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The structure of a ship financing lease deal is somewhat different but analogous to
that used in a ship financing purchase transaction.
Conventional Ship
Financing
Conventional Ship financing involves a security arrangement
with a bank or other lending institution, by which money to
purchase a vessel is received in exchange for a security
interest in the vessel.
Conventional Ship
Financing
The security interest generally takes the form of a First Preferred
Ship’s Mortgage. The borrower executes a “promissory note”
promising to pay the loan, as well as, a First Preferred Ship’s
Mortgage which pledges the vessel as security for the loan.
Conventional Ship
Financing
The note usually obligates the borrower personally so that if
the vessel is foreclosed and sold by the lender, the borrower
must pay any deficiency if the vessel does not sell for enough
to pay the entire loan. This mortgagor pledges the ship as
security for the loan and has priority over most other claims
with some specific exceptions.
Types of Lenders
Standard commercial financing depends upon your credit history,
amount of down payment and the evaluation of the ship. Many
banks will make such loans if you are a “good” customer and have a
credit history with them. This also assumes that they will do marine
financing. Due to the crash in the oil field industry during the 1980’s
and 1990’s many lenders left the marine market and have not
returned.
Types of Lenders
Marine lending is viewed as a high-risk market due to the
nature of the business and the fact that the ship may leave
U.S. ports and never return. The fear of seeing their security
sail over the horizon inhibits many bankers.
Types of Lenders
To balance out the risk factors, the banks will look at several
things, principally, your credit history and other suitable
security such as real estate, cash or investments in addition to
the ship.
Types of Lenders
If you have a long, good relationship with a bank, that should be
your first choice. You will be more likely to receive a good interest
rate and fair terms. Be aware that you will have to pay the difference
between the loan amount and the purchase price of the ship. Your
down payment generally will range from 10% to 40% depending
upon the requirements of the particular bank.
Types of Lenders
Generally, the bank will not lend money for ,Start up costs, Repairs
or refitting, Fuel and lube oils, Insurance and fees.
Also, the bank will probably be expecting to lend between 60% and
80% of the purchase price of the ship. This means that on a
$500,000 purchase, you will need to have between $100,000 and
$200,000 in cash to pay for the purchase down payment.
Introduction
Significant developments in bank
shipping finance occurred the
subsequent decades. The world
economy growth together with the
need for larger cargo ca- pacities
elevated the amount of requisite
capital investment to levels
beyond the ability of private equity
finance
15
Introduction
Bank shipping finance began to
grow in importance in the 1960’s
with owners in possession of oil
charters from major oil companies
of sufficient duration to cover a
substantial part of the repayment
period.
16
Introduction
To date, with an estimated require-
ment 1 of $207 bil- lion over the
six years 2002-2007 [M. Stopford,
2002], owners have a hard-time
satisfying the industry’s appetite.
The reason for this is that we are
going through a convalescence
period.
17
Bank & Other Lending
Organisations
These are the conventional maritime financing service
providers that exist. Banks as lending organisations take a
detailed inventory about the firm approaching them for
financial purposes. Only if they are satisfied with the
company’s credit worthiness or only if the company has a
long-standing association with them, then the banks invest in
with the required funds.
Bank & Other Lending
Organisations
As collateral, the receiver of the finance is required to mortgage the ship
or pay an initial deposit as per the bank’s existing norms. The amount of
initial deposit claimed by a bank is anywhere between 10 to 40%, while
maritime financial assistance is provided for only about 60 to 80% of the
intended commercial activity. The rate of interest is also variable
depending on a bank’s association with the party intending to opt for
marine financing.
Marine Money Landers
Money-lenders too form a vital part in the domain of shipping
financing. While money-lenders are not opted for by
companies primarily for maritime financial assistance
purposes, they nonetheless provide valuable assistance when
aid from banks and other recognized financial organization is
denied.
