28 tháng 3, 2012

Global macroeconomic uncertainty to continue to affect shipping companies negatively

The global macroeconomic uncertainty will continue to affect shipping companies negatively, compounding an already volatile operating environment. Oversupply in certain segments will also continue to exert downward pressure on both charter rates and market values of vessels.

The past three years have been a challenging time for both shipping companies and shipping financiers. The global financial crisis hit the industry hard in 2008 and 2009 and despite a welcomed improvement in 2010, market conditions have rapidly deteriorated in the first nine months of 2011.
This has been driven by significant oversupply of capacity and uncertainty brought about by the sovereign debt crises in Europe and the slowdown in growth of the US economy.
The shipping industry is characterized by its capital intensity, the cyclical nature of charter rates (and thus asset values), and intense competition. The long build period of new vessels also serves to increase the volatility of the markets. As a result of the global financial crisis, many banks and financial institutions have withdrawn from ship financing.
Some sectors have made small recoveries, but the oversupply situation continued to depress rates. Whilst many shipping companies (especially the top names) continue to get support, other shipowners find it difficult to finance their growth plans, particularly as banks struggle to satisfy new capital requirements. With the Eurozone crisis showing no signs of abating and the continuing likelihood of a new global recession, the financing landscape will become even more challenging.
However, the crisis has provided a good opportunity for shipping companies to strengthen their market position and strategically lock in capacity at cyclical low rates. There are also new, innovative financing structures that can help nurse shipping companies back to health. However, the most widely adopted financing instrument remains traditional asset-backed debt financing.

Senior loans
Senior secured loans are flexible and can be tailor-made to meet shipowners’ requirements. During the previous shipping boom, there were instances where certain financial institutions newly entering the market were offering loans of up to 100% of the value of vessels, against a more prudent loan-to-value (LTV) ratio of 60% to 70%.
Now, however, even some of the more specialist European banks that have traditionally been very active are withdrawing as capital constraints hit home. Only a few international banks and local banks are still actively lending in this sector.

Junior loans
Certain shipowners may wish to limit the equity they put into a financing and might seek a so-called ‘junior’ loan from a bank. The junior loan provider will rank behind the senior lender (i.e. the senior lender’s loan will be repaid first), and to compensate for this weaker security position the junior lender will expect a higher return for its loan.

Export credit
In the past few years, new structures have emerged that complement the traditional senior loan structure. A prominent entrant has been the use of export credit agencies (ECAs).
For example, a foreign shipowner buying a vessel from a Korean yard can apply for a loan from Kexim (the Export Import Bank of Korea). This loan, which will have a long tenor, will be attractively priced but will limit the leverage the shipowner will require; traditionally, other foreign banks work with the ECAs to fill the equity gap.

Chinese government support
An interesting extension of the ECAs has been the decision by the Chinese government to support the country’s shipbuilding industry by encouraging selected Chinese banks to work with foreign shipowners (they will automatically try to support local owners) that have placed orders in preferred Chinese yards.
These loans are not structured by way of ECA guidelines; rather, they are done on a more open commercial basis. In these situations, Chinese banks tend to work in tandem with foreign lenders. These structures have enabled Chinese banks to gain a great deal of experience in structuring and documenting ship finance loans.
KS structures and KG partnerships
Two other forms of finance that are directly related to specific countries are KS structures, from Norway, and KG partnerships, from Germany. The KS is a form of limited partnership whereby Norwegian taxpayers can buy shares in a specific partnership established by an experienced KS house, and that partnership provides some 30% of the equity to acquire a vessel with the balance provided by an experienced ship-financing bank.
Traditionally, the arranging firm will buy the vessel from a shipowner on a sale and leaseback basis, by way of a bareboat charter, so that the KS does not have to charter the vessels to third parties.
In Germany, KG houses initially followed a similar pattern, acquiring partnership funds from German taxpayers to buy a specific vessel (normally container vessels) with a charter to a German owner and debt sourced from a German bank. The KG house, the arranger, would then run the transaction and pay dividends to the investors. The high tax breaks offered to the investors made the scheme initially very popular, to the extent that vessels were ordered with debt sourced from German banks but no actual employment fixed for the vessel at ordering.

Shipping assets
As mentioned, the vast majority of shipping transactions have been senior secured financings and experience shows that in difficult markets owners feel more comfortable with this type of financing. However, it is necessary to highlight the complexities of the assets and the legal issues that have grown in the past couple of decades. In shipping assets today, there are 16 sectors and 60 subsectors, and any active financier requires a good knowledge of these assets.

Leasing solutions
Financing vessels through operating or finance leases is another option that shipowners and shipping lines should explore. Compared to aircraft financing, where leases finance 33% of the global fleet, less than 5% of vessels globally are financed through leases. Leases offer significant advantage, including LTV of up to 100%, off balance sheet treatment and the transference of residual risks to the lessor (for operating leases). Sale and leaseback transactions also allow shipping companies to release cash flows required to support their business or to invest in their new build programmes.

Debt capital markets
Bond issuance is another financing option for shipping companies. In most instances, smaller shipping companies target the high-yield bond space, paying a relatively higher price to secure bond financing compared to larger entities that will pay less. Capital markets, whether debt or equity, are driven predominantly by sentiment and availability is not a given quantity. Shipping companies that want to access these markets will need time to correctly prepare well in advance so as to be able to move fast when an opportunity arises.

Public equity
Equity remains a key source of financing for shipping companies and by the use of public issuances, a large amount of equity capital can be raised quickly to support growth and newbuild plans of shipping companies. However, given the current adverse market conditions, shipping companies may find it difficult to raise capital at the right price today.

Other sources of financing
There are other sources of financing for shipping companies such as mezzanine financing and private equity. Mezzanine finance has the characteristics of both debt and equity financing. Shipping companies can also potentially share capital upside in a project, thereby increasing the overall cost to the borrower. Private equity, from private investors, is the most expensive form of financing, with investors demanding significantly higher returns, compared to asset-backed lending.

The current state of the ship finance market
Lending in the ship finance sector grew with the global economic boom of the past 15 years and the ordering of vessels across all sectors was substantial. Standard Chartered estimates that in 2008, the volume of ship lending grew to US$120 billion; however, since 2009 this has declined considerably to probably half that total today.
With a global economic downturn, a lack of liquidity has meant a difficult time for owners and yards. However, there has been a lot more activity in the offshore sector since 2009. This has meant that banks today prefer to do bilateral transactions or ‘club’ deals where a small group of banks get together to finance their core clients.
For the shipowner, the club structure offers great advantages because the owner gains access to a wider group of banks as opposed to working with only one or two in an underwriting scenario.

Liquidity and the flight to quality
In 2010, there was a slight upturn in the ship finance market and liquidity seemed to be back. However, even though liquidity returned, it was limited to certain shipowners in a so-called ‘flight to quality’. In other words, strong shipowners could expect to be approached by a number of banks but ‘weaker’ ones would have a much reduced source of liquidity available.
Now, because of the Eurozone crisis, even well established lenders in this market are advising that they will not take on new business. This is not good for owners or the remaining banks, as the banks need partners to work with on the larger transactions.
The markets will continue to be turbulent in the near term and financing will continue to be difficult to obtain for most shipowners. However, by working with the right financial institutions, offering financing alternatives, shipping companies can still access financing, allowing them to acquire vessels at cyclically low rates.

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