Bearing a heavy burden

AFTER months of shrinking cargo volumes and plunging freight rates, will one of the global lines collapse?
That question may be answered in the next few weeks amid urgent efforts to rescue Compania Sud Americana de Vapores, ranked number 20 in the world in terms of boxship capacity, after a rapid expansion in recent years that included acquisition of Norasia’s liner operations and a sizeable newbuilding program.
For months now, owners, operators, bankers and brokers have been quietly speculating about which line was the most vulnerable after the worst downturn in the 50-year history of containerisation.
CSAV was frequently singled out for a couple of reasons. The Chilean line had built up a global network without the benefit of a core market in one of the big east-west corridors.
CSAV was then persuaded to join the industry heavyweights by ordering the new generation of super post-panamax containerships at the height of the investment frenzy of 2007 when the liner trades were still booming.
Fast-forward two years and emergency meetings have been called in both Valparaiso and Hamburg as CSAV directors try to find some compromise that will pacify both the company’s bankers and shipowners, which charter vessels to the Chilean line and could also be dragged down should CSAV withdraw from the container shipping trades.
That prospect was enough to persuade about 20 of Germany’s top containership owners to join in secret talks over a rescue plan that could see them end up as shareholders in the stricken line.
They met in Hamburg’s Steigenberger Hotel on April 7 at the invitation of HSH Nordbank’s consultancy arm HSH Corporate Financing, which is advising CSAV.
Among those who attended were representatives from Peter Dhle Schiffahrts-KG together with KG financing house HCI, F. Laeisz and Norddeutsche Vermgen, as well as one Singaporean owner, thought to be Pacific Shipping Trust.
What they heard sent alarm bells ringing.
Peter Dhle is most affected by CSAV’s woes, with more than 30 vessels chartered to the line. The next day, a second meeting was held with major shipping banks.
One prominent owner not present was Seaspan, the New York-listed company that has just taken delivery of the 4,250 teu CSAV Loncomilla, the first of a series of four newbuildings to be chartered to CSAV for six years and which will replace smaller tonnage.
Commitments
Chief executive Gerry Wang told shareholders that no requests to renegotiate charter terms had been received from CSAV or any other customer, and neither would any such proposals be countenanced.
Commenting on the recent downgrade of CSAV’s credit rating and public disclosures by the company about a possible restructuring proposal, Mr Wang was adamant Seaspan would not consider converting cash charter payments into equity, a message that had twice been conveyed directly to CSAV.
“At this time, we have not received a formal proposal by CSAV to renegotiate our time charters and we expect it to honour its charter commitments in full,” he said. CSAV only accounts for 3% of Seaspan’s total charter revenues, adding up to US$224m over the six years, whereas its biggest customers, China Shipping, Cosco Container Lines, MOL and K Line, represent 90%, with the balance coming from Maersk and Hapag-Lloyd.
But for some others, and particularly German owners, CSAV is a much larger customer.
At the Hamburg meeting, CSAV made an offer to shipowners that included reduced charter payments in exchange for company shares. Owners were asked to accept rate discounts of 20%, and a shareholding in CSAV equal to another 30%, adding up to 50% waivers in total.
No decisions have been reached so far, and owners are far from enthusiastic. But they appreciated CSAV’s approach and efforts to come up with a proposal. They are also prepared to make concessions of some kind, Lloyd’s List was told.
“This shows that the idea of a community in shipping is still intact,” one KG house manager said.
But some German owners also put forward conditions of their own. In return for agreeing to help CSAV out of this mess, they want the Chilean line to cancel its order for 12,600 teu ships.
The contract for eight of these jumbo-sized vessels was originally placed by Peter Dhle with Samsung Heavy Industries, but the German owner then sold four to CSAV at a reported US$640m, with the Chilean line agreeing to take the other quartet on long-term charter.
With these ships due to be delivered during a period of massive tonnage oversupply, business partners want CSAV to cancel the order, but Samsung is resolute in its refusal to annul the contract.
“We cannot under any circumstances accept cancellation of these orders but we are prepared to be flexible on payment deferrals. We are still in negotiation with the owners, so we can add nothing further at this stage,” a company source told Lloyd’s List.
Appeasement
That response is no different to the reply that all owners are receiving from South Korean yards as they try to cancel orders placed at the peak of the boom, but for CSAV, failure to get out of the commitment could prove critical.
What is unclear is whether pre-delivery finance is in place. If not, the ships probably will not be built.
