Probability of financial covenant violation. The case of internationally listed shipping companies

Master Thesis
Author
Margetas, Antonis Kosmas
Μαργέτας, Αντώνιος Κοσμάς
Date
2024-08View/ Open
Keywords
Financial covenant violation ; Prediction ; Risk assessment ; Shipping ; Shipping debt financing ; Shipping industry ; Shipping investmentAbstract
Bank loans are a crucial financing instrument for the shipping industry. The sector is
characterized by high uncertainty and volatility, and is affected deeply by geopolitical
events, the global economy trends and the global trade outlooks. The sector is
burdened with high investment and operational costs, and external funding is
necessary to the functioning of the shipping companies. However, the advantages of
debt are also accompanied with several drawbacks, in case the capital structure of the
company is not optimal. As the shipping industry is especially volatile, shipping loans
come with an extensive list of covenants, designed to closely monitor performance
and allow the banks and the companies time for corrective measures, should the
borrower’s financial health declines. The purpose of this study is to provide a
comprehensive snapshot of the financial covenants in the shipping industry sector and
explain their consequences and the factors that cause financial covenant violation by
the shipping firms, in order to help mitigate the risks faced by both borrowers and
lenders in the industry. The empirical part of the study attempts to predict covenant
breaches by using several statistical models. The analysis indicated that certain
financial variables, such as cash flows from financing activities, have a statistically
significant relationship with covenant breaches. Specifically, higher cash flows from
financing activities were associated with an increased probability of covenant
violations, suggesting that companies relying more heavily on external financing might
be at greater risk of breaching financial covenants.