standard and poors report

7/29/2019 Standard and Poors Report

1/10

Declining Asset Values Are PuttingInternational Shipping Companies AtRisk Of Breaching Loan CovenantsPrimary Credit Analyst:Funmi Afonja, New York (1) 212-438-4711; [email protected]

Secondary Contacts:Izabela Listowska, Frankfurt (49) 69-33-999-127; [email protected] Guerena, Singapore (65) 6239-6332; [email protected] Karlsson, Stockholm (46) 8-440-5927; [email protected] Mall, Toronto (1) 416-507-2544; [email protected]

Table Of Contents

What's Behind The Decline In Tanker Market Values?

Most Lenders Are Reducing Their Exposure To The Industry

The Struggle To Generate Liquidity And Avoid A Covenant Breach

Ratings Implications For Companies At Risk Of Covenant Breach

Related Research

December 7, 2011

www.standardandpoors.com/ratingsdirect 1

919934 | 301691467


2/10

Declining Asset Values Are Putting InternationalShipping Companies At Risk Of Breaching LoanCovenantsPlunging tanker values and weak rates are unleashing a litany of problems for international shipping companies and

their financiers. Many ship owners have loans with collateral maintenance covenants that require the amount

they've borrowed against a vessel to remain within a specified range of its fair market value. Thanks to prolonged

weak rates for ship owners, tanker values are dropping, and many companies are on the brink of breaching those

covenants. Where breaches occur, ship owners may have to pay part of a loan early. And if covenant cushions

merely shrink, shippers' access to bank lines may decrease also, damaging their liquidity and financial risk profiles.

We think that companies will continue to struggle until there is a meaningful and sustained increase in tanker

shipping rates--and we don't expect that before the end of 2013. (Watch the related CreditMatters TV segment

titled, "Plunging Asset Values And Weak Rates Threaten Global Shippers' Financial Covenants," dated Dec. 7,

2011.)

The damage to individual shipping companies will vary. In many cases, the shipping industry's financial distress is

forcing lenders to agree to covenant waivers and amendments--or risk loan defaults. But banks are also tightening

the lid on already limited debt financing, with many scaling back their ship loan portfolios. This has contributed to

our decision over the past 12 months to downgrade five of the 10 international tanker companies we follow. Over

the next 12 months, we could take more negative ratings actions if market conditions do not improve.

Overview

Falling tanker values are putting shipping companies at risk of breaching their loan covenants and possibly defaulting.

This is causing mounting cash flow and liquidity problems.

We don't expect that tanker values will improve until rates recover.

We have already downgraded five operators this year, and more could face a similar fate.

What's Behind The Decline In Tanker Market Values?

The market value of tankers has dropped over the past 12 months, with the largest tankers (very large crude

carriers, or VLCCs) suffering the biggest losses. As an example, the average price of a 5-year-old VLCC is down by

about 65% from the July 2008 peak of $165 million. Many factors figure into a vessel's market value, including its

replacement cost (largely a function of steel prices) and earnings potential over its useful life. A ship's earnings

potential is determined by voyage revenues (a function of tanker rates) less voyage expenses (such as fuel and port

charges) and vessel expenses (including crew costs and management fees). But the industry tends to view shipping

rates as a proxy for a ship's market value, since when they fall a vessel's revenue and earnings potential does too.

That leaves buyers unwilling to pay as much for ships--the opposite of what happens when rates are rising.

Standard & Poors | RatingsDirect on the Global Credit Portal | December 7, 2011 2

919934 | 301691467


3/10

Chart 1

Collateral maintenance covenants in credit agreements may require that the fair market value of a vessel that servesas collateral for a loan not fall below a certain level, or not fall below a multiple of the loan balance. The idea is to

protect the lender in the event of a loan default--by making sure that the proceeds from the sale of a vessel would be

sufficient to cover the outstanding loan principal. Currently, asset values are falling faster than loans balances,

leading to many loan-to-value ratios well above 100%. What this means is that in a loan default, proceeds from the

sale of vessels would not be sufficient to cover the outstanding loan principal.


