Monday, November 3, 2008

Concern over shipping derivatives losses

(FT) Fears are growing in the shipping industry over the potentially big losses that could emerge this week on derivatives triggered by the October collapse in rates to charter dry bulk ships.

Since short-term dry bulk charter rates fell 71.9 per cent in October, traders and shipowners have worried that traders might be caught out by the speed and severity of the fall.

Traders in forward freight agreements – derivatives based on short-term charter rates – could owe significant sums if they were betting on a rise in charter rates for ships carrying coal, iron ore and other commodities.

The sector’s Baltic Dry Index of charter rates started the month at 3,025 points and closed on Friday at 851. The 80 per cent of trades made through clearing houses were being settled on Monday, while traders who bought cash-settled products through private transactions, known as over-the-counter trades, have until Friday to settle.

The many shipowners participating in FFA markets could also face losses if their market positions went beyond simply covering the market exposure of their actual ships.

London-based, New York-listed Britannia Bulk, which has been hit by its exposure to speculative FFA trading, put its British operating subsidiary into administration on Friday. It is the first quoted shipping company to suffer such a blow during the current downturn.

Duncan Dunn, senior director in the futures division of London’s Simpson, Spence & Young shipbrokers, said the market’s rapid fall would have left anyone betting on upward movements needing to make substantial payments.

He said“If they’re under strain, then that’s only going to increase their problems”.

Market participants’ concerns have been heightened by the possibility of knock-on effects from failures of investors affected by FFA market losses.

If investors facing FFA market losses hand back ships they had chartered early to owners, the ships’ owners will earn considerably less than they expected. They could face problems servicing debt related to the ships.

Michael Bodouroglou, chief executive of Paragon Shipping, a Nasdaq-listed dry bulk shipowner, said that, even if a company had not participated in FFA trading itself, counterparties such as ship charterers might have done so. He said: “Company failures may cause a domino effect,” .

The market uncertainty stems partly from the complex chains of transactions in the market and the lack of clarity about different companies’ FFA trading.

It is widely expected that hedge funds could be particularly badly hit.

However, Philippe van den Abeele, managing director of Castalia Fund Management, a hedge fund specialising in FFA trading, said he expected hedge funds to experience bigger problems over speculative charters of actual ships.

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