COMPANY ANALYSIS A syndicated loan is a loan rendered by one or a grouping of commercial or investment banks. The syndicated loan, a major source of funds for the shipping sector, has been declining over the recent years. The syndicated lending has dried up over the years. The banking and the lending sectors are now emphasizing on financial liquidity. The shipping industry is characterised with increasing oil prices and other operational costs. Declining lease transportation rates, and rise in oil prices have led to shipping operations undergoing tighter margins.
In the year 2012, the shipping industry will continue to face more challenges. A majority of shipping operators face increasing financial costs, and the acquisition of new finances has become significantly expensive. They also face with challenges of accessibility to commercial banks and loans. In this paper, I examine various topics including reasons why the shipping industry has been experiencing tighter loan supply. The reasons why lenders are too strict on conventional shipping companies are shown in the effects and the implications of such for conventional shipping companies. Reason for tighter supply of loans for shipping companies There is growth of risk aversion among the lenders of the shipping industry.
These lenders are primarily commercial banks who have been experiencing constrained capital formation and funding (Sahler 47). This has come at a time when shippers are going through overcapacity, due to subdued demand growth, which has led to poor generation of cash. Most prudent lenders are familiar with future challenges such as financial necessities, payment of bonds and maturity dates. Therefore, they are taking appropriate, and necessary steps to guarantee that these positions are defended, and the appropriate resources and concordat acquired and installed. Many lenders especially banks are withdrawing from the shipping industry due to the economic downturn of the industry (Stopford 274).
The shipping sector has been experiencing oversupply pressures, and this has lead to growth of credit crunch. This increase is inhibiting the development of banks lending to the industry. Lenders have cut down their exposure to risky assets such as ship finance as these assets are unstable and unpredictable. Lending institutions are under pressure to rebuild their activities that incorporate large quantities of capital and funding.
Therefore, adversely affecting the long-term loaning and asset financing. The common currency of the ship funds will be affected by this decision taken by the lenders. This will impact negatively on the demand of shipping assets. The banks will be more cautious and will lend selectively; therefore, they will reduce their loaning to the shipping industry. The absolute majority of the shipping bankers are not offering loans to new customers. They support the most critical business requirement of their best clients. They offer loans to customers who have spotless financial statement and record of success.
These assists those to reduce liability that will accrue to them in case the new clients considered insolvent or due to any reason, they are unable to pay their debts. Lenders are paying more attention to subsidizing credit risk and maximising assurance. Therefore, they are asking much more securities and are also intent on the collateral, for example, preferred mortgage, granting of insurance and guarantees whether personal or corporate. Reasons why lenders are stricter on conventional shipping companies. Conventional shipping is the conveyance of conventional cargo.
On the other hand, conventional merchandise is freight that transported by a known bearer on a regular basis. Conventional shipping companies usually convey conventional cargoes on a regular basis. Most lending institutions are stricter on lending these companies. Most of these companies face several operational risks. They face marine risks, environmental mischarge, freight loss or damage and other accidents caused by human error, mechanical damage and also political actions. This has caused most lending institutions to dread lending to these shipping sectors mainly because of the rising operational costs of these companies.
The running costs have been rising due to the current economic situation. These costs can lead to bankruptcy. In addition, some conventional shipping companies are not as open as they claim. Some are still working hard to offload exposure. This suspicion and distrust has made many shipping banks fear lending to such institutions and the contagion has spread to other lending organisations. This situation has resulted to confusion among the lenders as to what is the actual condition of loans to conventional shipping companies. The conventional shipping industry face volatile, cyclical changes, (Sahler 50).
The freight rates, the prices of the shipping vessels and the profitability are not consistent. Profitability changes due to fluctuations in demand, and supply of shipping vessels and services. As a result, they are not predictable, and lenders are now stricter and are asking for extremely expensive securities and cash flow statements for the previous financial periods. The result of the lenders been stricter on conventional shipping is as follows; 1. There will be unmet operational costs. The company’s administration costs will be too high for the company to bear.
This is mainly because of the lack of finances from their trusted lenders. 2. The number of operations will reduce. The number of conveyance of freight will decrease as they are not able to cover all the costs necessitated. 3. Profit margins will decline. This results from a decrease in the number of operations of the company, unmet costs and lack of finances for investing in other assets and bonds. 4. They will as well lack resources for development of the conventional shipping industry. Growth of the sector will deteriorate, and investors will withdraw from it so as to reduce the risks accruing to them. Implications of the above effects to the conventional shipping company. There has been market exit.
A majority of individuals are exiting this industry since operational costs are high, there is a variety of market risks and that it is increasingly difficult to acquire financial services such as loans. Also, this is because of a reduction in the profit margins of those companies that are already in operation. In addition to that, the shipping lines have relatively cut down their capacity through slow steaming.
Costs have significantly reduced as they spend more days in the waters than they did before. They have been able to spend less on fuel and cut down capacity. Moreover, these shipping companies have resorted to seeking other forms of financing. They are seeking more finances from public equity, private placement, leasing, bond issuance and a variety of securities. Other types of financing have appeared much cheaper and more flexible than loans from the lending institution. Syndicated loans now considered more rigid, and most small-sized fleets firms consider banks do not provide consistent support in times of economic downturn.
There is a reduction of the profit and return on investment of the companies. The growing operational costs and lack of financing are the primary source of the decreased profitability. Conclusion In conclusion, the participation of syndicated loans allocated to the shipping industry has significantly declined since the financial turmoil. Lenders are now focusing more on quality and security. They are requiring higher collateral and guarantees. In addition, lenders are more rigid on the conventional shipping companies.
These has caused investors withdrawing from these markets, declined profitability for those in the market and lack of financial assistance from those they trusted more (commercial banks and shipping lenders). Therefore, the syndicated loan supply in the remaining part of 2012 is expected to remain tighter. Lenders are stricter on providing loans for conventional shipping and also for those customers that these lenders do not trust (mainly the small-scale fleet companies). Unless the ship-owners adapt to ever changing economic environment, their fortunes and returns will be changing with respect to the economic fluctuations.
Works Cited Sahler, Gregor. Ship Financing in Germany: A Possible Area of Application For Islamic Finance? Frankfurt: GRIN Verlag, 2011. Print Stopford, Martin. Maritime Economics. London: Taylor& Francis, 2009. Print