The Shipping 2018 guide provides expert legal commentary on key issues for businesses. The guide covers the important developments in the most significant jurisdictions.
Last Updated July 10, 2018
One point on which authorities such as the Baltic Exchange, Moody’s or Fitch Ratings tend to agree is that ship-owners today, especially those engaged in the dry bulk and container shipping sectors, are facing a considerable drop in their earnings.
The most visible causes for these negative EBITDA outlooks tend to be very low freight costs, resulting in part from overflow of world shipping tonnage. China’s economic slowdown and dropping demand for commodities also seems to be affecting this sector of the shipping industry, although the tanker and LGN/LPG sectors seem not to be included within the economic slowdown and are performing in a stable condition.
It is often said that the shipping industry goes through cycles, and this is neither the first nor the last time that it will be exposed to upwards and downwards forces. It is during these times of weak demand that conservative measures are necessary, and those ship-owners with far-sighted vision will be the ones who are able to ride out the storm until better opportunities arise.
In illustration of the way that shipping activity is marked by cycles, we have chosen three important examples of shipping companies, of different nationalities and markets, that were forced to file for Chapter 11 protection and were afterwards either liquidated, went bankrupt or were absorbed by the competition.
During the 1980s fierce competition, overflow of tonnage and low freight rates forced the container shipping company United States Lines to take on a considerable number of debts. In 1986 it filed for bankruptcy. Having started operations in the 1970s, their cargo service-provider was finally liquidated in 1997, leaving several of their container vessels stranded in different ports of the world.
We represented two service-providers (necessaries) and bunker suppliers that arrested the “SS American Utah” and the “SS American Astronaut” in Panama, one in the Atlantic Ocean and the other in the Pacific Ocean, before the vessels transited through the Panama Canal while trying to arrive at US ports. Due to the fast and efficient specialised maritime court in Panama the claims were settled before any other creditors could make their presence known in obtaining further arrest, so the two vessels successfully transited the canal and made it safely to US ports without further inconvenience.
Adriatic Tankers Shipping Co. S.A.
In the 1990s an overflow of tonnages, combined with liberal banking finance handouts in a depressed market, produced a combination of increased fuel costs and extremely low freight rates. This forced Greek ship-owners Adriatic Tankers out of business, leaving many creditors stranded and without the opportunity of collecting their credits. Among such creditors were several important law firms worldwide. Again, during this crisis our services in Panama proved once again to be useful in collecting monies owed for providing necessaries to Adriatic Tankers' vessels. We also tried to help banks and Adriatic Tankers with the financial restructuring of the company, but unfortunately it was too late to prevent a substantial amount of Adriatic Tankers' vessels from being repossessed and put out of business.
Hanjin Shipping Co. Ltd.
Korea's largest shipping company, and the seventh-largest in the world, Hanjin Shipping collapsed after failing to raise enough capital to restructure its debts. It filed for bankruptcy in August 2016, leaving many of its container carriers stranded in different parts of the world. Hanjin is the latest casualty, and one of the biggest, of the shipping industry's ups and downs. The consequences that will follow the downfall of this important company are still unpredictable, leaving providers of necessaries with the fear that they might not get paid for their services.
Once again Panama’s jurisdiction proved to be a key location not only for collecting debts, but also for partly restructuring the debts of certain companies whose vessels were registered under the Panamanian flag, utilising the private sale system allowed under the Panama ship mortgaging rules to lower costs in transferring assets (the vessels).
The maritime courts were also useful, and our Shipping & Admiralty Department managed to arrest two vessels of the Hanjin fleet on behalf of a provider of necessaries, the “Ro-Ro Sprinter”, through an in rem action and on behalf of a bunker supplier, the “Hanjin Bremerhaven.”
In times of trouble, as mentioned above, a given jurisdiction can play an important role in protecting the assets of a company and lowering its costs. Our Ship Finance & Registration Department managed to assist with the partial restructuring of Hanjin Shipping’s debts through the usage of collateral guarantees, such as ship mortgage and pledge of shares. The high-ranking priority lien status that our Maritime Trade Law gives to the naval mortgages helps the banks in their position as creditors, second only to:
The origins of open registries can be traced back to 1917. Panama formally established its open registry in 1925 and Liberia in 1948. In the 1950s, financial institutions came to play an important role in the development of the shipping registries.
Ship finance is a capital-intensive business and as such it will have its ups and downs. After the 1973 and 1979 oil crises, when the countries forming OPEC obtained vast surplus petro-dollars by monopolising the oil market, these surplus dollars were invested in the shipping industries and became in part responsible for the subsequent shipping crisis of late 1980s and early 1990s. The resulting tonnage oversupply caused substantial losses to banks, which eventually withdrew from their ship-financing activities (words mentioned by the subscriber in an international maritime symposium on ship finance which took place in Panama in 1991).
In past decades we have seen new ways of obtaining capital through private equity and hedge funds, in addition to the more traditional ship-finance schemes of syndicated loans with the expectation of obtaining high returns.
In 2015 and 2016 we have again seen fierce competition among ship-owners, causing another oversupply of vessels. This has partly been the result of a speculative gamble on the expansion of China’s economy and its needs, and has ultimately had a part in creating another crisis with a negative impact on the dry bulk and container sectors.
We still find, however, banks that have anticipated these cyclical negative periods. Such banks continue to be in the business of ship finance, for instance by offering loans with scheme structures and swap agreements that diminish their exposure. A number of banks have used mandated lead arrangers and security agents to accommodate finance structures that enable them to share risks. Such institutions include:
Other common means used for raising ship-finance capital include private equity, bonds, shares and family funds. All these modes of ship finance have one thing in common: the usage of a jurisdiction that will protect their financial investments. It is here that a specialised jurisdiction like Panama comes into play.
The most commonly used jurisdictions used by ship-owners and financial institutions, due to the many advantages they offer in protecting their assets and in lowering operational costs, are the so-called open-flag states. These include Panama, Liberia, the Marshall Islands, Hong Kong, Singapore, Malta and the Bahamas.
Users of these jurisdictions are attracted by considerations including:
It is not a mystery why all these open-flag states carry a substantial amount of world tonnage: the benefits and functionality they offer help world commerce to flow in a more practical way.
When choosing a jurisdiction, financial institutions (and especially banks) will consider its stability and whether or not it is convenient to enforce collateral guarantees, such as ship mortgages and pledges of shares. They will first check if a ship mortgage creates a maritime lien on the vessel, its priority among other lien-holders and how practical it is, in case of need to foreclose on the mortgage, to collect their funding credits.
It is throughout these years of crisis that these jurisdictions have proven to be more useful. At this moment, there is no way to predict when the market's weakness will pass, but without any doubt it will pass, as it has done in previous crises. Those companies with a long shipping tradition that have foreseen previous difficulties will without doubt continue to be in business.
With the enlargement of the Panama Canal and the Suez Canal we can conclude that a new shipping era has begun. Neopanamax vessels with greater capacity to carry goods (dry bulk, containers carriers, tankers), and the more specialised LNG and LPGvessels, have created a need for new port facilities to accommodate them.
In the future we will probably see a decrease in the number of vessels, but with bigger capacity. Big companies will merge with each other in order to survive the competition, especially in the container sector. Examples of this, some of which are still in formation, include:
Medium-sized ship-owners will still continue to operate in a more defined local market, but global shipping will be in the hands of the aforementioned big conglomerates.
Let us hope that the process of riding out this new shipping industry crisis will not continue for a long period of time.