As many as half of publicly traded commodity shipping lines may breach their loan covenants by April after a record collapse in hire rates, according to Royal Bank of Scotland Group, the third-largest lender to the industry.
The cost of second-hand capesizes, the largest group of commodity carriers, plunged 70 per cent last year, according to the Baltic Exchange in London.
Fleet values are one of the key covenants used. Banks review loans as often as every quarter, Lambros Varnavides, the bank's head of credit to the shipping industry, said in London on January 12 and January 13.
It is hard to avoid a breach when asset values have fallen so significantly, said Varnavides, who is global head of shipping. Assuming rates and values do not rebound in the next several months, shippers in breach of covenants will likely have to renegotiate loans, he said.
The Baltic Dry Index, a measure of shipping costs for commodities, slumped 92 per cent last year, causing at least four shipowners to fail since October.
Demand for raw materials plunged as Europe, Japan and the US entered their first simultaneous recessions since the Second World War.
The ratio of losses on RBS's shipping loans has averaged about 0.03 per cent in the last 15 years and that is not going to change much in the long run, Varnavides said.
The bank has lent $25 billion (Dh91.7bn) to shippers, of which $18bn has actually been used.
About 60 per cent is financing oil and gas tankers.
"We remain confident in the quality of our portfolio and there is a benefit of loans being re-priced higher," the managing director said.
About a third of closely held coal, ore and grain shippers may also be close to breaching loan covenants, Varnavides said. Most banks will be more interested in maintaining their relationship with shippers than seeking the highest possible interest rates when renegotiating loans, Varnavides said.
"In many ways, it is an old-fashioned business, it has old- fashioned virtues," Varnavides said.
Loans to shipowners are being made at 200 to 300 basis points over the London interbank offered rate, compared with less than 100 points about 18 months ago, Varnavides said.
A basis point is 0.01 of a percentage point and Libor is the rate banks say they charge each other for loans.
RBS is the third-largest lender to owners based on how many shipping loans it holds directly.
HSH Nordbank AG and DnB NOR ASA are the biggest, Varnavides said.