Fitch Ratings said that the shipping industry is likely to face significant funding challenges as banks take a tougher line on lending. Constrained capital and funding have increased risk aversion among banks, and this comes at a time when overcapacity is leading to poor cash generation among shippers.

European banks are a major source of funding for shipping companies. But they are under particular pressure to restructure operations that absorb large amounts of funding and capital. Long term lending and asset finance, especially in US dollars, the common currency for ship finance, are likely to be most affected.

Although lending to shippers by Asian banks has been rising, Asian banks are unlikely to fully replace the reduction in European bank lending to the shipping sector as they become more cautious and lend more selectively.

It is expected an increase in the number of distressed shipping credits in the next 12 to 18 months. The oversupply in most shipping markets and weakened asset values will make loan work outs increasingly challenging for banks.

A flight to quality is expected. This will make refinancing difficult and more expensive for weak shipping credits. However, the over supply and the weak asset valuations should make lenders exercise a higher level of forbearance, which is typical for the shipping industry.

In addition to the refinancing needs of the sector, there is also a large under funded order book. Funding for building new ships will prove to be extremely challenging. These challenges will be increased by banks reverting to tighter loan to value requirements.

Tapping the debt and equity capital markets for funds will be difficult for the smaller and weaker companies. All this might lead to some consolidation within the industry.

(Sourced from www.fitchratings.com)