Marine Money Landers
The most important and note-worthy aspect of loaning
marine finance from money-lenders is that their repayment
options are tricky and costly at the same time. Unlike banks
which have a prescribed set of rules and stipulations, money-
lenders do not fall under the ambit of these stipulations which
could cause problems for parties opting for money-lenders as
a lending option.
Capital Investment
Just like investments in shares, in the marine sector there is the
option of investing in a particular marine project. Some people
interested in how to buy cc. Interested people invest their funds for
the project to come to fruition with limited profits to their credit.
Capital Investment
While capital investment is a good option in terms of
maritime financing, it is equally risky as, if a project ends up
failing, all the people with vested funds in the project end up
losing their money completely.
Capital Investment
Shipping financing is a necessary cog in the marine industry. It
helps the marine industry to take risks and reach new heights,
and also attract newer and newer business organizations to
enter the fray.
Manufacturer Lending
Several of the major engine companies have developed
financing programs revolving around the purchase of their
propulsion engines and generators. Detroit Diesel and
Caterpillar in the United States have been the two major
players in this market.
Manufacturer Lending
The loan program generally requires the purchaser to either build a
new vessel with specific equipment or to repower an existing vessel.
Again, the amount of the loan will depend upon a realistic evaluation
of your credit status and the value of the vessel upon completion.
Lenders of Last Resort
We consider banks and equipment manufacturers as lenders
of first resort because they offer the lowest rates and most
competitive terms. They are also the most difficult from
whom to obtain a marine loan.
Lenders Last Resort
Lenders of the last resort, are, for the most part, private
lenders who specialize in “high risk” loans with a very “high
rate of return.”
Lenders Last Resort
These individuals offer money when you need it, but at
interest rates in the 17% to 25% range. Usually, these loans
are for twelve months or less and require the borrower to
provide personal guarantees for the loan.
Lenders Last Resort
The higher rates are justified by the high risk nature of the
loans. Generally this type of loan can be completed in a few
days or weeks and may, in some cases, save your interest in
the ship.
Lenders Last Resort
Security for the loan is generally in the nature of a First
Preferred Ship’s Mortgage as well as other security such as
real estate, bonds or stock shares.
Venture Capital
Venture capital is money that is invested by private individual
to provide start-up costs, vessel purchase funds and operating
costs. The money is invested in a particular ship or project
with the purpose of earning profits for the investor.
Venture Capital
Generally, venture capital is secured only by the project. If the
ship or shipping project fails, the investor loses his
investment. There is no other obligation other than the
equipment alone.
Venture Capital
There may be any variety of combinations of investments in a
Venture Capital program, but in the general sense, the
investor becomes a limited partner in the ship and takes his
chances along with the operator.
Bond Financing
Bonds were originally developed to finance states for various
purposes. This type of debt investment is today used widely
also by companies to finance projects.
Bond Financing
The procedure to raise funds through bonds requires a bond issue
and an IPO (Initial Public Offering) in a stock exchange. Investors buy
the bond at the par price in the day of the IPO, thereafter the bond is
trading with its daily price reflecting its status.
Bond Financing
While the owners of bonds (bond holders) are in fact creditors
to the company that has issued the bond, the funds raised
through the bond issue are considered as quasi -company
equity in cases where other types of borrowing are also
present.
Bond Financing
Although the duration (term) of a bond is fixed, the interest
payable may be fixed or variable. Short term bonds are for
periods up to five years, medium term from five to twelve and
long term for more than twelve years.
Bond Financing (2)
Company bonds generally offer higher yields
compared to government bonds to compensate bond
holders for a higher risk of default.
Bond Financing (2)
The two main types of corporate bonds are Convertible and
Callable bonds.
A Convertible bond can be redeemed for company’s equity at
predetermined times if the bond holder so wishes and this in
effect constitutes a form of stock option.
Bond Financing (2)
A Callable bond instead can be redeemed at the discretion of
the issuing company before maturity, usually at a premium.
This type of bond offers the possibility to the issuer to take
advantage of lower interest rates through calling the higher
interest bonds and re-issuing new lower interest ones.
