Look for More Defaults, Consolidations in Shipping Sector Next Year

Fitch Ratings is holding on to its negative outlook for the world’s shipping sector in 2017, due to subdued demand growth that is likely to worsen overcapacity, apply pressure on freight rates, and push more consolidations and defaults.

Tanker shipping will experience slightly less stress than dry bulk and container shipping, said Angelina Valavina, senior director of corporates, and Simon Kennedy, senior analyst at the ratings firm.

A lot of container shipping and tanker shipping firms had enough cash for short-term maturities at their most recent reporting date, but are reliant on uninterrupted access to bank funding to cover negative free cash flow, the analysts said.

“Therefore, the filing for receivership in August by Korea-based Hanjin Shipping, the seventh-largest container shipping company in the world, may have far-reaching ramifications,” Valavina and Kennedy said. “In particular, creditors' withdrawal of support may indicate a reassessment of the financing landscape, where secured bank funding for new vessels has remained relatively accessible even as market conditions have deteriorated.”

Fitch expects to see more mergers and acquisitions activity and defaults in the short- and medium-term, which will “…only restore equilibrium and boost freight rates if they prompt capacity reduction,” the ratings firm said. In the container shipping segment, Fitch foresees consolidation to affect companies in the entire sector, “…with smaller operators focusing on survival through increasing scale while market leaders such as Maersk Line defend their market position through M&A.”

Look for likely defaults among companies with weak liquidity and limited access to bank funding, Fitch said.

– Nicholas Stern, editorial associate

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