Grim prospects for restructuring in dry bulk sector

Continuing with the grim task of sorting through the wreckage of the industry, speakers at the 9th Marine Money Hong Kong Ship Finance Forum noted the problems with reaching a solution for the beleaguered dry bulk sector while also highlighting the increase in activity in the offshore sector in Europe especially.

While the bankers on the panel were naturally more positive and spoke about the preference for and benefits of bigger players and consolidation in the dry bulk industry, others were notably less upbeat.

DNB Markets md and regional head Joachim Skorge noted that smaller players will have more difficulty in finding financing with banks, bondholders and other investors preferring larger entities with bigger market capitalisations and more liquidity.

Meanwhile, HSBC Asia-Pacific head of Corporate Sector Group Mark Long pointed out that other advantages of scale are that there will be a diversity of ship sizes and types and ages. This will also contribute to better access to cargoes and the ability to generate long term income, he added.

EMS Partners md Dimitris Belbas however bluntly said: “I don’t know how much shipowners would like to consolidate.” While he conceded that corporations may be coaxed in a variety of ways to do so, regarding traditional ship owners which make up a significant portion of the Greek market, he said, “so far I haven’t seen it happen”.

Watson, Farley & Williams partner Madeleine Leong said the sector, and how fragmented it is will determine the effectiveness of any consolidation efforts.

Another factor is how the exercise is carried out, she added. For example, whether it will increase cost savings or boost competitiveness and also reduce duplication and help to downsize the sector. “It’s in the task of consolidation and how you effect that as to whether or not it’s going to be successful and worthwhile pursuing,” she concluded.

Alix Partners md Lim Lian Hoon said that drawing parallels with the US domestic airline industry and the restructuring that took place, there is good potential for consolidation in the container sector. However, perhaps stating the obvious, he also conceded that for the dry bulk “it’s very, very tough”.

While it is generally accepted that scale will bring better management, Lim pointed out that the difference between already very small fleet sizes and slightly less small fleets is marginal.

Putting the final damper on any spark of promise, Belbas cited an example of a restructuring case he is working on. If you put together two companies, each with 30% negative equity, will it change anything, he asked.

Turning to the offshore downturn and potential restructuring efforts there, Lim said he is seeing “an awful lot of activity” in the offshore space in Europe. Much of this has been driven at the operational level where companies are trying to take pre-emptive action to avoid slipping into financial restructuring.

“A lot of those companies are getting in on the act early and taking out cost in a very aggressive way in advance to avoid finding themselves with too big debt burdens,” he said.

Leong concurred, adding that a lot of companies are in “self-preservation mode” currently and trying to avoid going into restructuring. She also pointed out that restructuring could also mean operational restructuring to bring down costs and target inefficiencies within a company as well as management and leadership restructuring instead of just purely financial restructuring.

“If you can rectify all that first, then perhaps the financials will follow,” Leong said.

But just to end on a suitably dour note, Long reiterated that the offshore downturn is very different from the one in the shipping market as the assets and operations involved work in very different ways. This is a fine point which perhaps newer players might be starting learn to their detriment.

For example he said laying up a drill ship is a very different proposition from laying up one or even a few bulk carriers. “If you’ve got a big drill ship or a rig, it’s pretty binary whether you have a contract or not and the cost of keeping these things warm stacked and ready to go back out is at a completely different level of magnitude to that in shipping,” he said.

He ventured that banks are going to learn the hard way that this sector is much trickier and harder when they discover that their exposure as one of many players in a weak VLCC sector for example is very different to that of having 100% exposure to an unemployed drillship.

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