Keeping off the rocks? Navigating restructuring in shipping & offshore
05 April 2017
By Steve Moll, Matthew Little and Nasos Tsarouchis
The message is clear, the shipping sector outlook appears challenging. Many have withstood the difficult environment so far, but cash buffers are continuing to erode, and without new sources of liquidity some will inevitably face a financing crunch either this year or next.
The offshore shipping sector has been one of the most active parts of the restructuring market over the last couple of years given the low oil price environment and the consequential reduction in oil companies’ offshore capex spend. In addition, certain segments in the wider shipping market such as dry bulk and container continue to be plagued with overcapacity, uneconomic rates and lack lustre returns for investors.
With little optimism that market dynamics will change over the next 18-24 months, we anticipate these challenges will continue to impact the sector in 2017. A number of companies, particularly in dry bulk and container segments, have withstood the challenging conditions so far, but with cash buffers eroding some inevitably will face a financing crunch this year or next.
Restructurings in shipping and offshore
Restructurings for shipping businesses often involve complex capital structures with multiple creditors (bondholders, bilateral and/or syndicated banking facilities, lease/charter creditors and significant liabilities with shipyards and shipbuilders) who have invested within a web of special purpose vehicle companies.
Inter-creditor tensions, coupled with poor market conditions make reaching a consensual deal extremely challenging. Consequently, there have been a number of recent insolvency filings in the sector despite this route generally remaining an unattractive option – it is one that requires careful planning if value is to be preserved.
The most successful restructurings have laid out clear principles from the outset and have engaged with all stakeholders - not just lenders and shareholders - so that, where possible, common ground can be established early in the proceedings.
Inevitably in the circumstances, sticking plasters have been applied in a number of cases in the hope of better pricing conditions materialising by the end of the decade. We expect some of these companies will require a second round of restructuring in a couple of years’ time to address over-levered capital structures and in some cases to shore up liquidity with new money.
For various corporates, particularly those in dry bulk and container segments, 2017 is likely to be decisive year. Offshore will remain distressed with low levels of activity and increasing pressure on liquidity, giving rise to new money requirements for some and perhaps more pragmatism to deliver sustainable capital structures. Restructuring solutions that provide a ‘win-win’ outcome will be hard fought particularly over the next 12-18 months. Find out more about shipping segments trends in our fuller article or watch our market update.