Bond Financing (2)
Bonds are tradable. In the past many high yield shipping
bonds fell in the category of ‘’junk bonds’’ – i.e. BB rating or
lower - due to the high risk they represented for the bond
holder.
Bank Loan Financing
Bank loans are the oldest form of asset financing and by far
the most common method in shipping. The lender provides
funds to the borrower on basis of a Loan Agreement.
Bank Loan Financing
Prior to a loan agreement, a Commitment Letter is sent by the bank
to the borrower where the main terms, conditions, covenants and so
on are laid out. A Commitment Letter assumes legal status after the
recipient has signed it, indicating his basic agreement. Thereafter
the parties will need to contact their legal counsels in order to start
discussions in preparation of the Loan Agreement.
Bank Loan Financing
Loan agreements are flexible instruments that can be cut to
measure according to the wish of the contracting parties, yet,
these contain a substantial number of common terms.
Representations and
Warranties
Before commiting to make a loan , a lender will invstigate the
potential borrower’s financial condition and credit
worthiness.
Representations and
Warranties
It will also require the borrower to confirm his legal status
(sole proprietor or other business entity), and other material
issues that the lender may require prior to a loan commitment
Conditions to Closing
Lenders require aborrower to : demonstrate that she has the
authority to approve the loan, including corporate
resolutions, pay any fees at closing and sign all documents
Bank Loan (2)
continued All loan agreements make mention of: the duration
of the facility (tenor), the applicable interest rate (fixed or
floating), the bank fees payable for the management of the
loan, the collateral(s), i.e. liquid or fixed assets which the
lender can access in case of a default, and the covenants, i.e.
certain conditions the borrower must satisfy and the rights of
the lender in case of a default in repayment.
Bank Loan (2)
These basic requirements are followed by a detailed list of
provisions which describe what needs to be done and how.
These however lay outside the scope of this introductory
presentation.
Ship Leasing
In countries where ship leasing is allowed, leasing arrangements
provide an alternative to traditional ship financing. Banks will
generally consider it favourably given that the position of the
‘’lender’’ is stronger compared to loan financing.
Ship Leasing
As banks are generally unwilling to become involved in ship
management the most usual method used takes the form of a
‘’ Sale and Leaseback’’ where a shell company owned by the
lender ( lessor) becomes the owner of the vessel and enters
into a bareboat contract with the lessee who takes over both
the commercial and the technical management.
Ship Leasing
The lessor will typically have a first preferred mortgage on the
ship. This triangular arrangement has considerable
advantages, but also serious disadvantages, for the lessee
which we shall briefly review.
Sale and Leaseback
The main advantage of a Sale and Leaseback solution for the
lessee is the ability to expand the fleet under his own control
with the minimum of equity.
Sale and Leaseback
The main disadvantage is a quite complicated, inflexible and
inequitable leasing contract replete with covenants in favour
of the lessor.
Sale and Leaseback
S+LB is a back to back arrangement where the lease is paid
over a number of years through charter hire involving three
parties, the owner of the vessel, the bareboat charterer and
the lessor.
Sale and Leaseback
As in all leasing contracts one finds a ‘’ Hell and High Water’’
clause which nullifies the possibility of the borrower to pay
only interest and remain within the spirit of the agreement, as
the case is under a loan agreement.
Sale and Leaseback
Installments therefore have to be paid in full and by the due
time or else a charter termination event may be triggered.
Sale and Leaseback (The
Owner Side)
Generally the interests of the Owner and the Bank are coordinated,
yet at an arm’s length. The Owner for example will always welcome a
clause whereby loan repayments will need to be made only
subsequently to charter hire payments and that the bareboat
Charterers will be under obligation to respect mortgage covenants.
Sale and Leaseback (The
Owner Side)
Similarly, the position of the Owners vis-à-vis the Bank will be
strengthened if events of default concerning their own loan
agreement could only take place following a breach from the
side of the Charterers.
Sale and Leaseback (The
Owner Side)
In case of problems regarding the proper course of lease
repayment the Owners are the party to take measures against
the bareboat Charterers to safeguard the interests of the
lessor.
