Finance special Alternative funding
Lamenting the demise of the shipping loan Ideocean Group’s Manish Singh explains why ship finance is not the rock it used to be
T Manish Singh
he audience at a recent ship finance event in Singapore was shaken out of post-lunch languor by the bold announcement of the ‘demise of the shipping loan’ by the panellist from a prominent German bank. While some would say this represents one extreme end of a range of opinions, it is fair to say that the challenges facing ship financing have approached unprecedented levels as a result of the ongoing challenging market and the loss of ‘domestic’ investment in shipping. I am chairman of the Cambridge Academy of Transport where we regularly analyse the ship finance market in the process of developing and delivering our ship finance seminar. We have come to the conclusion that ship finance should really be seen as a market of markets. This means that while there are some common factors that affect all finance sectors – for example, high credit risks and the affect of Basel III – we believe that it is naïve to apply sweeping finance related generalisations to the ship finance market. Instead, challenges and opportunities in the ship finance sector need to be viewed from different perspectives. For ship financiers looking to be long term suppliers of capital, it’s important to have a clear strategy and the means and discipline to execute it. In the past, overheated freight markets have generated extreme excitement, false expectations and frantic shipbuilding fuelled by undisciplined lending activity. In 2012, a lack of ship finance liquidity was amplified by continued anxiety in the market with prominent names such as OSG faced with chapter 11 bankruptcy. Persistently anaemic charter rates have meant that many borrowers have run out of steam and cannot continue to service their loan obligations. But as banks currently face a wide range of problems not restricted to shipping company defaults, some have postponed calling in the loans, which has effectively kicked the proverbial ‘can’ further down the road.
WHITE KNIGHT? Private equity as a means of respite has been widely debated, but has not so far been the white knight the market sorely needs and is unlikely to plough in anywhere near enough to fill the liquidity gap that the current market and orderbook poses. Similarly, while there has been much anticipation about bargain
“While traditional ship financiers are largely shut for business or being highly selective, it is relationship banking that is keeping things moving in certain segments” 24
Banking in shipping today is all about relationships
deals driven by distressed funds, the market has yet to experience these types of deals in any sustained numbers. While traditional ship financiers are largely shut for business or being highly selective, it is relationship banking that is keeping things moving in certain segments. Liquidity from the capital markets is also thought to be funding the shipping markets with beneficiaries being growth sectors such as LNG and offshore. There has been much talk about Chinese banks and export credit agencies funding large swathes of newbuilds. However the reality is that while Chinese banks have been quite active in recent months, the support is largely for Chinese national interests – tonnage built in Chinese yards and mainly for vessels that are owned by Chinese owners. So while Chinese banks have been a sizeable source of liquidity, they cannot be counted as a viable solution for the wider global industry. Meanwhile, the requirement imposed by Basel III on the banking industry at large has heavily affected the degree to which banks are allocating funds for shipping projects, with priority going to better investment grade industries. Some European banks have taken a selective approach towards greener tonnage, earmarking a substantial proportion of their new loans for more modern and more energy efficient ships. But the threat of asset redundancy remains the cause of much hand-wringing. This is because not only are yards willing to deliver substantially cheaper newbuilds, such new deliveries are also significantly cheaper to operate. SN Manish Singh is the chairman of Cambridge Academy of Transport, a maritime knowledge business, and the managing director of Ideocean Group, a maritime strategy consulting services provider.
INSTITUTE OF CHARTERED SHIPBROKERS – SHIPPING NETWORK
Finance special Money talk
It’s all about the money, honey Ideocean Group’s Manish Singh talks money with Standard Chartered Bank’s Abhishek Pandey
S Manish
hipowners blame the bankers, the bankers blame the global markets, but who is really responsible for the lack of liquidity in the market? Ideocean Group’s managing director Manish Singh spoke with Abhishek Pandey, head of Shipping Finance, Southeast & South Asia, at Standard Chartered Bank, to get to the bottom of the blame game.
segment, we have seen very few in shipping. Also, the formation of ‘clubs’ has gathered more momentum. Overall, relationship banking has proven its strength again.”
Singh
Manish Singh: “Do you think 2013 will be better than 2012 in terms of liquidity in the ship finance market?” Abhishek Pandey: “For a few years now, the shipping sector has been experiencing a downturn. 2012 was no exception. The industry continued to face liquidity and financing challenges, amidst other macroeconomic issues. Liquidity is likely to remain a big challenge this year, especially given the ongoing uncertainties in the global environment. Despite the gloom, there were some bright spots in shipping, for instance in the offshore sector.” MS: “What are the top concerns, in prevailing circumstances, for prominent ship financiers?” AP: “For European financiers, capital and liquidity issues are key, as well as regulatory uncertainties. They also face increasing competition in Asia, which is where most of the action is, including ship building. There is strong competition from local/regional banks, and ECA backed structures from China/Korea attract local banks there even more. Standard Chartered, with our deep roots in Asia, had been able to step in to fill some of the financing gap.” MS: “Are there any bright spots at all?” AP: “The offshore sector continues to do well due to the oil prices and hence high level of E&P activities. The gas markets (LNG and LPG) are attractive and assets like FSRUs are generating a lot of interest.” MS: “What has changed in ship financing in recent years?” AP: “A lot I would say. There are quite a few traditional shipping banks that have exited this space or have slowed down drastically. It is difficult to think of a bank where the decision to exit was driven by the quality of the shipping book alone. In fact, the reasons for most decisions to exit or slow down have most possibly been due to the need for capital management (Basel requirements). For the majority of banks that are still active and providing liquidity, there is a clear flight to quality names and also to their local markets. From the clients’ perspective, the source of liquidity has become as important as the price of liquidity considering the changed banking and regulatory environment. “It is also fair to say that more of the liquidity is getting into the offshore space instead of the traditional shipping space. Though there have been a few large syndications in the offshore
INSTITUTE OF CHARTERED SHIPBROKERS – SHIPPING NETWORK
“For the majority of banks that are still active and providing liquidity, there is a clear flight to quality names and also to their local markets” Abhishek Pandey MS: “What is your view on the degree to which export credit financing in major ship building economies like China and Korea will supplement liquidity?” AP: “This market is very active right now. For banks, these ECA backed structures provide clear credit enhancement, are capital efficient, and hence attract liquidity. From the clients’ perspective, they create value with attractive terms including longer tenors, higher leverage, diversification of funding sources, and access to a larger financing market, to name some. Direct lending by ECAs and policy banks (such as KEXIM, CEXIM), provides access to an additional large pool of liquidity beyond the traditional bank liquidity. This is particularly important given the limited long term US dollar liquidity available with banks in the current market. Institutions like KOFC also supplement bank market liquidity under covered structures. Though traditionally more popular in shipping, ECAs have become a significant source of financing for offshore assets both in Korea and China, and we expect this trend to continue. SN
25