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Half of dry bulk owners may breach loan pacts, RBS says

Hong Kong: As many as half of publicly traded commodity shipping lines may breach their loan covenants by April after a record collapse in hire rates, according to Royal Bank of Scotland Group Plc, the third-largest lender to the industry.

The cost of second-hand capesizes, the largest group of commodity carriers, plunged 70 percent last year, according to the Baltic Exchange in London. Fleet values are one of the key covenants used. Banks review loans as often as every quarter, Lambros Varnavides, the bank's head of credit to the shipping industry, said in interviews in London with Bloomberg on Jan. 12 and 13.

"It's hard to avoid a breach when asset values have fallen so significantly," said Varnavides, who is global head of shipping. Assuming rates and values don't rebound in the next several months, shippers in breach of covenants will likely have to renegotiate loans, he said.

The Baltic Dry Index, a measure of shipping costs for commodities, slumped 92 percent last year, causing at least four shipowners to fail since October. Demand for raw materials plunged as Europe, Japan and the U.S. entered their first simultaneous recessions since World War II.

The ratio of losses on RBS's shipping loans has averaged about 0.03 percent in the last 15 years and that's "not going to change much" in the "long run," Varnavides said. The bank has lent US$25 billion to shippers, of which US$18 billion has actually been used. About 60 percent is financing oil and gas tankers.

"We remain confident in the quality of our portfolio and there's a benefit of loans being re-priced higher," the managing director said. [19/01/08]

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