The shipping sector has been at the forefront of distressed investors’ agendas for the past few years, with Italian players being no exception. Between 2009 and 2017, 10 of the major Italian shipping groups underwent restructuring processes, some of which are still ongoing, while a few are coming back for round two, or more. Something has clearly gone wrong, panelists and attendees at Debtwire Italian forum in Milan on 9 May agreed. The panel line-up included Sara Bertolini, Managing Director at DeA Capital, Francesco de Gennaro, Partner at DLA Piper, and Fabrizio Vettosi, Managing Director at Venice Shipping & Logistics.

Dry bulk versus tankers

The outlook for the industry worldwide remains challenging, with several yards expected to run out of orders by the end of 2018, and a quarter of active shipyards having not received any new orders since June 2016, according to data quoted during the panel.

This may result in several yards being forced to close, at least temporarily, until the market rebalances. Drivers for a market rebound could be the introduction of new standards for digital ships, and a much needed consolidation of the market, De Gennaro noted. “The main expectations are market consolidation as well as digitalization of the vessels,” he said. “But investments are required to do that and only a limited number of players appear to be capable to pursue such investment policy.”
For the dry bulk segment, the average second hand price of a vessel has stabilised from the second quarter of last year onwards, while the order book has dropped to only 8% of the overall fleet. On the flipside, the average second-hand price of a five-year old crude tanker declined by 12% in 2017 compared to 2016, before increasing by 3% on a year-to-date basis. The crude tanker fleet is also young with few obvious scrapping candidates left, and the order book representing 13% of the fleet. “The dry bulk segment is currently doing better than tankers – opposite to where it started,” De Gennaro highlighted.

Issues galore

One of the main issues affecting the sector is moral hazard, the panellists concurred. In some situations, the owner’s residual economic interest in the asset is so small that there is no reason to care about it, De Gennaro pointed out. Equally, when the principal amount of the ship mortgage is materially higher than the present value of the vessel, and no market recovery is in sight, owners have no incentive to repay financial debt.

This scenario can get even worse in family-owned businesses, as is the case of most of Italian shipping groups. “They think that in due course there will be an upswing and what is out of the money now will be back in the money. This means that they don’t really tackle issues and just waste time – which in fact is a key factor,” De Gennaro commented.

When it comes to a full blown restructuring, another issue often underestimated is the global reach of most of the shipping companies. “This means that you may need to coordinate several local filings,” he pointed out.

Get to know it

Despite being a relatively small market, the Italian shipping sector has not been short of opportunities for distressed investors. Between 2009 and 2017, 10 Italian key players – with a combined debt pile of around EUR 3.2bn – began restructuring processes. The outcome in most of the cases, however, has not been that encouraging, digging up another key issue within the sector.

“The know-how in shipping is way more important than the single assets,” Vettosi commented. “Shipping does not exist as an industry in itself, but should rather be defined as a services-provider sector, for end-customers that can vary largely, meaning lots of skills and competencies are required.”

“Likewise, this is a sector not for pure distressed investors, but rather turnaround investors. Geopolitical factors, traffic volumes, operating aspects – you need to be on top of all of these, you can’t be merely a financial guy,” Vettosi continued. “It is also a very regulated sector, with some 13 supervising bodies versus only three – ECB, Bank of Italy and to some extent Consob – for banks.”

Italian shipping loans in numbers

The complexity of the issues and aspects involved have been weighing on the banks as well, traditionally the main source of funding for shipping companies.
“The shipping sector in Italy is very fragmented, with a number of small family-owned businesses operating fleets with less than 10 vessels. Most of the ships now in water were bought between 2006 and 2009 at the peak of the market and therefore at very high prices with lots of leverage, resulting today in fragile capital structures compounded by volatile cash flows,” Bertolini commented. “This is leading to a misalignment of interests between ship owners and banks, where the first cannot repay their debts and invest in fleet renewal, and the latter cannot deleverage according to Central Bank requirements. This is an opportunity for investors though, who can try to bridge the gap, also benefiting from the fantastic market momentum to enter the sector.”

“Banks have been lending to shipping companies but not in a good, efficient way,” Vettosi said. “They [banks] should be able to discern the intangible as opposed to the single asset as the best way to recover and maximise value.”

The Italian shipping sector currently features around USD 7.9bn in NPLs and UTPs (unlikely to pay), with an additional USD 6.4bn of current loans, Vettosi highlighted. Out of the USD 7.9bn NPLs and UTPs, some USD 1.6bn is set to end up in liquidation, USD 3.7bn is heading towards some sort of restructuring agreement, and USD 2.6bn is up for sale (USD 1bn) or has been sold (USD 1.6bn).

If the liquidation size still equates to the sale size – as per the numbers above – then something has definitely gone wrong. But in between them, where the credits under restructuring sit, lots can happen and pay off for investors prepared to do their homework.

Chiara Elisei Deputy Managing Editor Debtwire

Chiara joined Debtwire in February 2008. Since then she has been covering restructurings and distressed, with a focus on retail, construction and food & beverage sectors. In the past few years she has been expanding Debtwire's Southern Europe coverage, unveiling distressed opportunities in Spain and Italy. She is currently an Editor in charge of leading new coverage initiatives.

In Italy she worked as reporter at Corriere della Sera, Il Messaggero, RAI covering current news and international affairs.

Chiara graduated in Classics at Scuola Normale Superiore, Pisa, where she also got a PhD in June 2010.