BY CONTINUING TO USE THIS SITE, YOU ARE AGREEING TO OUR USE OF COOKIES. REVIEW OUR
COOKIE NOTICE

Register with us today

and in less than 60 seconds continue your access to:Latest news headlinesAnalytical topics and featuresCommodities videos, podcast & blogsSample market prices & dataSpecial reportsSubscriber notes & daily commodity email alerts

Already have an account?

Log in to register

Forgot Password

Please Note: Platts Market Center subscribers can only reset passwords via the Platts Market Center

Enter your Email ID below and we will send you an email with your password.


  • Email Address* Please enter email address.

If you are a premium subscriber, we are unable to send you your password for security reasons. Please contact the Client Services team.

IF you are a Platts Market Center subscriber, to reset your password go to the�Platts Market Center to reset your password.

In this list
Shipping

LIBOR gains pose concerns for shippers

Natural Gas | Oil | Metals

President Xi's Second Term

Shipping | Marine Fuels

Platts Bunkerworld

Oil | Refined Products | Fuel Oil | Shipping | Dry Freight | Marine Fuels | Tankers

Mediterranean Bunker Fuel Conference, 7th Annual

Agriculture | Biofuels

US boho factor falls below zero for first time since 2014

Watch: LIBOR gains pose concerns for shippers

The three-month LIBOR is one of the prevailing benchmark rates for lending across financial institutions. It comes as no surprise then that when LIBOR increases, a capital intensive sector like shipping feel the stress on its earnings and cash flows. Rates are still at relatively low levels, but S&P Global Platts Credit Analyst Jianrong Wong says increases will undoubtedly weigh heavily on the already debt-laden shipping firms.

View Full Transcript

Video Transcript


LIBOR gains pose concerns for shippers

By Jianrong Wong, Credit Analyst (Maritime), Asia

Welcome to the snapshot, our series which examine the forces shaping and driving the global commodities market today. In this episode, we look at concerns over the effects of rising interest rates on the shipping market.


After more than three decades of a bull run in the bond market, things are looking to come to an end. Major central banks are poised to reduce their balance sheets by offloading bond holdings into the market. This translates to an avalanche of supply, putting pressure on bond prices and concurrently lifting rates. The yield on the 12 month treasury note has risen over 2.2% as of May 2018 and LIBOR, which closely tracks US interest rates, reached 2.3 percent, its highest level since 2008.


The three month LIBOR is one of the prevailing benchmark rates for lending across financial institutions. It comes as no surprise that as LIBOR increases, a capital intensive sector like shipping, will feel the stress on its earnings and cash flows. As rates are still at relatively low levels, further increases will undoubtedly weigh heavily on the already debt-laden shipping firms.


To illustrate the level of gearing the shipping sector is exposed to in relation to the general economy, let’s look at the mean leverage ratio of the large shipping companies listed on S&P Capital IQ platform to the S&P 500 companies as proxy. As you can see, the difference between the two is staggering: while the debt to EBITDA of S&P 500 firms is about 1.5x, the rate for shipping firms is around 8.0x.


A marginal increase in lending rates can lead to disproportionally higher pressures on a company’s debt servicing. This means that a 1% increase in LIBOR could amplify the cost of debt as a share of operating income. We identified one profitable US listed dry bulk shipping company, and the sensitivity analysis in its 2017 financials reveals that a 1% rise in LIBOR would result in an increase in interest expense that potentially could eradicate 80% of its operating income.


Shipping companies have accumulated more debt amidst protracted low interest environment to fund for capital expenditures, including new-building and mergers & acquisition. Among the S&P Global Ratings universe, 15 out of 17 shipping companies were rated non-investment grade as of February 2018. Notably, these companies have very weak leverage factor scores, which contributed to the final rating.


Investors should brace themselves for the inevitable headwinds in shipping, particularly when looming new regulations will fuel additional costs to the industry. Are these unwarranted concerns or is LIBOR the elephant in the room?


Till next time on the Snapshot, we’ll keep an eye on the markets.