German owners have a strong interest in making sure that the Chilean line survives, as otherwise many of their vessels will be without work for a very long time, placing their own businesses at risk.
Furthermore, it is in no one’s interest to have even more vessels coming available at a time when the containership charter market is at an all-time low.
The owners’ group has appointed Jan Dreyer of Hamburg law firm Dabelstein & Passehl, Henning Winter, former member of the managing board of Deutsche Schiffsbank, plus Herbert Juniel, former head of shipowner F. Laeisz, to collect views and balance interests of the different parties caught up in CSAV’s problems.
A manager of a KG house stressed a lot of delicate work would be needed to reach a final agreement.
According to ship finance sources, the meeting aimed both at appeasing owners that have outstanding charter payments, and at sending a signal to CSAV’s banks that a solution was in sight.
Interest
“They needed a standstill agreement with shipowners,” one ship finance source said.
Many questions remained unanswered, participants said.
There was still debate about whether all owners will be affected in the same way by hire rate cuts or whether they should be treated differently, depending on vessel size or charter party terms.
“You have to differentiate between a charter contract that was fixed in the high market and a rate that is already comparatively low,” a bank source said.
“The percentage of reductions cannot be the same for all vessels,” the KG house manager added.
It may also be necessary to differentiate between older and younger vessels that would have larger mortgages attached.
Ship finance sources also indicated that banks will play a decisive role in the negotiations. In some cases they will have to agree to a reduction in rates, especially when they affect the ability of a one-ship company to pay interest and repayments.
Another question still to be answered for KG-financed vessels is whether KG shipping fund investors will have to bear the full brunt or if banks will participate.
A large number of the vessels affected are owned by one-ship KG companies. A KG fund manager stressed that they would need to achieve at least breakeven rates so that they could cover operating costs as well as repay bank loans and interest.
Last month’s hush-hush talks in Hamburg coincided with equally urgent meetings back in Valparaiso where shareholders, vendors and business partners are following events closely as management seeks to stem runaway losses and inject new capital to strengthen CSAV’s financial standing. 

The scale of the task ahead has become more apparent, with losses of US$265.9m in the first quarter expected to escalate into a first half loss of US$400m as plunging freight rates and the closure of important services wipe a projected US$1bn or more off the group’s revenues in 2009.
CSAV posted total revenues of US$4.9bn last year.
CSAV’s managing director Juan Antonio Alvarez and chairman, Jaime Claro, brother of the late Ricardo Claro, patriarch of the company for the last two decades, spelled out the details of the company’s restructuring plan at the most important shareholders’ meeting in recent memory.
The embattled Chilean shipping group, which operates in the container, reefer, general cargo, chemical and car carrier trades, has already taken steps to rationalise its operations, axing 660 jobs, 60 in Chile and the rest throughout its global office network.
Those attending the meeting were also told that while there was still no agreement concerning the capitalisation of charter party contracts and the cancellation of newbuilding orders, talks were “moving in the right direction”.
Altogether, CSAV is seeking to convert up to US$400m of charter commitments and newbuilding contracts into stakes in the company.
In return, CSAV hopes to postpone charter payments for up to a year and cancel or delay delivery of almost US$1bn of new tonnage.
Chilean media is speculating that partner Peter Dhle will end up owning up to 20% of the company, a stake worth around US$125m based on its current share price.
Ahead of the US$400m capitalisation of these important contracts, existing shareholders will be asked to extend their commitment to the group by acquiring new shares to be issued in the next three months. As part of a US$130m rights offering, 233.2m shares will be offered to existing shareholders at Pesos250, representing a 31% discount to the company’s current share price of Pesos361, a clear effort to reward existing shareholders prepared to commit to its future.
Shareholder
A broadening of the number of shares in the company would take its market value to around US$600m at the current share price, a third of the peak reached in 2007 when the company was valued at US$2.2bn and its shares topped Pesos1,800.
A second US$220m rights issue will be opened up to shipowners and shipyards if the company’s existing shareholders do not confirm their desire to participate in further offerings. Together the offerings should raise US$350m.
The Claro family has declared its intention to maintain its position as the largest shareholder with a 45.6% stake, which will require the family to raise up to US$170m.
If the Peter Dhle group does become a shareholder in CSAV, it will not be the first time the company has taken such steps. In the Asian crisis in 1999, it bailed out Uruguayan line Montemar and eventually offloaded its stake in the company to CSAV.
It also has a 13% interest in CCNI, alongside CSAV, which has an identical share in Chile’s second largest container line.