One of the markets that has withstood this year's downfall of tanker freight rates has been the one for second hand vessels, where prices have been for the most part relatively stable, although a major correction in prices has occurred since the "boom and bust year" of 2008. According to a recent report from US-based consulting firm, Mcquilling Services, in the larger tanker classes, five year old VLCC and Suezmax tanker prices were essentially flat while there was a gradual decline in the Aframax, Panamax and MR2 sectors. A five year-old VLCC had an average price of US $58 million year-to-date, down about 40% for the same time period in 2010. Throughout the same period of time, five year-old MR2s have declined by 20% from US $26 million in January to US $21 million going into November. This has occurred despite the robust trading activity of clean petroleum products and highlights the potential pressure facing this sector from a large orderbook and the expectation of future deliveries. As stated in our previous Industry Note, Delayed Reaction, throughout the first 10 months of the year 77 MR2 tanker orders have been placed" said Mcquilling Services.
It added that "given the current pressure facing the global economy, any support for tanker prices will be contingent on the return of a balance between supply and demand. For the transportation of crude and residual products this road will be less direct than in the past as a result of rising US crude production and its unknown impact on seaborne imports. Petroleum products trade will be influenced by rising refinery capacity in non-OECD Asia, India and the Middle East while a consolidation of the industry will transpire in the Atlantic Basin. When examining the nature of vessels that are sold for further trading, during the first 10 months of the last three years there were 96, 84, and 82 transactions. In terms of volume between 2010 and 2012, MR2 sales were the most frequent. Part of this can be attributed to this sector having a larger supply compared to the other sectors. Given the decline in second hand values, a spat of VLCC sales have also transpired in the past months" the company's report said.
Mcquilling Services predicted that at present, it's unlikely that asset prices or earnings will post a dramatic recovery in the near term, as a result of continued economic concerns and vessel supply. "This will mean that tanker owners will continue to explore new ways to finance outstanding loans which should continue this year’s theme of high profile restructurings. Owners will still face difficulty securing financing for newbuildings or renegotiating charter terms. One of the critical issues of restructurings will be the resolution of inter-creditor terms and finding a way to reach an agreement over future cash flow expectations. For many ship owners, the problem of low charter rates that are not enough to cover operational cash flow requirements much less financing, will remain an issue. Further, Basel III requirements are increasing the need for raised underlying equity in vessel loans with poor credit ratings. Given the already depleted cash reserves of many ship owners this will likely be problematic in the short term.
In general, restructuring strategies in 2012 have focused on single loans and comprehensive full fleet refinancing. In single loan/vessel refinancing, a lender may grant a new senior loan to extend the tenor and relieve borrower liquidity pressure. Additionally, a junior portion would be extended by the lender for the portion of refinance which could not be executed due to loan-to-value constraints. The combined senior and junior loans are structured in such a way that repayment in regular installments on the senior loan is possible, while the higher interest junior tranche is structured as a bullet repayment at the end of a bridge financing period.
While this solution will help resolve the issue for both parties it can be a labor intensive and costly process. Furthermore, it often places a heavy burden on the lenders and given the current environment, this may be a difficult to achieve.
As a result, asset markets will continue to be challenged until enough industry consolidation occurs to put a floor under prices. Tanker owners with a healthy balance sheet are likely to continue seeking bargain priced assets to expand their fleets. Meanwhile, those requiring restructured loans will need to find increasingly innovative ways to extend conditions or face difficult decisions. Although this reality casts a negative cloud over the tanker industry, the silver lining for owners is reduced fleet expansions, which should result in a brighter horizon" concluded Mcquilling Services.