(Part 1 and Part 2 of a live conversation that was held on June 9, 2020, exclusively for Marine Net members. This is part 2 of "Reviewing the financial results of the shipping majors in Japan for the year ending March 31, 2020". For the Part 1, please refer the following URL.)

(4) Common issue

Tanishige：The issue of crew change is not only for the three Japanese shipping majors; it is a common issue in the shipping industry.

Yamamoto：In this current market, we hear that operators are forced to drift off the vessels because they could not disembark crews although they had to have them cold layup. The crew change issue is one that we, The Japan Maritime Daily are keeping attention. It is estimated that there are about 2,500 vessels that are members of the Japan Shipowners' Association, and about 56,000 Filipinos and other seafarers are said to be on board. Including small coastal vessels, there are about 5,200 domestic vessels, with about 28,000 Japanese crew members on board, and about 84,000 people are engaged in maritime transportation on a daily basis in Japan-related vessels alone. The issue of seafarers has been the biggest by the new coronavirus, and the initial concern was that if crew members who were on board would be infected with the coronavirus, the risk of infection would spread to the entire vessel. The current situation is more serious, as it means that seafarers cannot get on or off the vessel in Singapore, China or Europe, where the main crew changing take place before pandemic. In principle, seafarers were allowed to be on board for ten months, but this has now been prolonged to 12 months. In reality, however, some crews have been on board for more than 12 months, and as of April, more than 100,000 crew members were not supposed to be replaced, according to figures. The three Japanese major shipping companies, the Japan Shipowners' Association and the Ministry of Land, Infrastructure, Transport and Tourism(MLIT) are discussing the possibility of using part of the international airport for crew replacement. However, due to various issues such as customs and vessel registrations, it has been slow to move forward, and I've heard that it's a very serious problem that cannot be solved by themselves.

Tanishige：It is difficult to arrange crew change because the schedule of vessels in operation are not fixed usually. With newbuildings, their schedule are clear, but because of this environment, the crew for those newbuildings have to be quarantined for two weeks. They have to get into the country ahead of schedule. I have heard that MLIT has coordinated with them to allow the crew　to join the vessels if they take necessary time, but I heard that there are some problems at the time of departure from the countries of crew.

Yamamoto：Seafarers are people we are not familiar in our daily life, but I understand that they are in a very difficult situation. The delivery of newbuildingscould be interrupted, and now, I can understand why seafarers are being called "essential workers" after the new corona disaster.

Tanishige：It's really damaging economically both seafarers and ship management companies.

Yamamoto：Seafarers on shore cannot be replaced even if they want to be on board, so they are not getting any money. Even if our company wanted to start a movement in the shipping industry by providing charity for seafarers, the rights related to distribution are very complicated. There are some organizations, like a ITF, ISWAN, and Mission to Seafarers, that will take care the task, but they are not be together, and each organization is supporting its own member seafarers.

(5) The issue of reduction of charter rates requested by overseas operators

Tanishige：The situation and policy of each operator are different, and there are operators who unilaterally ask to reduce hire rate, and others request the negotiations/discussion with charterers’ idea for reduction of charter hire. If the charterer is in unilateral breach of the charter party, the shipowner may cancel the charter party and withdraw the vessel then change the charterers.

Yamamoto：Even after the global financial crisis time, there were many cancellations of contracts, and I heard that there were quite a few cases where Chinese operators who had chartered a capesize vessel in a soaring market at $100,000 were forced to abandon their contracts, almost as if they were flitting. However, what is unique about the reduction in charter rates in response to the new coronavirus is that all charterers are in a difficult situation. According to one local shipowner, he understands that the market is in a bad state, but he suspects that charterers request a reduction of charter rate in the confusion as a good opportunity. As of last year, some companies have been asking for reductions in charter rates, and others, whose payments had once been normalized, have asked for reductions again. They understand that the market has declined slightly as a result of the pandemic of new coronavirus, but they suspect that the operators’ management base was basically weak. Japanese owners have to choose overseas operators and keep in touch with them. I think that the shipowners are well aware that there are operators who have not actually ask to cut their rates. As featured in The Japan Maritime Daily, Pacific Basin in Hong Kong, Ultra Bulk in Denmark, Norden in Denmark, and Medway, the owner-operator in Greece, have made it clear that they will not request a reduction in charter rates. I feel that a major challenge for them is to estimate the creditworthiness of overseas operators.