Sale and Leaseback (The
Owner Side)
These measures will typically include the right to replace the
Charterer, the right to seek a buyer for the vessel and other
stop-gap measures which will ensure that a non-performance
from the Charterers leading to a charter termination event
does not end up as an Owners’ default.
Events of Default
the borrower does not pay any money due for payment by it
under the loan agreement (or any security document or
guarantee) in accordance with its terms and conditions.
Events of Default
the borrower does not comply with any other obligation
under the loan agreement (or any security document or
guarantee) and, if that default is capable of remedy, it is not
remedied within [5 Business Days (or such longer period
agreed by the Lender)] after its occurrence or the borrower
does not, during that period, take all action which in the
lender’s opinion is necessary or desirable to promptly remedy
that default.
Events of Default
a representation, warranty or statement made or deemed to
be made by the borrower under the loan agreement is untrue
or misleading; the loan agreement is unenforceable (or any
security document or guarantee) is void, or is claimed to be
so.
Events of Default
and an administrator, provisional liquidator is appointed in
respect of the Borrower or any action is taken to appoint any
such person and the action is not stayed, withdrawn or
dismissed within [5 Business Days].
Sale and Leaseback (The
Character Side)
In case of delays in charter hire payments leading to a charter
termination event, the Owners will need to see clearly what
their rights are concerning the ‘’Charterer’s Deposit’’ i.e. the
lessee’s capital contribution to the deal.
Sale and Leaseback (The
Character Side)
In a similar, albeit inverse way, the Charterers will be keen to
see they own ‘’ Charterer’s Deposit’’ to be as protected as
possible.
Sale and Leaseback (The
Character Side)
Will need to see a clear term sheet delineating their rights and
obligations. Will need to see purchase options at specific
dates
Sale and Leaseback (The
Character Side)
Will review the interpretation of the ‘’Hell and High Water ‘’
clause and will want to make sure mortgage covenants do not
impact their rights under the bareboat charter party.
Blank Check Companies
According to the Securities and Exchange Commission ‘’a blank
check company is a company that has no specific business plan or
purpose, or has indicated as its business plan to enter into an
unidentified merger or acquisition. These companies often involve
speculative investments”.
Blank Check Companies
A Special Purpose Acquisition Company (SPAC) is a
corporation formed by private individuals in order to raise
funds through an Initial Public Offering.
Blank Check Companies
Typically the money raised is committed to a Trust until either
an investment is made, or a certain time period has lapsed.
During that period the staff managing the SPAC are not
allowed to receive salaries.
Blank Check Companies
If no deal is made by the deadline, the funds are returned to
the investors together with allowances for bank or broker
fees.
Syndicated Loans
When capital requirements exceed the credit ceiling of a bank
to a single customer, banks form a syndicate whereby each
one of the covers a portion of the total facility,
Syndicated Loans
The syndicate has a leader. The leader is in charge of negotiating the
terms and conditions between the syndicate and the borrower. After
this stage is completed the lead bank manages the flow of credit
from the syndicate members to the borrower and vice versa during
the stage of repayment.
Syndicated Loans
Syndication has advantages for both sides and it is the ultimate
weapon of bank financing in the battle with other types of finance in
commercial shipping. However, negotiations between syndicate
members can last for months and negotiations with the borrower
even longer.
Syndicated Loans
Therefore, slowness and complication may be the main
disadvantages of a syndicated loan in exchange for very high
levels of lending.
So , this is levels of lending
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Export Credit Schemes
Many exporting countries facilitate sales abroad by
guaranteeing seller’s credit to foreign customers. The
exporters extend credit to their customers and the state acts
as guarantor to this credit by taking over the risk of default.
Export Credit Schemes
Seller’s credit has a long history in shipbuilding, however in
recent years it has become object of heated arguments in
OECD, in WTO and in the EU whether such practices fall
within the definition of a State Aid.
Export Credit Schemes
Central to this debate is whether the interest rate charged is –
directly or indirectly – subsidized but other important issues
are also examined.
