09-01-2019

Expectations 2019: Ship Finance

Shipping is a capital intensive industry. At the same time, future earnings and market values are difficult to predict. This inherent nature of the beast makes investment in ships and ship financing a challenging task. Most other capital intensive industries provide modest but stable returns on normally depreciating values.

Ships had traditionally been financed by German, Dutch, French and Scandinavian banks, who had specialist shipping teams with many decades of shipping experience. The Relationship Managers in these banks understood the cyclical nature of the industry. Japanese or Korean financing was generally for newbuildings and as a promotion for shipbuilding. Local banks, for example, in India and Singapore financed local shipping Companies as Corporate Finance.

For the past few years, we have seen availability of European bank finance diminish as they have seen huge build up of non performing assets post the 2008 crash. Basel regulations also require them to provide additional capital adequacy for ship lending. Chinese lessors are now dominating the newbuilding ship finance scene at domestic yards. There has also been the entry of alternative finance providers who entered shipping by buying loan portfolios from European banks but are now building their own loan portfolios also.

Year 2018: The early part of year 2018 saw pick up of rates and values in the drybulk and feeder container market sectors. Crude and product tanker markets, along with LPG remained subdued. Financiers naturally supported the sectors that were doing good.

The preference for mainline banks remained clients with some track record, not a distressed balance sheet, modern vessels and preferably some employment cover. Leverage of between 70-80pct with a margin of 150-300bps was available for such clients/assets.

Newer owners with limited/no balance sheet and/or older vessels and/or spot employment required to pay a higher margin. It was vital in such cases for the owners to negotiate a longer amortization period with the financier to keep the break even rate (daily Principal plus Interest repayment) as low as possible and to match the P+I of a low interest but more aggressive amortization loan.

Year 2019: The latter part of 2018 has seen softening in drybulk and container market. Crude tanker earnings have picked up. The ice-cream flavor of the day is product tankers, with expectations of earnings upside post the 2020 IMO Sulphur regulations coming into play. Financiers still remain bullish on the drybulk sector. Mainline financiers will get more restricted in not being able to finance more than 12-15-year-old vessels.

Timing of asset acquisition remains THE most important decision for a shipowner. Unfortunately, when asset values are high because of strong earnings, the payback period for ships looks very short and attractive. This tempts shipowners to invest and provides more easy justification for financiers to their credit. On the other hand, when asset values are low it would be a safer bet to acquire assets, but then ship finance is not easily available because of low earnings. This conundrum in shipping has been there since time immemorial. The expectation is for financiers to have the flexibility to support owners during the low points of the cycle, although this is easier said than done.

Source: Mr. Divay Goel, C. E. O., Prudent Shipping Investments Pte. Ltd.

 

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