By Anna Molin
Of DOW JONES NEWSWIRES
STOCKHOLM (Dow Jones)--Nordic banks' earnings will likely come under pressure going into next year as the five-year boom in shipping financing comes to an end and loan losses from that sector aggravate the pain already felt from the credit crunch, analysts say.
Norway's DnB NOR ASA (DNBNOR.OS) and Sweden's Nordea Bank AB (NDA.SK), two of the shipping industry's biggest financiers, have both lent heavily to ship owners who wanted to increase the size of their fleets to take advantage of record demand and soaring freight prices.
With the encroaching recession, analysts fear that some of those loans will turn bad as cyclical shipping sectors, such as dry bulk and container freight, see business slow.
"If this depressed state in the shipping markets is sustained, then several shipping companies could default on their bank obligations," Arctic Securities shipping analyst Jonas Shum said.
The London-based Baltic Dry Index, which gives an average freight rate for raw material cargo, has collapsed 94% since an all-time high at 11,793 in May. The index Wednesday traded at 763, its lowest level since around 1985, barely covering the daily operating costs for ship owners, who are laying up vessels while struggling to fill ships kept in circulation.
As a result, ship owners' profit and cash flows are dwindling at a time when more vessel deliveries are due, further diluting ship values.
According to U.K.-based shipping research firm Clarkson, the order book for new vessels has fallen for three consecutive months, slightly off historically high levels, while shipping contracts in October fell to the lowest number reported in a month since February 1999.
Jitters among investors also intensified after two European shipping companies recently filed for bankruptcy, leaving a trail of unpaid bills, including a $170 million term-loan facility with Nordea Bank Denmark A/S and Lloyds TSB Group PLC (LYG).
Analysts say the bankruptcies of Ukraine-based Industrial Carriers and U.K.-based Britannia Bulk Inc. could prompt a wave of charter party defaults, distressed sales of bulk vessels and cancellations of orders, many of which have yet to be financed.
Nordea's Carl Erik Steen, head of shipping, oil services and international banking, estimated that a quarter to one-third of new orders due for 2010, 2011 and 2012 won't be delivered.
"I've been in shipping for 30 years, and I've never experienced anything like this before - this is really extraordinary," Steen said Wednesday at a shipping seminar in Stockholm.
Honing In On Loan-To-Value Covenants
As a result, DnB NOR and Nordea are keeping a close watch on shipping loans, some of which are secured by first-priority mortgages on vessels, rigs and newbuilds on order as collateral.
Nordea's shipping portfolio of EUR8.15 billion in the third quarter represents about 3% of its total lending, while DnB NOR's shipping loans totaled 122.22 billion Norwegian kroner ($17.55 billion) in the third-quarter, representing about 10% of its lending.
Both banks said this week that they are tightening their loan-to-value covenants, which measures loans in relation to the value of the underlying security, and are using breaches of covenants as the basis for renegotiating price and loan terms, including requesting additional security or a reduction of the loan amount.
Nordea's Steen told Dow Jones Newswires that a handful of projects have breached covenants in excess of 70%, prompting the bank to request additional collateral in the form or ships, cash or guarantees. More covenant breaches are expected as asset values deteriorate, he said, and that Nordea will try to work with the borrowers on a case-by-case basis to avoid bankruptcies. In worst-case scenarios, it will sell ships once values improve.
"We will definitely see more defaults in the coming months," Steen said, adding that the number of shipping borrowers on the bank's observation list is now close to 20, up by nearly 75% from the last quarter.
"Loan-loss provision will be much higher in 2009 than in the previous five to six years, but it will still be manageable," he said.
Nordea expects loan-loss reserves on its shipping portfolio to rise to above 20 basis points in 2009, up from an average of 3 basis points over the course of a business cycle, Steen said.
DnB NOR, meanwhile, said in a Web meeting with investors that it expects loan-loss reserves in 2009 to be higher than the 19 basis points of exposure at default. Exposure at default is a measure of the extent to which a bank may be exposed to a counterparty in the event of default.
Analysts See Higher Loan Losses
Three analysts polled by Dow Jones Newswires estimated losses at between 50-200 basis points for DnB NOR and Nordea's shipping portfolios in 2009.
"Loan losses on the shipping portfolio could reach a historical peak in 2009," said Fridtjof Berents, bank analyst at Arctic Securities.
"If freight rate levels continue to stay under pressure in the dry bulk and container segment for another year or so, into 2010, we could see losses even higher than 2%. In a stress scenario, I expect losses between 5%-10%," he added.
In 2009, Berents said that he expects DnB NOR's loan-loss provisions to peak at NOK6.2 billion, 38% of which will come from shipping.
The bank last saw losses of that magnitude in 1998, when it wrote off 170 basis points on its shipping portfolio. The bank said it won't see the same level of losses this time around, as it is now focusing on the leading players in each segment.
"Back then, our loan book did not include much container financing," it said, adding that most of its losses then came from low-quality ship owners involved in the dry bulk segment, where it in addition was exposed to fraud from one employee.
DnB NOR said it expects loans to the shipping industry to remain largely at today's levels in 2009. However, the total credit exposure can be reduced as undrawn overdraft facilities will be limited if covenants are breached or default situations are anticipated.
Repayments and prepayments will lead to a reduction in the shipping lending portfolio. However, both Nordea and DnB NOR plan on hiking margins by passing on costs to customers and charging more for loans.
"Banks have stepped from the back seat to the driver's seat when it comes to setting the standards for shipping lending," said Ronny Bjornadal, Nordea's head of syndicated loans.
Company Web sites: http://www.nordea.com
http://www.dnbnor.com
-By Anna Molin; Dow Jones Newswires; +46 8 545 130 91; anna.molin@dowjones.com
(Art Patnaude in London contributed to this item.)
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(END) Dow Jones Newswires
November 26, 2008 08:57 ET (13:57 GMT) | 
