Kang Wan Chern

SINGAPORE (Sept 8): With the embattled shipping sector still nowhere near turning for the better, Rickmers Maritime is once again being forced to seek debt relief from its lenders to stay in business.

On Sept 7, the shipping trust announced that its lenders had collectively agreed to extend the repayment of a US$260 million ($350 million) outstanding loan from March 2017 to 1Q2021.

The move will enable Rickmers to continue operating for another five years and buy time for it to improve its balance sheet. However, it is subject to bondholders agreeing to restructure an existing 8.45% $100 million bond due 2017.

If they agree, bondholders will forgo remaining principal and coupon payments on that existing bond in exchange for a new unsecured $28 million fixed rate perpetual bond, 20% of which will be convertible into new units of the trust and valued at around $40 million at issuance.

&ldquo We are asking note holders to take a haircut on the debt owed to them and to give us time to get our balance sheet back to sustainable levels in the next five years. In return, we are offering them future upside in the company which will come when demand and supply in the shipping sector balances out,&rdquo says Soeren Andersen, CEO of Rickmers Trust Management.

Rickmers&rsquo lenders include three banking syndicates comprising eight banks in total, one of which is DBS Bank.

&ldquo In a vote of confidence in the future of our business, our lenders have agreed to us pushing out our senior debt to 2021 to give us more time to position the trust for a market improvement and further growth,&rdquo adds Andersen.

No choice
Should bondholders agree to restructure and take a haircut? It turns out they will have little choice in the matter. &ldquo We need the support of our bondholders without which the trust will no longer be tenable as we are not able to meet our current loan commitments in the current market,&rdquo says CFO Tomas Norton.  

&ldquo We need the five-year extension to stabilise our balance sheet to ride out this cycle so that we are in a position to gain from the upside in which bondholders will also be able to participate in as they will end up owning a good chunk company,&rdquo adds Norton.

The risk though, is that the trust may yet turn to its lenders and unit holders for funds in the future if the shipping slump takes longer than expected to turn. &ldquo We can&rsquo t promise that we won&rsquo t have to think about this again. But it is the only way the business can carry on,otherwise we will just be postponing the pain,&rdquo says Peter Greaves, a partner at PricewaterhouseCoopers Advisory Services, which has been appointed to assist in the restructuring.

Not the first time
Indeed, this isn&rsquo t the first time Rickmers has turned to unitholders and lenders for funds. In 2013, for instance, it raised cash through a rights issue to repay loans and negotiated extensions on loan-to-value covenants.

Yet, freight rates have remained volatile and earnings in the sector have fallen to &ldquo record lows&rdquo as supply continues to overpower demand. &ldquo Despite fundamental changes, such as industry consolidation and pooling of resources, we see the trend of overcapacity and industry losses continuing for at least the next two years,&rdquo says Rahul Kapoor, a director at Drewry Financial Research Services.

Drewry expects the industry to lose about US$6 billion in 2016.

Andersen is seeing things begin to change for the better though. For one, demand for containerised goods in the US and Asia has been growing, leading to higher utilisation levels and deployment of ships in the TransPacific and intra-Asia trade routes.

The other emerging trend is the shifting of production bases closer to the end-market. &ldquo Retailers like Zara need to get their merchandise on the shelves as quickly as possible so they are moving production nearer to where their consumers are,&rdquo says Andersen.

For example, merchandise is now being assembled and completed in Turkey, which is nearer to Europe compared to China, where the goods were manufactured in the past.

As a result, demand for smaller ships to ply shorter routes has risen. The lingering problem though is that liners are now finding it more difficult to fill the larger ships built for long haul transport that are still coming onstream.  

&ldquo There are still many large ships in the market that need to be filled but the good news is global volumes are still growing by 4% per year and scrapping levels will reach record levels this year and next. Things will balance out in the shipping sector we just need time to work through the overcapacity,&rdquo he says.

Rickmers will meet with bondholders at 2pm on Sept 15 to discuss the restructuring.

Shares of Rickmers closed 3% higher at 7 cents.