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Shippers get margin call from slump-wary banks

Lenders to the shipping sector are seeking additional collateral as asset prices are just a few notches above scrap value globally.

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Lenders to the shipping sector are seeking additional collateral as asset prices are just a few notches above scrap value globally. Banker-shipper agreements allow for additional cash, additional asset or debt repayment as additional collateral, but shipping companies have been pledging other debt-free assets.

The additional collateral being asked is for assets acquired around four years back, when asset prices were significantly higher. Typically, when a bank funds a ship acquisition, the ship itself is taken as collateral, keeping a value 1.3 times the debt as mandatory asset cover for the funding. With ship prices crashing, the value of such collateral has eroded to go under the mandatory limit.

“All Indian banks have already asked for additional cover to match up with the asset cover requirements. Given the current dismal state of the sector, shipping companies will have to give a debt-free asset (an older ship for which debt has been repaid) as additional cash would be difficult. However, banks are open to negotiating,” said an industry official who sought anonymity.

It is believed that even state-owned Shipping Corporation of India (SCI) is among the companies that provided additional collateral to banks.  B K Mandal, director of finance at the SCI refused to comment on company-specific queries. However, Mandal added, “All such agreements have an asset cover requirement of 1.2 times of the outstanding loan; in case this is not met, it has to be supported with additional ship, additional cash or the loan has to be repaid.”

The average time period for loan repayment for a ship is seven to eight years, thus leaving three to four years for completing debt repayment for assets acquired four years back.

Confirming this, Vinay Kshirsagar, CFO of Shreyas Shipping, said it is a normal process. “Out of our four ships, two ships have a debt on them. We have offered the third ship, which is debt-free, as collateral,” he said.

An Essar Shipping official said, “Given the company’s relations with the banks, we had offered a letter of comfort from our parent only once in 2009-10, when the fall in asset prices started.”

“Other ships are in the loan-to-value requirement bracket, so no additional collateral has been given in the recent past,” said the official.

While shipping companies provide additional collateral, it is also being seen as an opportune time to invest in assets. “With assets available at such low prices, Indian shipping companies should look at acquisitions,” said Anil Devli, CEO of the Indian National Shipowners’ Association (INSA).

The INSA has also written to the government to introduce new policies to help ship finance in India, which is relatively expensive at 12% cost of debt, against 3-4% internationally. It recommended setting up of a special funding body to lend to shipping companies or float bonds specific to the industry. Devli pointed out that China has been extending yuan-based funding to its shipping companies for acquiring assets at discounted prices.

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