Export Credit Schemes
Despite these debates export credit schemes continue to
exist in an overt or covert fashion, particularly in the Far
Eastern markets.
Export Credit Insurance Cover to Banks
254
Introduction
Bank shipping finance began to
grow in importance in the 1960’s
with owners in possession of oil
charters from major oil companies
of sufficient duration to cover a
substantial part of the repayment
period.
255
Introduction
To date, with an estimated require-
ment 1 of $207 bil- lion over the
six years 2002-2007 [M. Stopford,
2002], owners have a hard-time
satisfying the industry’s appetite.
The reason for this is that we are
going through a convalescence
period.
256
Introduction
Ship financing has always evolved in consonance
with the commercial market’s trends. As illustrated
in Figure 1, about shipping industry, bankers and
owners have had to deal with many changes in the
commercial environment over the last 50 years.
257
Introduction
There has been a ‘Golden Age’ of
growth in the 1960’s; a ‘bubble’ in
the 1970’s followed by an oil crisis
and a deep recession in the 1980’s.
258
Introduction
Finally the 1990’s were extremely
volatile though less life threatening.
[M. Stopford, 2002] Perhaps the most
interesting point is that with each of
these commercial devel- opments, the
characteristics of finance changed.
259
Introduction
The above graph, illustrates the
world Demand for cargo ships and
the world Supply, which is the
world fleet size. What is interesting
is the evolution of fi- nance.
260
Introduction
Cash: In the 1950’s debt was regarded as a sign of
weakness so the estab- lished Greek families along
with European ship-owners, stuck firmly to a policy
based on retained earnings. There was no real need
to borrow, as cash was plenty; the only problem was
finding profitable investments.
261
Introduction
Charter back: As the European and Japanese economies
started to expand in the 1950’s and 1960’s, trade grew
rapidly and it was then that cash would not work. Large
corporations with growing cargo volumes desperately
needed bigger ships and were willing to give long-term
charters to get them. Independent own- ers used these
charters as security to finance new buildings, which they
regis- tered under low-cost flags of convenience.
262
Introduction
Bankers, who now had access to the expanding
Eurodollar1 market, were happy to offer very high
advances against the security of a time-charter and
the mortgage of a ship.
By the end of the 1960’s about 80% of the
independent tanker fleet was on time charter and
highly leveraged. [M. Stopford, 2002]
263
Introduction
Bubble: As trade grew faster in the
late 1960’s owners found time
charters restrictive and started
ordering ships on their own
account to enjoy the profits of spot
market booms. Unfortunately,
bankers considered ship
mortgages to be suf- ficient
collateral and disregarded time
charters.
264
Introduction
It was this change in banking strategy
that broke the link between Supply
and Demand. The effect was
disastrous and according to Dr Martin
Stopford, we are still living the
consequences 25 years later. The
figure shows orders escalating to 120
m. dwt in 1973 – a genuine bubble. The
combination of over-production and
collapsing demand
265
Introduction
Distress: In 1980’s the way the
world banking community thinks
about shipping risk, changed com-
pletely. A visible indicator of the
crisis was the volume of modern
tankers in lay up representing 25%
of the fleet in 1984.
266
Introduction
Lack of prudence in the 70’s
expressed its consequences in the
1980’s :
● During the four years 1983 to
1987 borrowers defaulted on
$10 billion worth of shipping
loans.
267
Introduction
● The amount written-off the books by commercial banks and
leasing com- panies because of defaults by shipping
companies during this period was between $3 billion and $4
billion.
● Experienced ship financial institutions wrote-off 1-5% of
total commit- ments each year and others as much as 10%.
Several banks disposed of their whole portfolio and
dissolved all links with shipping finance.
268
Introduction
● Three Japanese banks wrote-off $700 million
loans to a single shipping company.
