Shipping companies will find it tough to borrow money again this year as a slump in the sector shows few signs of easing and regulators press banks to cut back lending, Citigroup's global head of shipping said. Traditionally a major source of funding for shipping companies, many European lenders are abandoning or scaling back this part of their business as regulators seek to make banks safer after the 2008 global financial crisis.

-- European banks under pressure to scale back shipping loans

Global syndicated lending for shipping in the fourth quarter of last year dropped to $2.85 billion from $5.48 billion in the previous three months, Thomson Reuters LPC data showed. "It is going to be another difficult year like last year," Michael Parker told Reuters in an interview on Monday, adding that 2013 would probably not be any worse.

Banks including France's BNP Paribas, Britain's Lloyds Banking Group and Germany's HSH Nordbank are lending less to shipping as they shrink their balance sheets to reduce risk and as tougher regulation requires them to hold more capital, making loans less profitable.

German lender Commerzbank said last year it would wind up its ship finance unit altogether. By contrast, as European rivals reduced exposure, US-based Citi bought part of French bank Societe Generale's shipping loan portfolio for an undisclosed price last June, taking advantage of slumping values. Citi's shipping book is valued at around $11 billion after the acquisition from Soc Gen.

"We will continue to see more focus by regulators and we will continue to see the shrinkage of those banks that have announced their scale backs," Parker said. "I think the capacity of those banks to do more will be a function of the comfort of their regulators, the quality of their portfolios and their own broader addressing of capital issues as banks."

Bolstered by record-high freight rates, shipping firms ordered large numbers of new vessels between 2007 and 2009 - and the extra capacity arrived just as economies world-wide were slowing, sending rates tumbling. The industry is entering the fifth year of a downturn - one of the worst on record. "Depending on what does happen, particularly in the dry bulk and tanker market, there is a risk that some companies not under stress may start to have problems if demand does not pick up."

Parker expects the freight market to see the start of sustained recovery and rates at a consistently higher level in 2014, as the oversupply of ships is mopped up and demand ticks up in an improving world economy. "There is not a significant amount of new money coming in to trigger new building orders," Parker said.

But even under those conditions, banks are unlikely to make a swift comeback and shipping companies will have to turn to other sources of finance such as bond markets. "I don't think that is going to have a huge impact on shipping finance. It is not going to cause people to change their mind if they have decided to exit. It is not going to cause banks to suddenly massively grow their portfolios."

Top shipping companies are expected to increasingly use debt instruments such as the high-yield bond market, the investment- grade bond market and structured bonds. Industry players say banks in Asia are unlikely to fill the funding gap for shipping left as European lenders pull back.

-- Source from Reuters