Tidewater, European banks, and zombie companies…

You walk outside, you risk your life. You take a drink of water, you risk your life. Nowadays you breath and you risk your life. You don’t have a choice. The only thing you can choose is what you’re risking it for.

Hershel (The Walking Dead)

Tidewater announed their restructuring today… as is widely reported they have written off USD 1.6bn of debt and reduced operating lease expenses by USD 73m. US Chap 11 isn’t perfect, and having nearly been on the receiving end once I find it amazing that US courts will claim jurisdiction essentially on the basis of a US domestic dollar bank account and Delaware address (which clearly isn’t the case here), but it is remarkably efficient from a macroeconomic perspective.

Last week The Economist published an article on Zombie companies noting:

there is a growing belief that the persistence of zombie firms—companies that keep operating despite a poor financial performance—may explain the weak productivity performance of developed economies in recent years.

An inability to kill off failing companies seems to have two main effects. First, the existence of the zombies drives down the average productivity level of businesses. Second, capital and labour are wrongly allocated to such firms. That stops money and workers shifting to more efficient businesses, making it harder for the latter to compete. In a sense, therefore, the corporate zombies are eating healthy firms.

… [the] analysis builds on the work of an OECD paper* published earlier this year which found that, within industries, a higher share of capital invested in zombie firms was associated with lower investment and employment growth at healthier businesses.

A fair summation of European shipping and offshore at the moment if ever I read one.

The contrast with the European shipping and offshore firms, where the banks have constantly tried to pretend that insolvent companies are viable by allowing them to pay interest only and deferring the principal payments, and the willingness of US firms to restructure and move on is clear. Part of it is structural as US banks have a smaller percentage exposure to these troubled assets but that doesn’t change the outcome. Quite how long auditors are going to allow this to continue when there are clear market based transactions with demonstrable asset values is anyone’s guess but eventually these loans will default. I agree with short-term measures, the equivalent of a liquidity rather than a solvency crisis for firms, when it really is that but with depreciating assets eventually the bullet payment is due and years into these situations the arguements for writedowns on a scale not yet seen is becoming more apparent.

The Nordic banks have been through this before during the Nordic Banking Crisis (1988-1993) having overextended themselves in real estate loans, in this case the credit bubble was driven by deregulation, like offshore shipping with a high oil price, the boom was procyclical.

Nordic Banking and Real Estate 1988-1993

Nordic Banking Crisis Data.png

As can be seen a reduction in asset values leads to a dramatic reduction in the amount of bank credit. The same thing will happen in shipping in offshore, despite it being a much smaller part of the overall bank loan books, and this reduction in credit is likely to permanently impair asset values. Economists have called this process the financial accelerator and it is clearly interacting between the banks and zombie offshore and shipping companies.

The sceptic in me thinks only a combination of liquidations, writedowns, and scrapping is going to return these sectors to an economically viable level. But the actions of the various stakeholders, individually rational but collectively irrational, the collective action problem I have mentioned here before, makes this unlikely. A future of low profitability and structural overcapacity in Europe beckons while restructured American companies with clean balance sheets look to be able to move ahead with a cost base that matches the operational environment.

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