Shipping Industry Facing Economic Distress

Since the latest economic upheaval has hit the world, companies in different industries report a dismal financial picture, with many going bankrupt.
Shipping Industry Facing Economic Distress
Containers are loaded onto an international freighter at the Tokyo port on May 23. The shipping industry has especially struggled in recent years due to the economic turmoil impacting the global economy. (Yoshikazu Tsuno/AFP/GettyImages)
8/16/2012
Updated:
9/29/2015
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Since the latest economic upheaval has hit the world, companies in different industries report a dismal financial picture, with many going bankrupt. Mostly, but not always, it is smaller companies that are facing bankruptcies, as they lack customers to buy their products, leaving in its wake a broken industry with mass layoffs.

During the first two months of 2012, the U.S. Bureau of Labor Statistics (BLS) reported 1,476 mass layoffs, resulting in 508,381 workers losing their livelihood. 

Mass layoffs were reported in the transportation and warehousing industry, with the BLS reporting 205 mass layoffs during the first six months of 2012, putting 32,877 people out of work.

One industry, which has been in an economic depression for a while is the shipping industry, an industry that not only had to deal with Somali pirates that attacked ships and demanded millions of dollars for their return, but also the economic downturn, resulting in fewer shipments. 

The shipping industry is reeling under economic pressure. “The worldwide shipping industry has struggled in recent years with decreased rates and an inability to refinance debt,” said an article on the AM Law Daily website. 

The U.S. shipping industry’s economic woes continue, with the latest being the drought in the Midwest. Water levels have sunk so low that shipping barges have to reduce their loads and make more trips at their own expense, according to the Midwest Shippers Association. 

“It’s no wonder, then, that ocean carriers are looking with trepidation at the severe drought conditions gripping the eastern half of the country. The U.S. Department of Agriculture is calling the drought the worst since 1956 and the third worst in recent history,” said a July 30 article on the Midwest Shippers Association website.

Shipping Industry Neglected by Wall Street

“US maritime companies are suffering under the weight of the recession, and bankruptcies on US soil – something of a new phenomenon – are proof of an industry struggling to cope in a financial climate where investors continue to distance themselves from maritime players,” according to a 2012 report published on the website of the law firm Blank Rome LLP. 

Before 2008, and the Lehman Brothers failure, Wall Street players were becoming quite interested in investing in the maritime industries. More and more shipment companies went public, with investors going after the first public offerings. 

After the economic meltdown, investment interest in shipping companies “has now almost completely dried up,” according to the Blank Rome report. 

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A major issue is that ships, such as tankers and containerships, typically have a lifespan of about 15 years. Without investors or the ability to borrow in the market, the shipping industry will with time be unable to service its customers. 

The report suggests that the banks that used to lend to shipping firms have disappeared and the few German and Norwegian banks that remain have a much tighter credit policy. Furthermore, the U.S. government is drawing back its support of the maritime industry, given its budget problems. So far, no one is quite sure if the U.S. government is even willing to support that industry going forward, or if it isn’t concerned about America’s maritime infrastructure.

For example, Greek shipping company owners “have their ships under foreign flags, they’re suffering because they’re being seen as part of the economic collapse. … Its very hard for a Greek borrower to get much of a welcome on Wall Street or Main Street – what you might call the high street banks,” said Clay Maitland, lawyer, in the Blank Rome report.

Global Shipping Industry Bankruptcies

“People are getting crushed by the low freight rates and we’ve seen a number of bankruptcy filings. What is unusual is that you’re seeing these bankruptcies in the US, whereas 20 or 30 years ago, ship owners did not come to the United States to file for bankruptcy so this is a new thing we are seeing and it’s a big issue,” said Donald J. Kennedy, partner at Carter Ledyard & Milburn in the article on the Blank Rome website. 

At the beginning of July, Japan’s largest Asian bound shipping corporation, The Sanko Steamship Co. Ltd. (Sanko Line) filed for corporate reorganization proceedings, Chapter 15 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. 

“We saw a sharp drop in the freight and charter revenue which were the main sources of our revenue because the growth of transportation demands rapidly slowed down due to the global financial crisis. … As a result, our profitability had rapidly and seriously deteriorated,” announced Sanko Line in a statement on its website. 

Sanko’s year-end March 2012 consolidated unaudited financial statements indicate working capital problems, as its current assets are only about 44 percent, or less than half, of its current liabilities. The ratio of current debt to current liabilities indicates that there is a problem meeting short-term obligations. 

Sanko’s liability is 12 times higher than its equity, a sign that it is highly leveraged, and an indication that the company finances its operations with debt. If debt is too high and coupled with working capital shortfalls, the company has overreached its financial wherewithal and thus, bankruptcy may be the only option for it to survive.

“Overcapacity and debt issues put the fear of looming bankruptcies into the shipping industry, which remains highly fragmented. Overcapacity could keep margins low for a while, with market participants forced to lower their prices to match the lowest priced competition,” said a July article on the Seeking Alpha website. 

On Jan. 12, Trailer Bridge Inc. announced that it had filed a restructuring plan on Jan. 17 at the United States Bankruptcy Court for the Middle District of Florida. On April 3, the company announced that it had received $31.5 million from a shareholder and would thus exit the bankruptcy proceedings. 

Trailer Bridge was provided with “$31.5 million in exit financing from its new majority shareholders, including SEACOR Holdings Inc. and Whippoorwill Associates, Inc., allowing the Company to pay its unsecured creditor,” according to an announcement on its website. 

In 2011, a number of shipping companies filed for Chapter 11 Restructuring. General Maritime Corp., a U.S.-based shipping company, filed its petition at the Court for the Southern District of New York in November 2011. Marco Polo Seatrade B.V., a Netherland-based shipper, filed for Chapter 11 restructuring at the Southern District of New York in 2011. 

On July 8, 2011, Omega Navigation Enterprises Inc. (ONE), a Greece-based shipper filed a Chapter 11 bankruptcy petition with the U.S. Bankruptcy Court for the Southern District of Texas (Houston). “The Company believes that in light of the unwillingness of its Senior Lenders to work with Omega on an out-of-court restructuring of its Senior Loan Agreement, the Company needs the protection of Chapter 11 to ensure the uninterrupted operation of its vessels and services to its customers,” announced Omega on the company website.

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