S&P: Credit Risks Mount For U.S. Vessel Carriers
By Stas Margaronis
The U.S. domestic shipping industry, which supplies Alaska, Hawaii and Puerto Rico as well as tug and barge carriers transporting coal, and agricultural products along the nation’s inland waterways, is facing an ageing crisis due in part to problems of finance.
As a result, U.S.shipbuilders will build fewer ships and be unable to improve economies of scale that lower construction costs.
The lack of rebuilding has a further impact to the U.S. Army, Navy, Marine Corps, Air Force and Coast Guard as construction costs go up at a time of budgetary cutbacks.
The tug and barge industry is a fuel-efficient transporter of agricultural goods and other commodities that is already facing a crisis because of lack of infrastructure spending in obsolete locks and dams along the nation’s inland waterways.
The credit crisis being faced by the industry and the replacement crisis of locks and dams could shift more cargo onto roads and highways at a time when Congress has resisted raising taxes to repair and replace roads and bridges on the nation’s highways.
A report by Standard & Poors paints an alarming picture of a domestic shipping fleet that cannot find money to replace its fleet exacerbated by Congressional budget cuts that are reducing access to lower cost government guarantees.
The S&P report says “More than a thousand ships and barges will reach the end of their useful lives in the next few years. More may be forced out of service as environmental standards tighten. But given the eroding credit quality of many carriers, replacing vessels may prove difficult, or at least costly, for shipping companies.
Standard & Poor’s Ratings Services believes: “The U.S. domestic fleet likely will contract over the next three to five years as vessels retire faster than owners can replace them. Companies that cannot find sufficient financing to refresh their fleet may not survive. For operators that do, the reduced capacity should cut back on industry oversupply and support better charter rates “March 26, 2012
In an interview S&P analyst Afona Funmi said “this doesn’t mean that the industry is going to fall off the cliff after 2013, but there is an urgency to replacing vessels.”
Fummi noted that in 2011, two U.S. carriers Horizon Lines and Matson Navigation both requested that they no longer be rated by Standards & Poors. Horizon Lines has been beset by growing debt problems.
The S&P report made the following points:
1)U.S.carriers with good credit have sought government loan guarantees, because they offered better repayment terms:
“Those with satisfactory credit quality can seek help from government-backed financing programs. U.S.-government-backed ship financing lowers the effective cost to a company of replacing or adding new vessels and can help accelerate the accumulation of capital for such purposes. Shippers can also use the funding to pay existing indebtedness on vessels if it is a part of an overall building program.”
2) Unfortunately, the U.S. Maritime Administration’s Title XI loan guarantee, which finances new U.S. shipbuilding is a receding opportunity, due to Congressional budget cuts, tougher credit requirements and some loan losses by carriers:
“…fewer companies can meet those programs’ credit standards. For example, Title XI program participants, after going through the Maritime Administration’s (MARAD’s) lengthy and rigorous application process, must meet minimum working capital and maximum debt to net worth financial covenant requirements. For example, in February of this year, Overseas Shipholding Group (OSG) withdrew its application for $241.8 million in Title XI guaranteed financing after MARAD said it wouldn’t approve OSG’s application as submitted. The requested loan guarantees were for two mortgage-free shuttle tankers, for which OSG has already paid in full, built in 2010 and 2011. Had the financing been approved, we believe interest rates would have been less than 4%, well below market rates, and it would have helped enhance OSG’s liquidity and financial flexibility. Even after companies have cleared MARAD’s credit hurdles, access to its government-guaranteed financing programs is not as straightforward as it used to be because of budget cuts. Furthermore, future congressional support for the program is uncertain given the history of loan defaults and losses to the government. During 2011, MARAD approved Title XI loan guarantees for 10 vessels, with a total commitment amount of $797.8 million, including $210.8 million of loan guarantees on OSG’s two articulated tug barges (which use mechanical barge connectors). As of Feb. 17, 2012, MARAD had pending applications for loan guarantees on 16 vessels, with a requested loan amount of $995.7 million. Included in the pending applicant pool is American Petroleum Tankers Parent LLC (the parent of American Petroleum Tankers LLC; B-/Stable/–), which has applications for loan guarantees on five vessels and a requested loan amount of $470 million.”
3) The reduced access to government loan guarantees and more stringent requirements exacerbate credit quality issues forU.S.domestic carriers making it even less likely that they can borrow money to replace vessels:
“We believe that capital spending for fleet replacement will be a big concern for theU.S.domestic shipping industry. Weak credit quality, challenging capital market conditions, and reduced access to government-guaranteed loans likely will increase the cost of funding new vessels and retrofitting old ones to meet upcoming environmental regulations. Companies at the lower end of the speculative-grade spectrum–particularly those we rate in the ‘B’ category or below)–are both the most likely to face steep financing costs and the least equipped to deal with these high costs. Ultimately, how quicklyU.S.domestic shipping companies are able to replace retired vessels and how they finance fleet replacement will be the keys to their well-being.”
For more information, contact Mimi Baker, S&P communications director: Mimi_Barker@standardandpoors.com