919934 | 301691467

Declining Asset Values Are Putting International Shipping Companies At Risk Of Breaching Loan Covenants


4/10

Chart 2

Most Lenders Are Reducing Their Exposure To The Industry

To avoid losses from companies that might otherwise default on loans, lenders are amending credit agreements by

adding clauses that permanently reduce lines of credit and require borrowers to pledge more unencumbered vessels

as collateral. They are also implementing cash flow sweeps (where the creditor imposes a mandatory debt paydown

above scheduled amortization when the borrower's cash balance exceeds a defined threshold) to force debt

repayments. European banks (HSH Nordbank, DnB NOR, BNP Paribas, Credit Agricole CIB), many of which are

embroiled in the European sovereign debt crisis and are big players in the ship financing market, are feeling

mounting pressure to curtail financing for new ships and to further shrink existing loans to the sector. For example,

HSH Nordbank, in a deal with the European Commission agreed to cut its balance sheet by 40%, relative to 2008


919934 | 301691467



5/10

levels, by the end of 2014. Banks are also seizing ships--or arresting them, in industry terminology--and forcing asset

sales to cut their loan losses. For example, earlier this year, the Royal Bank of Scotland arrested a tanker owned by

Ocean Tankers Holdings (not rated) because of outstanding loan payments.

By contrast, Asia-based state regulated agencies, such as the Export-Import Bank of China, the Export-Import Bank

of Korea, and the Japan Bank for International Cooperation, have continued to provide financing to existing

borrowers and are still investing in new ship financing, in part because shipbuilding is important to their economies.

Still, these agencies provide only a small fraction of the financing the industry needs and thus can't fix the credit

problems of most shippers.

Media reports suggest that Chinese shipping companies could be building as many as 80 very large crude carrier

tankers over the next few years, as part of the government's goal to transport about half of oil imports on

Chinese-owned ships. If the reports are true and China builds new vessels (a process that will take several years), we

believe this will alter the seaborne international crude oil trade significantly. Non-Chinese international tanker

operators will suffer sustained capacity overhang that will cause crude oil tanker rates to crash and asset values to

take a deeper nosedive.

The Struggle To Generate Liquidity And Avoid A Covenant Breach

Ship owners facing a potential covenant breach typically need to raise a substantial amount of cash to pay down

their loans and bring them in line with covenants. Usually, cuts in operating expenses hardly make a dent in that

figure, because the high fixed-cost nature of shipping limits the amount of expenses they can cut. In theory,

companies that own unencumbered vessels can raise cash by doing sale-leaseback agreements (ship owner sells vessel

and leases it back at a fixed rate over a set period). Or, they can sell or scrap vessels. In the current environment,

though, owners that want to sell or sell and lease back vessels are having increasing difficulty finding buyers and

lenders. And the few buyers in the market are demanding deep discounts, forcing sellers with limited bargaining

power to record shortfalls relative to the book value of their vessels. Owners that choose to scrap vessels have so farbenefited from high steel prices. However, global economic turmoil doesn't guarantee that steel prices will stay high.

To help avoid covenant violations, owners could adopt more moderate financial policies, such as cutting dividends

and avoiding share buybacks. With the exception of Teekay Corp. (BB-/Stable/--), none of the tanker operators we

rate have repurchased shares since 2010. If a potential breach isn't imminent and the company is public, it may have

time to raise capital through an equity offering. Embattled tanker operators can also turn to private equity or hedge

funds for equity infusions or to issue debt hybrids, such as convertible preferred and pay-in-kind notes, though they

typically have to pay high interest rates to place those. They could also issue warrants to purchase sizable amounts

of equity in their companies at a greatly reduced strike price to lure investors. Several of the international tanker

operators we rate, including Navios Maritime Acquisition Corp. (B/Stable/--), Overseas Shipholding Group Inc.

(B/Watch Neg/--) and General Maritime Corp. (D/--) have used some combination of these strategies to raise capitaland improve liquidity. But these options are becoming increasingly difficult to arrange, because of global economic

turmoil, strained capital markets, and geopolitical uncertainty.

