Shipping sector sailing toward crisis(2)

In the years after the bankruptcy of Lehman Brothers in 2008, the European banks that dominated ship finance turned inwards, looking to shore up their own balance sheets and capital needs. And they left a big gap, said Nigel Anton, global head of ship-ping finance at Standard Chartered Bank, speaking during a Marine Money conference in March in Hong Kong.

Orders for new ships rose before the global financial crisis, much as they rose last year, and that led to huge amounts of overcapacity in most categories of dry and wet shipping just as demand for shipping services plummeted along with global trade in 2009 and 2010.

In 2007, banks were carrying as much as $94 billion of debt related to ship finance on their books. By 2010, that number had dropped to $38 billion, Anton said.

That created a vacuum. Even in a recession, goods still have to move around the world and shipping companies need to buy ships to keep their fleets up-to-date, but it became harder to tap the banks for the money to make those purchases.

"Automatically, we had a big gap to fill. How was that gap going to be filled?" Anton asked.

The answer was a combination of demand curbs, meaning that shipping companies cut down or canceled orders for new ships, and the emergence of new sources of financing.

On the demand side, many orders were canceled. That made it possible for companies to continue operating in an environment of severely curtailed financing. But it also made it hard for shipyards to stay afloat. Many of them went bankrupt, particularly smaller shipyards in the Chinese mainland that produced ships with older technologies.

But the continuing need for funding also created an opportunity for finance companies and private equity funds to get into the shipping business on their own terms. Private equity funds in particular stepped in after 2011 with funds to acquire ships, but trading those funds for stakes in the companies they supported.

Tiger Group Investments of Hong Kong estimates that private equity funds and hedge funds have invested more than $10 billion in shipping in the past few years.

Another new source of funds that emerged in the post-crisis years was the policy banks, most notably China Development Bank and the Export-Import Bank of China. Leasing companies in the Chinese mainland－often owned by well-capitalized state-owned banks but operating at arm's length－also stepped into the fray.

Sources of finance from South Korea also upped their game, and smaller regional banks in Asia, once sidelined by their larger European or global peers, were suddenly interested in providing financing for ships.

By the end of last year, the amount of debt in the market linked to ship finance had recovered to $56 billion, still short of the 2007 peak but much higher than in 2010. And this year the amount of debt should be even higher, Anton said.

"There is a lot of activity right now," he said. "The banking sector has changed a lot recently. Banks are coming back."

There is a danger of history repeating itself, says Leszczynski.

"Most of the problems across most sectors were coming from excessive orders and excessive deliveries," he warns. "It is very, very important that we don't make the same mistakes again."