Saturday, November 28, 2009

Shipping Set to be the Next Industry to Make Banks Take a Bath

As if the Dubai saga was not enough to cast a pall on the bonus jackpots of the banking sector. It now emerges that a number of loans banks made to shipping companies have been going sour. In the past, shipping companies took out loans to either build new ships or purchase second-hand ships from other companies. Banks, especially those in Europe, underwrote huge loans to finance these purchases. Now with ship prices dropping due to contracting global trade and an oversupplied ship market, shipping companies are deeply underwater on their loans (same as the housing crisis). A Bloomberg news piece titled Shipping Has ‘Trouble" Building Behind the Dam, points out:
Ship prices may keep dropping for at least another year because banks have not yet dealt with the weaker loans they made to the industry, according to Michael Drayton, a former chairman of the Baltic Exchange.
The cost of a second-hand capesize used to haul iron ore plunged 66 percent to $53 million since July 2008. The cost of a second-hand supertanker slumped 52 percent to $77 million, according to data from the London-based bourse.
“There’s trouble building up behind the dam, and the dam is going to be breached,” Drayton, now an independent shipping consultant in London, said in an interview. “The market is blocking the natural flow to where it should be.” Drayton said he has been approached by private-equity funds and institutional investors seeking advice on when to buy distressed loans and the ships tied to them.
Yeah better grab those fat bonuses and scurry on to a safe corporate job, before the dam bursts.

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