That said, some companies we rate have negotiated multiple covenant amendments over the past 12 months. The

nature of these usually depends in part on a company's original credit agreement. Some agreements have a cure

provision or grace period that allows the borrower to remedy a breach through an equity sponsor's equity infusion

or via a pledge of more vessels as collateral, for example. For companies with agreements that don't include a cure


919934 | 301691467



6/10

provision or grace period, a breach could be tantamount to a loan default.

Chart 3

Ratings Implications For Companies At Risk Of Covenant Breach

We may lower a company's corporate credit rating even if it successfully amends its financial covenants. This is

because many companies in this predicament also suffer from severely constrained liquidity, highly leveraged

financial risk profiles, and limited financial flexibility. In addition to covenants tied to vessels' fair market values,

most credit agreements contain covenants that limit debt leverage and require minimum fixed charge coverage or

interest coverage levels, for example. While a covenant amendment may stave off the imminent breach of a credit

agreement, it doesn't resolve the underlying credit quality issues.

Moreover, companies often try to resolve a potential covenant breach in tandem with solving a severe liquidity

crisis. To do so, they may look to restructure their debt or contemplate filing for bankruptcy (leading to a 'D'

rating). We could lower the corporate credit rating to 'SD' if a company reaches an agreement to restructure its debt

in a manner that we would classify as a selective default (see "Timeliness Of Payments: Grace Periods, Guarantees,

And Use Of 'D' And 'SD' Ratings," published Dec. 23, 2010), and lower our issue-level rating on the restructured

debt to 'D'.

We could lower the recovery ratings (debt instrument-specific estimates of post-default recovery for creditors) on


919934 | 301691467



7/10

rated debt issues if our simulated default scenario leads us to believe that lenders will recover lower principal and

pre-petition interest due to falling asset values. In evaluating the recovery prospects associated with the underlying

assets, we typically use a discrete asset valuation methodology because most vessel financings have a security interest

over specific vessels, giving lenders a strong incentive to seek recovery upon default by repossessing and disposing of

their respective collateral. We only assign recovery ratings to companies with speculative-grade corporate credit

rating. Our recovery ratings when viewed together with the company's corporate credit rating can help investorsevaluate a debt instrument's risk/reward characteristics and estimate their expected return.

General Maritime ('D') is one of several international shippers we rate that has defaulted. If the world economy

stays weak long enough, more shippers eventually could find that there are too few life preservers to go around.

Table 1

Rated International Tanker Operators, Strongest To Weakest

As of Nov. 23, 2011

Company name RatingBusiness riskprofile

Financial riskprofile

Liqudityassessment

Standard & Poor'sanalyst

1 MISC Bhd.* BBB+/Negative/-- Satisfactory Significant Adequate Manuel Guerena2 Stena AB BB+/Negative/-- Satisfactory Aggressive Adequate Per Karlsson

3 BW Group Ltd. BB/Stable/-- Fair Aggressive Adequate Manuel Guerena

4 Ship FinanceInternational Ltd.

BB/Stable/-- Fair Aggressive Adequate Izabela Listowska

5 Teekay Corp. BB-/Stable/-- Satisfactory Highly leveraged Adequate Jatinder Mall

6 First Ship Lease TrustLtd.

BB-/Negative/-- Weak Aggressive Adequate Manuel Guerena

7 Navios MaritimeAcquisition Corp.

B/Stable/-- Weak Highly leveraged Adequate Izabela Listowska

8 Overseas ShipholdingGroup Inc.

B/Watch Neg/-- Weak Highly leveraged Adequate Funmi Afonja

9 PT Berlian Laju TankerTbk B-/Negative/-- Weak Highly leveraged Weak Manuel Guerena

10 General Maritime Corp. D/-- Vulnerable Highly leveraged Weak Funmi Afonja

*MISC Bhd.s rating reflects application of Standard & Poor's criteria for rating stand-alone credit profiles within our group methodology. We assess MISC's stand-alonecredit profile to be 'bb+'. Stena AB is not a pure-play tanker company; it is a conglomerate with interests in shipping, offshore drilling, ferry operations, real estate, andother investments. Ship Finance international Ltd. and First Ship Lease Trust Ltd., though not tanker operators, own tanker fleets that they lease to operating companies.They are therefore exposed, albeit indirectly, to the underlying issues in the industry.

