Q: Companies including Omega Navigation, Marco Polo Seatrade and several other small operators have gone into bankruptcy protection recently, and Cyprus-based Ocean Tankers made a EUR19.6m net loss on EUT9.77m income this year. Do you think the shipping industry can recover and what do you think the future holds?
The shipping industry suffered an extremely hard crash in late 2008, off the back of unprecedented boom-time earnings levels. Many industry participants, both new entrants and long-time industry players, contracted to buy ships at price levels that cannot be repaid out of freight earnings at prevailing levels. Those with a strong balance sheet or backer behind them are surviving, whilst many are folding or seeking protection from creditors. Governments, seeking to maintain employment and economic activity at home, have stepped in to assist certain key players, but are faced with the reality that they cannot prop up all participants. The Chinese and Korean governments have notably stepped in to help certain of their shipbuilders. Export credit financings that used to be tightly tied to home-country content have been broadened to ensure throughout. On the other hand, it is now envisaged that many of the newly-constructed shipbuilding yards will operate as ship-breaking yards instead. But one person's loss is another's gain. There are many private players who had the perspicacity to sell out near the top of the market, who have been sitting on piles of cash for the last few years, waiting for the right time to get back in. A number of funds have been established with the specific intent of finding "distressed assets". As some are fleeing or being evicted from the industry, new participants such as Wilbur Ross, the "bankruptcy king", are being attracted to the industry. Commodities traders are getting back into ship ownership, as much to serve their own cargoes as to provide an opportunity to profit should asset values pick up.
But many feel that that the pace of defaults has been slow, in the context of the severity of the market correction in 2008. Given that shipping is a capital intensive industry, part of the reason for this no doubt lies in the fact that ship financiers have had their own problems to deal with. There is a view that banks, already weakened by the effects of the Lehman Brothers collapse, have been desperate to avoiding calling default on their shipping clients because that would mean they would have to mark down large portions of their loan books – ships valued according to their "value in use" can possibly be valued at levels above what they may exchange hands at. At the same time, there has been a very real decrease in the amount of money banks have been making available to the industry. In some cases, banks bailed out by their governments have been forced to reduce exposure to international assets, such as ships, in favour of domestic lending. In other cases, shipping loans, which have historically been keenly priced, have been eschewed in favour of traditionally highermargin business. Whereas before borrowers could raise up to 80% of a highly valued ship's market price, nowadays a level of 65% or so would be more achievable, albeit the asset value has come off significantly. Those borrowers with long banking relationships or strong balance sheets are being sought out by banks, but where there are new ship loans being made, bank margins have increased markedly. Many of those unable to access bank debt financing are turning to the equity and bond markets. A common model amongst listings in New York is for the company to have no bank debt, but to pay out all its profits in dividends.
Q: What are the challenges your clients face when involved in shipping and maritime in your country?
South Africa remains in the throes of transition from an apartheid to a democratic society and, as such, continues to suffer from side effects both of the past and rapid change from it. Major challenges facing the shipping industry include:
- a lack of clear shipping policy on the part of government with the suggestion that trans-African cabotage (the exercise of maritime transport and related activities between ports of member states to the revised African Maritime Transport Charter of the African Union) will be limited to South African and other member states flagged vessels in circumstances where:
- there is a lack of experience on the part of the South African Maritime Safety Authority in administering any real number of cargo vessels on the South African register;
- there is no special taxation dispensation for the shipping industry, such as tonnage tax, although there are moves afoot to implement such a dispensation;
- the financing of South African registered vessels is perceived to be adversely affected by the relatively low ranking afforded a mortgagee on judicial sale in South Africa;
- There is a need to update the implementation of technical maritime legislation in South Africa;
- The policies of the Department of Home Affairs, such as can be discerned, are not conducive to permitting foreigners skilled in the maritime sector to supplement the South African skills base;
- South African and foreign companies are obliged to comply with strict broad based Black Economic Empowerment criteria for the economic advancement of the previously disadvantaged populous of South Africa.
- inefficiencies and high costs in the operation and management of State Owned Enterprises, particularly, in respect of the shipping industry, in the National Ports Authority, the Port Authority for all South African commercial ports, and Transnet Port Terminals, the monopoly operator of all South African container terminals and many other terminals as well.
Q: Are there any future legislative changes you would like to see?
We work through industry trade associations to ensure that international standards and comparative playing fields are realized in the South African shipping industry by comparison to the shipping industry in other countries and that legislation dealing with the South African shipping industry is updated from time to time. Specifically we encourage a competitive tax regime for South African owners and operators and the ranking of ship financiers more in line with various International Lien and Mortgages Conventions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.