Ship orders languish in the dry dock of funding

The cancellation of an order from South Korea's second-biggest ship builder, the country's first this year, signals a worsening storm for the seaborne sector as bank funding dries up and overcapacity pulls earnings further under water.

Daewoo Shipbuilding & Marine Engineering (042660.KS) said late on Friday that a Greek shipper had cancelled a 589.3 billion Korean won ($514 million) order for two very large crude carrier (VLCCs) oil tankers and two bulk carriers, made at the height of a shipping boom in 2008.

A source with direct knowledge of the matter told Reuters on Tuesday that Gulf Marine Management, which did not respond to calls for comment, was the Greek shipper, which had failed to make a second payment. A separate source confirmed the cancellation.

"There is a tightening of finances, and even some big owners are starting to get strapped for cash," said George Lazaridis, head of research with Greek ship broker Intermodal.

"We will start to see a lot more ship owners getting into trouble with their financing and banks, and will have to cut their losses in certain areas either by selling vessels or by selling new building contracts."

An armada of ships ordered when times were good has continued to hit the water this year, outpacing demand for commodities such as iron ore and coal in the dry bulk sector and crude oil in the tanker market, battering ship owners' earnings.

"Any prolonged downturn in VLCC rates, which is generally expected over the next 12-24 months, will cause owners more distress, especially in the context of a looming euro zone credit crunch," a shipping source said.

"If the owner cannot raise the cash, then he needs to talk to the shipyard and, in the worst case, may have to walk away, probably forfeiting all or most of the installments paid up to that point."

Mounting Casualties

South Korea, which is vying with China to be the world's top shipbuilding nation, is home to leading shipyards including Daewoo and Hyundai Heavy Industries (009540.KS). The Seoul stock market's shipbuilding subindex .KRXSHIP lost 3.38 percent on Tuesday, underperforming the overall market's .KS11 1.88 percent fall.

A Daewoo spokesman said building work on the cancelled vessels had not yet commenced.

Shipping sources said owners were looking to either delay or switch orders for vessels to other classes of vessels such as liquefied natural gas carriers (LNG), as that sector was experiencing a boom in demand and growth.

"In some instances, owners may limit their losses by switching to other types. This year, three Greek owners have between them converted at least five VLCC orders to five or more LNG carriers with mutually agreed price adjustments and delivery rescheduling," the shipping source said.

Nevertheless, a growing funding crisis was expected to hit the funding firepower of many players in the sector.

"It is realistic to see more outright cancellations appearing; mostly it is because of bank financing," said Arctic Securities analyst Erik Nikolai Stavseth. "If you don't have financing, you don't have it for an alternative order."

The world's largest independent oil tanker operator Frontline (FRO.OL) said on Tuesday it was selling a vessel at a net loss of $100,000 after repayment of bank debt.

"We are concerned that a significant reduction of short-term credit to the real economy could be the next major step taken by many banks," broker ICAP Shipping said this month. "It is also the most dangerous scenario of all for the shipping industry."

Bankers are expecting more bankruptcies and restructuring in the sector. Last month General Maritime, a leading crude oil tanker company, elected to file for Chapter 11 bankruptcy.

Separately, Danish shipping group Torm (TORM.CO) has cancelled an order for an oil tanker from a Chinese yard in a bid to "conserve cash", and earlier this month it reached a deal with its banks on a temporary deferral of debt repayments.

The widening crisis has meant the cost of insuring debt for some shipping companies has soared. Moody's Investors Service last month put top Japanese shipping company Nippon Yusen KK's (9101.T) Baa1 bonds under review for a possible downgrade, citing an increasingly weak market and oversupply of ships.

Nippon Yusen's bonds widened 12.5 basis points or nearly 5 percent on Tuesday to close at 250.125 bp, almost double the widening of the Japan iTraxx five-year index, which closed at 184 bp, or up 2.6 percent.

[Source: By Jonathan Saul and Hyunjoo Jin, Reuters, London and Seul, 16Dec11]

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