As these events unfolded, banking officers faced
problems for which a ca- reer in commercial banking
could hardly have prepared them. Bankers were edu-
cated in the risks of financing ships in the most
dramatic way possible
269
Introduction
Convalescence: It is how the following period is
known. In the 1990’s bankers and owners had to
practice ‘rehabilitation’. No one knew where needs
for new investment would be satisfied from.
Alternative techniques were ‘taken out of the
cupboard, dusted off and put into practice’.
270
Introduction
Ship funds, IPOs, Bonds, Leasing schemes, private
placements, venture capital and shipbuilding credit
accounted for more than 60% of the capital raised to finance
90’s investments.
In fact, through the 90’s a much sophisticated group of
bankers has emerged from the ship finance business, all
having tremendous experience of the years behind them.
271
Introduction
Out of the methods used in the 90’s some
were a success others failed. It is now that
the shock’s impact has faded and the
finance landscape is blooming again, that
investment is showing its new face. The old
family-owned shipping company is leaving a
new breed of managers to continue its path.
On the other hand, bankers equipped with
credit risk awareness and modern theory
models are here to do business in a much
more complicated framework.
272
The Demand and Supply Side of Shipping
Markets
• Among economists,it is considered a common wisdom
that shipping markets are the markets where the classic
“pig-cycles” can be observed and analyzed
parexcellence since not only the supply side and the
demand side are relatively well-documented, but also
the market results (the freight rates or time charter
rates). It is common understanding that the demand
side of the markets is represented by the need for
freight transport, whereas the supply side consists of
the ships that deliver the commodities. Both sides meet
on the freight market, where the service “transport” is
exchanged most commonly against US$. Stopford
(2009) lists five elements influencing the development
of either one of the sides of this market (see the picture)
• The Demand Side
The seaborne transport of commodities is regularly documented in
statistical publications of leading brokers, NGOs or research
institutes. Quite often though, these statistics are based on
estimates as most publications reporting on international trade
flows do not worry about the volume of goods transported as much
as about their value. Therefore, the figures published on global
seaborne transport volumes sometimes differsignificantly from
source to source and are adjusted several times
The Demand and Supply Side of
Shipping Markets
275
The Demand and Supply Side of
Shipping Markets
276
The Demand Side
The seaborne transport of commodities is regularly
documented in statistical publications of leading
brokers, NGOs or research institutes. Quite often
though, these statistics are based on estimates as
most publications reporting on international trade
flows do not worry about the volume of goods
transported as much as about their value.
277
The Demand Side
Therefore, the figures published on
global seaborne transport volumes
sometimes differ significantly from
source to source and are adjusted
several times. According to
Stopford (2009), the development
of the demand side is affected by:
278
The Demand Side
● The world economy, as a
higher (or lower) economic
output regularly requires a
higher (or lower) input of
resources and also generates
more (or less) merchandise
available for foreign trade.
279
The Demand Side
● Seaborne commodity trades, which may be subject to
seasonal cycles in the short run (examples can be found
in the crude oil, grain, or container trade) and which on
may evolve in the long run, resulting from:
○ changing industrial demands
○ changing transport policies
○ depletion or discovery of resources
○ relocation of processing plants.
280
The Demand Side
● Average haul and ton miles, being the more
precise measurement of the demand side than the
pure information about the volume of shipped
goods as the distance over which the commodities
are transported can vary widely and often demand
peaks (resulting in a higher volume) have to be
satisfied using more distant suppliers (generating
an even larger impact on the ton miles).
281
The Demand Side
● Random shocks like, wars,
economic downturns, natural
disasters, which can intensify
the impact of seasonal or
economic cycles or mess with
the average haul.
282
The Demand Side
● Transport costs, as the general theory of
maritime trade suggests that trade takes place if
a commodity can be bought more cheaply in a
different country, the ever declining cost of
transport (resulting from the economies of scale)
in itself has helped to boost maritime trade
(Stopford 2009, pp. 140–149).
