The global shipping industry has been feeling the pain of the recent and highly uncertain economic environment. Major shipping firms have seen a significant drop in their margins, and general weakness within the industry is likely to be prolonged. With no clarity yet on when shipping rates will start moving upwards, the situation is getting even murkier. What are salty, sea-faring Fools to do?
Ray of hope on the horizon
Although shipping firms are finding themselves in a mess, thanks in part to the distorted demand-supply scenario, there's still plenty of room left for stabilization and, in fact, renewed bullishness.
A number of shipping firms are considering recapitalizing or restructuring their balance sheets and have been finding able partners in some financial firms. No surprise there.
For instance, leading investment and advisory firm, Blackstone (NYSE: BX), along with Dahlman Rose & Co. has agreed to extend financial advisory services to the maritime industry. Blackstone isn't alone. Fund manager Oaktree Capital Management has already offered its financial support to shipping firms such as General Maritime (NYSE: GMR) and others.
From the East
Help is coming from Asia, too. The Maritime Affairs Ministry of Greece says Chinese authorities have announced a fund of around $10 billion to assist Greek shipping firms with low interest rate loans. These could come as a sigh of relief for Greek firms, which have been struggling for a while now.
Challenges the industry faces
Despite the recent aid flowing their way, many obstacles still stand in the way of a rapid stabilization in the shipping industry. Natural disasters, such as floods in Australia and the Japanese crisis, have distorted demand patterns over the last 12 months. In addition, a growing oversupply of ships has also put downward pressure on charter and spot rates.
Inflationary effects vis-a-vis rising fuel costs have also added to worries about the industry's short-term prospects. Higher fuel costs have pushed up expenses that these companies incur on voyages. And with weakness in freight rates persisting, these firms have been forced to borrow money to meet expenses and sustain their operations.
As these companies have assumed higher debt, their debt-to-equity ratios have shown a simultaneous jump. Higher debts lead to higher interest expenses, which ultimately weigh on earnings. This has been the case with majority of the shipping companies, especially the Greek firms.
Among them, Danaos (NYSE: DAC) has the highest debt-to-equity ratio, at 645%. Frontline's (NYSE: FRO) debts are 360 times the equity it uses to finance its business. This is too high when compared with Diana Shipping's (NYSE: DSX) debt-to-equity ratio of 31%.
And for Fools, the prospect of investing in a company that has such a highly levered balance sheet while operating within an industry that is clearly struggling is anything but attractive.
The Foolish bottom line
Shipping companies facing financial imbalances definitely require restructuring in order to address short-term liquidity concerns. These investment management firms can help --albeit at a price.
Under such gloomy economic conditions, the slow recovery in global trade has not been able to fuel the growth of the shipping industry. Shipping companies -- long a cyclical and capital-intensive industry -- are saddled with high interest payments at the same time that their industry is crippled. None of this is good.
It may take some more time for the industry to come out of the choppy situation. Until then, investors should seriously consider staying away from this cyclical industry.
