The seafood industry has faced strong headwinds over the past two years, and the system of financial institutions supporting it didn’t have it any easier.
A panel of financial experts at Seafood Expo North America, which ran from 10 to 12 March in Boston, Massachusetts, U.S.A., said 2022 and 2023 represented one of the toughest operating environments for lenders and financial institutions in recent memory.
“I don’t have to tell anybody who is at the show that it is a challenging period right now,” Bank of America Senior Vice President and Senior Relationship Manager Jason Brantley said. “There are multiple external factors that are generally beyond the control of anybody in the industry.”
A run-up of interest rates, high inflation, the war in Ukraine and resulting trade tensions with Russia, Middle East unrest, unusual weather, and natural disasters harmed global seafood trading for the past two years. M&T Bank Executive Vice President and Head of Commercial John Doucette said the level of disruptions "unprecedented."
“Folks who know me have heard me say this – in the seafood industry, there’s three good years, one great year, one not-so-great year. Well, I haven’t seen two not-so-great years back to back, so it becomes very challenging,” Doucette said.
A 500-basis-point increase in interest rates and drooping sales figures have put both seafood companies and the lenders that support them in a bind, Doucette said.
“If you add 500 basis points to an interest rate and you have some term debt financing, all of a sudden you’re tripping covenants,” he said.
A breach of promises made by a borrowing party and a lender can be troublesome even if the financial institution wants to be lenient, as it is legally required to make sure it abides by federal lending regulations, according to Doucette.
“Banks are regulated institutions. If you have a couple of years of bad performance, we have to pay up on our requirements, our loan loss reserves to the point that it could be 10 percent, 12 percent of your loan commitment,” Doucette said. “If you’re borrowing USD 20 million [EUR 18.3 million], we lose USD 10,000 [EUR 9,200] a month.”
Doucette said banks often rack that up to the cost of doing business, but if covenant breaches become more frequent events, banks are forced to become more cautious about lending. T
“You always hear ‘it’s FDIC insured.’ That is insurance paid by banks and thus by depositors,” Brantley said. “I think for Bank of America, in Q4, that was USD 1.8 billion [EUR 1.6 billion] in additional insurance premiums that we paid for those banks that went down. So that cost is now [baked] into our cost structure.”
Brantley said federal regulators have provided hints they may push the same rules applied to the five largest "too big to fail" banks onto smaller banks – potentially onto institutions with USD 100 billion (EUR 91.8 billion) in assets or larger, which could burden them with as much as USD 150 million (EUR 137 million) in additionall compliance costs annually.
“Bear in mind that we lenders are also in an environment where a lot of our costs are going up, and so that’s going to be a factor even if rates come down,” Brantley said.
Despite the challenges, Doucette said most financially strapped seafood companies he's worked with can still be saved, though it may mean it taking a hit.
“We said this last year, but if you can work through your inventory issues, you should be able to replace your inventory with today’s right price," Doucette said. "It’s a bump in the road, it is what it is, but the first loss is the best loss."
When interest rates jumped and the financial market shifted suddenly, seafood companies couldn’t quickly pass on the costs to customers. But now the market is in a much more predictable place and companies have a ...
