Providing ship finance in a turbulent market

Shipping has proved to be slow to pick up on the myriad of financial tools available to a volatile industry. Admittedly a growing number of ship owners have used alternative sources of finance, but the use of bonds and other notes is the exception rather than the rule.

	Fortum’s crude oil carrier “Mastera” of 106,000 DWT, built 2002. This double-hulled, Finnish flag vessel has 1 A Super ice class.

The financial horizon of most investors is one that is ill suited for a long-term, capital-intensive business like shipping. True, investors have been eager to get a piece of the cake during the present period when earnings are good.

However, they are unlikely to stay in when the earnings slip and owners are forced to live off the fat they have accumulated during this prosperous period.
Shipping has an inordinate number of players despite the ongoing consolidation and restructuring of the industry. To the ordinary investor and the run-of-the-mill financial institution the risk appears too great. Investors are asked to put money into ships that are delivered in three or four years’ time. What is the market likewhen the vessel is delivered? And if the vessel is fixed for a period after delivery will the charterer remain bankable? There are simply too many imponderables for your average investor and the non-specialist banker.

Long-term finance
In order to plan and carry out a newbuilding program to match market demands the owner must secure long-term finance. The big shipping corporation is generally in a better position, especially those with a strong cash-flow, but even they can fall victim to the vagaries of the market. In the past 18 months there has been no shortage of money.

But do the banks really know what will happen in the market in three years time? No more than the shipowners themselves, and the specialist shipping banks take the somewhat sanguine view that this is a risk worth taking knowing full well that the rapid upturn in freight earnings will not last. They take one year at the time, knowing they could lose money. Syndicated loan may again have to be renegotiated because non-specialist members of the syndicates want out when the going gets rough. It happens every time the market has a long, bad patch and it will happen again.

Is it different this time?
When talking to shipping bankers they do not see the present market development as widely different from what they have seen before. Banks like Nordea, DnCNOR and Citibank, Royal Bank of Scotland and some of the German banks have been in this game for a long time and they seem to treat the current market outlook as they did 10 years ago.

So why is it different this time. Here are a few pointers. Interest rates are the lowest for over 30 years, US dollars are likely to weaken further, oil prices may stifle economic growth and newbuilding prices are historically high. The trend at the time of writing is for second hand ship prices to fall, some owners try to renegotiate newbuildings at lower price, interests rates are firming and a colossal deficit on the US federal budget may dampen the value of the dollar. In Germany – and now also in Norway – tax advantageous investments in shipping have tended to drive prices up.

Regulators increase cost
A myriad of new regulations, mostly to do with safety and security, has led to a hike in operating cost, as has higher bunker prices. In the present market this extra coast to the owner is easily carried, but when the market turns – and it will – owners will start to count the pennies and margins will tighten. Charterers are not likely to shoulder the extra cost in a hurry after a long period of high freight cost, unless they can pass the cost on to the consumers. In the final analysis the owners may have to foot the extra bills without any recourse to higher freight rates.

Just muddle on!
Will your average owner just muddle on? Highly likely. The ups and downs of the freight markets have become a part of life. You make money and you take the rap when the chips are down. But is it necessary to continue in the atmosphere of boom and bust, or is it possible at least to secure some sort of stability of earnings to secure longer term funding. All risk can be insured or even spread, but it seems financial risk insurance has only been deployed in certain deals. Klaveness, Seaspan and Golden Ocean spring to mind, but more could follow. We believe that risk insurance, and certainly residual value insurance (RVI) and other instruments ought to be deployed more freely.

The problem is that shipowners are risk takers and do generally not want to cover risk.

//Petter Arentz