Cheap finance for ship – but for how long

	The Hanseatic Kogg was very possibly the first type of vessel financed by a rudimentary KG system. It served a purpose then, and it still does.

Tons of cash is needed to finance the current orderbook and many owners are looking for more equity, either in the equity capital market, through venture capital and through private equity funds. Most of the big shipping companies do not need to look for equity, but medium size to smaller operators are always on the lookout for risk capital. Money is not too expensive these days, except in the high-risk areas like shipping.

In the past year shipping has hit the headlines because of very high earnings, at least for the bigger vessels, and it is likely that the supply for finance is higher than demand. Funding shipping investments has developed greatly over the years, and owning companies are mostly well versed in the intricate techniques of corporate finance. Ship owners are also attractive customers, not only as borrowers, but because they produce impressive cash flows when the freight market is good as it is at the moment.

The Hanseatic Kogg pictured on this page was a type of trading vessel used by the Hanseatic League, and a rudimentary form of KGs, by and large, financed it. The German KG market was very busy last year, raising USD 2.9 billion (EUR 2.3 billion) in new equity. It equates to ship investments of close to USD 7.5 billion (EUR 6.0 billion). Nobody believes in a repeat performance this year, because of a lack of suitable projects. But another USD 1.8 billion (EUR 1.5 billion) could be placed – either in newbuildings or in re-financing projects involving purchase and charter pack arrangements.

The big KG players
The big players in the KG market in Germany now say there is not enough vessels to accommodate their investors. This could mean that more marketing effort is going into refinancing through purchase and charter back, in line with what we have seen with Frontine and lately with 14 container vessels from P & Nedlloyd.

Nordcapital and Dr Peters are perhaps the best know of the KG investment companies, but there are others like Conti, HCI, Fondhaus Hamburg, König & Cie., MPC, Norddeutsche Vermögen and Atlantic. Some observers of this market now say that more of these capital providers man establish new ship owning units, either on their own or in cooperation with existing shipowners.

Debt rating is important
A number of shipping companies have sold senior unsecured bonds mostly in the US. The coupon is fixed from 6.5 to 7.5 per cent per annum and the issuers are looking for a good rating. At best they will get a BB+, which reflects the volatility of the shipping markets. These bonds are being picked up fairly quickly in the US market, at least as long as the freight market remains strong. Overseas Shipholding, Frontline and Stena have raised funds in this way both as fresh capital and for re-finance purposes. If freight earnings fall to levels seen two years ago, few companies will be able to tap this source of finance.

It is the current interest environment, which allows shipping companies to borrow at low coupons.

If the outlook becomes a bit more uncertain, investors could go for convertibles. Here the share price in the individual company comes into play. If one believes the share price has peaked, it could be worth looking at for the owners. Companies that have used this avenue are Teekay and CP Ship. Teekay offered convertible notes as part of the financing of the purchase of Navion last year. Some financiers warn that few shipping companies can pull off deals like CP Ship and Teekay.

//Petter Arentz

Latest update 18-10-2006 8:49

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