Table 2

Peer Comparison--Shipping Companies

MISC Bhd. Stena ABBW Group

Ltd.

Ship FinanceInternational

Ltd.Teekay

Corp.First Ship

Lease Trust

OverseasShipholding

Group Inc.

PT BerlianLaju Tanker

Tbk.

GMa

Rating as ofDec. 5, 2011

BBB+/Negative/-- BB+/Negative/-- BB/Stable/-- BB/Stable/-- BB-/Stable/-- BB-/Negative/-- B/Watch Neg/-- B-/Negative/--

Rolling 12monthsended

Sept. 30, 2011 June 30, 2011 June 30,2011

June 30, 2011 June 30,2011

Sept. 30, 2011 Sept. 30, 2011 Sept. 30, 2011 Se

(Mil. $)

Revenues 3,769.5 4,078.7 1,108.7 774.6 1,932.3 105.3 1,023.8 648.7

EBITDA 562.8 1,058.7 451.6 685.3 657.9 82.2 121.1 198.1


919934 | 301691467



8/10

Table 2

Peer Comparison--Shipping Companies (cont.)

Net incomefromcontinuingoperations

430.6 398.1 142.4 138.7 (226.2) (3.3) (198.2) 24.2

Funds fromoperations(FFO)

787.3 1,060.9 388.3 553.1 396.7 56.1 43.5 16.2

Capitalexpenditures

1,497.4 2,047.8 164.7 357.6 596.5 94.7 598.9 280.7

Freeoperatingcash flow

(919.0) (980.0) 204.9 207.3 (233.4) (33.8) (561.8) (320.0)

Discretionarycash flow

(1,461.6) (1,024.4) 144.0 90.2 (513.8) (56.5) (615.4) (320.0)

Cash andshort-terminvestments

469.8 158.5 176.0 88.5 497.5 28.5 182.1 194.7

Debt 4,644.5 8,912.6 2,032.1 3,646.9 5,152.5 481.5 3,449.6 2,276.5 1

Equity 7,543.6 4,673.5 3,183.0 857.9 3,335.5 342.8 1,603.6 1,018.5

Adjustedratios

EBITDAmargin (%)

14.9 26.0 40.7 88.5 34.0 78.1 11.8 30.5

Operatingmargin (%)

5.0 13.4 21.3 68.5 10.8 22.6 (6.4) 9.4

EBITDAinterestcoverage (x)

2.7 2.8 4.8 4.2 3.7 3.6 0.7 1.1

EBIT interestcoverage (x)

1.6 1.9 3.3 3.6 1.3 1.0 (0.2) 0.4

Return oncapital (%)

2.7 5.8 5.1 13.0 2.7 2.7 (0.8) 2.4

FFO/debt (%) 17.0 11.9 19.1 15.2 7.7 11.7 1.3 0.7

Freeoperatingcashflow/debt(%)

(19.8) (11.0) 10.1 5.7 (4.5) (7.0) (16.3) (14.1)

Debt/EBITDA(x)

8.3 8.4 4.5 5.3 7.8 5.9 28.5 11.5

Totaldebt/debtplus equity(%)

38.1 65.6 39.0 81.0 60.7 58.4 68.3 69.1

Navios Maritime Acquisition Corp. does not release its financial statements publicly.

Related Research

Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Dec. 23, 2010

Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009

Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009


919934 | 301691467



9/10

2008 Corporate Criteria: Analytical Methodology, April 15, 2008


919934 | 301691467



10/10

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminateits opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com

and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional

information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result,certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the

confidentiality of certain nonpublic information received in connection with each analytical process.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P

reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of theassignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact.

S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any

investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. TheContent should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making

investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from

sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.

No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified,

reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor'sFinancial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well

as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the

Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, orfor the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED

WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS,

SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE ORHARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or

consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence)

in connection with any use of the Content even if advised of the possibility of such damages.

Copyright 2012 by Standard & Poor's Financial Services LLC. All rights reserved.


919934 | 301691467

standard and poors report

Documents