Tanishige：It's a difficult task. There could be the cases that overseas operators suddenly change their top management or change their management policies drastically, so it will become to be important to investigate operators’ creditability carefully and monitor their performance. It is important to check the situation of the operators well before signing the contract, but even after the signing contract, they have to hold this sense of continuity, and I think that this attitude will provide owners with a lot of information. It's also important to pay attention to the performance of the charter party, such as the behavior of the operators and operational policies.

Yamamoto：I think that's exactly right. In addition, I would like to pay attention once again to the fact that the number of bare boat charter (BBC) contracts has been increasing since 2016, when shipping industry was in a recession. At that time, Japanese operators stopped ordering newbuildings due to structural reforms. At the same time, in Japan, there was a surplus of money, and local banks had the capacity of financing, and there were more and more cases of foreign operators selling their own old vessels to Japanese shipowners through the broking of trading companies, and then chartering out the just ships’ hull without the owner's ship management. I think that ideal way of the operator is to construct and invest to newbuildings after selling off their old ships, however I am curious about the reason why foreign operators would sell an old ship and then charter back again. It was pointed out at the time that there were several operators who need immediate cash even they sell their own fleet. This is where lending capacity of Japanese local banks came to get attention, and people who wanted to start a new ship-owning business came to the BBC despite the lack of domestic projects. According to data on outstanding loans from Iyo Bank, about 60% of ship-finance were for the deal related to the Japanese operators in the past, but today the figure is reversed, with about 60% of loans for overseas operators. In the past, it was possible to communicate with domestic operators in Japanese language, and in some cases, face-to-face communication was possible. However, when operators are located in Greece, Denmark, Singapore and other countries, it is difficult to understand what kind of company they are, however the number of trade with overseas operator is increasing. If trades with them continue to increase in the future, as Tanishige san said, I realized that how to view the management policies and creditworthiness of operators will become very important through these news coverage.

Tanishige：That's right. There was a situation where European banks would not finance to the shipping sector, so foreign operators started to secure fund by BBC scheme, through Japanese regional bank and Japanese shipowners. After that the sale-and-leaseback scheme for old vessels came out, and as you mentioned, it became a way to secure short-term funding.

Yamamoto：That's exactly what you're saying. There is one more point that has been recently, which is that overseas operators are quickly changing their management. When someone from one of the original companies, Company A, started Company B, and then, new company does not have their own vessels and call themselves as "Asset light business" with fleet that consists of only T/C boats. There are many such cases in Denmark and elsewhere. These companies have no real assets, so they are quite dangerous because we don't know if they have the collateral to cover charter rate, and they can do business with European shippers because they only have a good face. Companies like this, which have cargo but not own vessels and charter vessels from Japanese owners, are often in the situation where they cannot pay the charter hire. Moreover, I've heard that they offered very good charter rates from the beginning of the offer. A company with a ratio of 100% of chartered ships perhaps might be called "self-proclaimed operator", is always ready to close business. A few years ago, a company called Western Bulk at the time split its operator function and its owners function into two separate companies and filed a bankruptcy petition with the court for its owners function only, thus eliminating all the debts of the Japanese shipowners. I feel that this is an issue for whole Japanese maritime cluster, and we need to keep attention in order to prevent the happening the same cases.

Tanishige：I think that it is depends on the credit strength and policy of shipowners how they would like to manage their fleet. In the case of long term time charter for newbuildings with the charterers who have no assets and just charterering function, I think, the shipowners have to do cautiously. I think it's possible for shipowners to charter out their own vessels to such companies if they could say “I want to find out the cargo myself, However, I don't have the know-how to do it, so I'll leave the vessel with them.”
They also need to pay attention to whether the company has enough collateral to cover the long-term commitment.

Yamamoto：The following interview with a shipowner left impression on me.
“In this market, it is still understandable that the operators are asking for a reduction of charter rates. However, I would like to say that they have to cut their own salaries and employees salaries and sell their assets before they ask for a reduction of charter hire rate. If we accept their request for a reduction easily, it will be a world where honest people look like fools.”
It's hard to do now, but I think shipowners should actually visit the operator's office with the trading company or regional banker who introduced the deal, because they don't usually get to see the overseas operators, and ask them what they think.
In fact, some of the shipowners were actually following such a policy, which I found very instructive.

Tanishige：The Japanese shipowners have great credit risks against the charterers, isn’t it? This is an important issue for Japanese shipowners, and I would like to discuss it again. Thank you very much for your time today.