Default Risk Drivers in Shipping Bank Loans

This paper is the first to investigate the default risk drivers of shipping bank loans. The existing literature investigates the default risk drivers of corporate loans in general but not specifically into the shipping sector where defaults are more often and of greater magnitude. Moreover, the extreme volatility of the freight rates into shipping business casts doubts on the ability of a shipping company to generate sufficient cash-flows to follow the repayment schedule of a loan due. By utilizing a unique sample comprising of the loan portfolio of a ship lending bank, which contains both quantitative and qualitative data, several default risk drivers are revealed. Findings suggest that the leverage ratio, the current ratio and the internal bank rating are able to explain around 18% of the observed defaults in shipping bank loans. The results of this paper have several important implications for a number of players in the shipping market such as banks, ship-owners, financial institutions and regulatory authorities.