Cato Brahde, a portfolio manager at Tufton Oceanic, a hedge fund that specializes in the shipping industry, says that history shows that the stronger the trade-driven boom, the longer the down cycle that follows, with the slump possibly persisting anywhere from three to 10 years.
The current bust began in the summer of 2008. And after what he called the “biggest order book of all time,” that suggests that most of the pain for the shipping industry is still to come.
“We estimate that there will be a 50 percent oversupply in container ships,” Mr. Brahde said. “And in the next five or six months you will see more banks repossessing ships. It is not life or death, but for those with real exposure there will be problems.”
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 with the 45 percent plunge in freight rates for container ships, the values of the ships that secured the bank loans have dropped, too.
For example, Aozora Bank, a Japanese bank that in addition to being one of Eastwind’s top lenders is a major creditor of Lehman Brothers, found to its dismay that the value of the 12 Eastwind ships it now controlled was considerably lower than its $77 million exposure, according to Eastwind’s bankruptcy filing. Other big lenders include the Bank of Scotland, part of the Lloyd’s Group, and Nordea Bank, based in Sweden.
It is that type of negative equity situation, which was at the heart of the subprime crisis, that could threaten banks if it occurs on a wider scale.
Most vulnerable is HSH Nordbank, which is exposed to the industry’s weakest segment, container ships. It has $50 billion in shipping loans, or about seven times its equity.
The exposures of other major ship lenders include Commerzbank, with $37 billion; R.B.S. with $25 billion; and Lloyds TSB with $23.9 billion, according to estimates made by ING Bank.
With the exception of HSH Nordbank, the shipping industry loans of the other banks represent a small percentage of their overall loan books — not enough, taken on their own, to make a balance sheet buckle.
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.
As a private company, without a Greek billionaire or friendly government to back it, the end came quickly for Eastwind once creditors refused to extend more loans.
So quickly, in fact, that some of the company’s ships, which are a main mover of Chiquita Brands fruits and vegetables, were left stranded in open water.
In one case, a ship belonging to Eastwind lacked the money to pay for fuel, according to the company’s bankruptcy filing. Another even lacked sufficient funds to provide food and water to its crew.
While the ships eventually found their way to port, it may well be their bankers that soon find themselves at sea.