increased, as has the volatility.”
Kristin Holth — global head of shipping, offshore and logistics for DNB — says looking merely at margins risks oversimplifying the lending relationship.
“It’s a good question with no easy answer,” she says. “The comment from Morten might be right, in a very long perspective, but that’s questionable.
“Strong companies get good terms, not only in margins but in structure, which is as important as the margin. Meanwhile, less-strong companies get different terms.”
Factors considered by banks include the financial strength of the company, corporate structure and owners’ use of capital market products, transparency and governance quality, and overall activity level in the market.
“When there are few deals, the best can get better terms than they would otherwise get,” Holth says.
“The focus solely on margin gives a simplified picture, as access to capital and terms and structure are as important.”
Another senior lender, asking not to be identified, says banks clearly are motivated by what other fees a shipowner might generate for the bank in areas like capital markets products (equity and bond fees), advisory work and deposits.
While a bank will assign an internal rating to a potential client based on risk and how much capital must be set aside to do the business, the potential for revenue generation is the other side of the equation, he says.
“That’s why if you look at two companies with similar credit profiles, a bank will lend at a lower rate to one than the other if it presents a lot of other ancillary revenue streams from its other relationships,” he says.
This fee-based rationale was pioneered by American banks when they were the dominant lenders back in the 1980s, but virtually all of them, except Citibank, no longer do shipping business, Arntzen notes.
“The capital that these banks put at risk dwarfs the incremental revenue they make from other activities,” Arntzen argues.
