Shipping industry urged to reinvent self as crisis drags

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container shipsWith the shipping industry already in its sixth year of crisis and showing no signs of early market recovery, stakeholders must focus on innovative platform solutions and structural change to adapt to the new normal, says a new report.

Authors Stephan R. Goethel and Oliver Rossbach said the shipping business today faces an unprecedented crisis triggered by “two cataclysmic developments which together had an explosive effect.”

These are an abundance of debt capital and equity capital which led to partly excessive investment in new shipbuilding, and the worldwide financial and commercial crisis which resulted in a considerable decline in the demand for ships as a means of transport.

“The course was therefore set for a huge surplus of shipping tonnage,” they said in a report published on Financier Worldwide. This resulted in charter and cargo rates that plunged to historical lows as well as the drying up of operational cash flows needed to pay off ships’ credits.

Germany, according to the report “The Shipping Crisis Presents Opportunities,” has been hit particularly hard since it is home to the largest container fleet in the world, is the headquarter of some of the leading shipping financiers, and houses two of the largest shipping companies in the world.

The authors said the crisis requires of industry participants two things to overcome: develop innovative solutions for current restructuring and insolvency scenarios, and press ahead with sustainable structural changes.

Regarding the bankruptcy scenario, the key is to win more time in anticipation of better markets with solutions that include refinancing a ship by investors to ultimately sell it possibly at a profit, and restructuring, in which the investors become the shareholders to retain the opportunity to receive future dividend payouts.

But the article argues that a bankruptcy declaration could also present “interesting opportunities and is occasionally the best option,” citing the latest insolvency law reforms in Germany that provide greater influence for the creditor on such proceedings and emphasize an insolvency plan that will overcome conflicting shareholder interests.

“In this situation the reset button can practically be pushed and every measure permissible under company law can be resolved and implemented. Ultimately the advantage of well-timed formal insolvency proceedings is that all otherwise threatening risks of liability are eliminated—from director’s liability to a later insolvency rescission through to possible criminal liability for delayed filing of insolvency,” it continued.

Sustainable structural change is another urgent requirement for shipping companies. “If they want to survive and profit from a later turnaround in the markets, they must consolidate themselves, cooperate with competitors and develop new sources of finance” including private equity investors and capital markets, said the report.

“Supported by the motive, synergy effects and cost-savings to be made, different forms of cooperation between shipping companies can be increasingly found. These range from simple contractual cooperation agreements to joint ventures through to real mergers. One example is the merger between German Hapag-Lloyd and Chilean CSAV. One can only hope for further innovation in this direction and that many make use of the crisis for what it is: namely an opportunity to reinvent and emerge stronger.”

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