Ro-ro and ferry sector to recover next year

2020-06-27T07:48:08+00:00 June 27th, 2020|Finance|

Out of KfW-INPEX Bank’s shipping portfolio around 11% are now ferry loans.

This sector has been growing for the past four to five years for the bank, it was said during a webinar organised by Mike Louagie’s Ferry Summit and News.

The speakers were Director Sebastian Blum, Vice president Moritz Hennig and Stefan Roehle, Assistant Vice President, Credit Analysis Shipping who gave a post pandemic update on the ferry market.

They saw a market in ferry replacements, as some units were becoming old and also in more energy efficient vessels, which will include the retrofitting of equipment, such as scrubbers, etc, as well as for newbuildings.

By mid-March, the various country lockdowns were beginning to take their toll, leading to a 90% drop in ferry passenger traffic by April/May in northern and southern Europe, including the Baltic.

As for ro-ro freight volumes, in the North Sea and the Baltic cargo fell by up to 20% in April and May but by up to 50% in the Mediterranean. The Irish Sea proved more stable than the English Channel, the speakers said.

In mid-May, some manufacturing had restarted giving a boost to freight volumes carried on ro-ros. By 15th June, some European countries and the Nordics had re-opened their borders resulting in passenger traffic returning. Greece saw a resumption of its vast ferry network on 16th May, albeit with restricted capacity.

The speakers did not foresee the negative volumes lasting well into next year, as GDP normally drives a country’s freight volume shipped by sea. However, the UK’s recently introduced 14-day quarantine for entering the country has further hit its passenger traffic.

Most of the larger companies had liquidity for at least 12 months and during the crisis, many financial measures were taken – revolving credit facilities (RCFs), new loans/bonds, prolongation of loan repayments, etc.

The ro-ro sector tended to be more stable, while the passenger side of the business was more vulnerable, due to its seasonality and Government support. The first government aid packages announced targeted essential freight routes (eg, UK, Ireland, Greece and Finland).

Passenger and smaller companies were somewhat at a disadvantage as leverage was a challenge. Pre-pandemic IBD/EBITDA of about 3.5x could increase by about 1.5x in 2021. The challenges could be due to the capex needed for the replacement of older tonnage, the fitting of scrubbers and the trend for the introduction of larger ferries. However, this might be a catalyst to speed up industry consolidation, the bank’s representatives said.

Turning to the response from the financial community, in commercial banks, RCFs were drawn quickly, payment holidays were arranged – the more passengers the more likely companies asked for deferrals – covenant waivers were agreed, fresh money was offered, eg, 3-5 year term loan unsecured or second ranking mortgages, or 5-year RCF unsecured. Fixed interest rates could be had at at 2% if backed by a government. These banks were also being aided somewhat by their regulators.

As for export control agencies (ECAs) and development finance institutions, they took the risk of bank facilities from 75-90%,  provided liquidity directly and supported deferrals from banks. ECAs covered newbuilding pre-delivery financings and several stepped into short term coverage of up to 24 months for a limited period. The measures and actions were not co-ordinated but with comparable instruments used. Will the OECD consensus change? Rather unlikely, they said.

In general, there was a long way to go to recover, as the EU single market is not a level playing field. More than €2 trill has been spent by European countries – half of this by Germany. The EU boosted its economy with a €500 bill package. Another problem was that a common currency is a challenge for southern European countries – debt is expensive.

There will be an unequal recovery, as the rich will recover faster. The European economy is expected to recover in 2021, growth catching up by 6%. A strong and then flattening recovery beginning 2H20 with GDP possibly getting back to former levels in autumn 2021, the bank said.

As mentioned, freight volumes are correlated to a country’s GDP, while in the passenger sector, on board sales depended upon consumer spending powers, they said.