283
• The World Economy
as a higher (or lower) economic output regularly requires a
higher (or lower) input of resources and also generates more
(or less) merchandise available for foreign trade. Hence,
both the business cycle as well as the trade development
cycle (nations going through a period of transition froma
traditional society to a society of mass consumption and,
hence, develop different consumption/production patterns
of raw materials or merchandise) have a major impact on
the demand for seaborne commodity transport.
Seaborne Commodity Trade
which may be subject to seasonal cycles in the short
run (examples can be found in the crudeoil, grain,or
container trade) and which on may evolve in the
long run, resulting from:
• changing industrial demands
• changing transport policies
• depletion or discovery of resources
• relocation of processing plants.
•
Average Haul and Ton
being the more precise measurement of the demand
Miles
side than the pure information about the volume of
shipped goods as the distance over which the
commodities are transported can vary widely and
often demand peaks (resulting in a higher volume)
have to be satisfied using more distant suppliers
(generating an even larger impact on the ton miles).
• Transport Costs
as the general theory of maritime trade
suggests that trade takes place if a
commodity can be bought more cheaply in
a different country, the ever declining cost
of transport (resulting from the economies
of scale) in itself has helped to boost
maritime trad
•
The Supply Side
The supply side of the markets is represented by the ships that carry the
cargoes. The information about the historical development of the fleet is
quite accurately documented in theleading fleet
registers,forexample,the Clarksons Registerorthe databases of IHS
Fairplay.The future developmentof the fleet can in the short term be
deviated from the orderbook of the yards and assumptions on likely
scrapping activity although the financial crisis of 2008/2009 has shown
that cancellation, slippage, or conversion of orders can play a major role
in the short run.
The Supply Side
The supply side of the markets is
represented by the ships that carry
the cargoes. The information about
the historical development of the
fleet is quite accurately
documented in the leading fleet
registers, for example, the
Clarksons Register or the
databases of IHS Fairplay.
289
The Supply Side
The future development of the fleet can in the short
term be deviated from the orderbook of the yards
and assumptions on likely scrapping activity
although the financial crisis of 2008/2009 has shown
that cancellation, slippage, or conversion of orders
can play a major role in the short run. According to
Stopford (2009), the supply side is affected by:
290
The Supply Side
● The world merchant fleet,
contracting and expanding in
cyclical movements of up to 20
years, and bringing about new
ship types and designs
eventually while phasing out
older designs or vessel types.
291
The Supply Side
● The fleet productivity, which may vary
depending on the use of the vessel. The effective
transport capacity each vessel can provide
during a given period of time is a function of the
speed of the vessel, the time the vessel is caught
up in the cargo handling procedures as well as
the regular or non-regular maintenance.
292
The Supply Side
● The shipbuilding production,
being a cyclical industry, where
a time span between the
placement of the order and the
actual delivery of the vessel can
range up to 4 years.
293
The Supply Side
● Scrapping and losses, which are the counterpart
to the shipbuilding production by reducing the
fleet capacity. While age is the primary factor
driving the demolition of the vessels, there are
other factors like the market prospects, scrap
prices, financial situation of the owners, etc.
which play a role in the decision whether to
scrap a vessel or not
294
The Supply Side
● The freight revenue, being probably
the most important element driving
the supply side. In the long run, there
seems to be an evident correlation
between the earnings of a fleet
segment and the amount of
investment that is taking place in this
particular market. In the short run, the
supply-side reacts to higher freight
revenues by speeding up the operation
and thus delivering more trading
capacity (Stopford 2009, pp. 151–160).
295
The Supply Side
From the viewpoint of a maritime economist aiming
to analyze a shipping market, the most interesting
perspective though would be to look at the
competitive environment of a certain type of vessel.
This analysis has become more complicated or
easier in the second half of the past century –
depending on one’s perspective.
296
The Supply Side
Before the 1950s, the majority of
seaborne trade would be
transported on liner or tramp
vessels of often equivalent sizes
and designs and, hence, the
tonnage could generally be
switched between trades.
297
The Supply Side
Resulting from this as well as from
the introduction of the container,
the highly specialized shipping
markets we are facing today have
evolved. Those shipping markets
offer individual vessel designs,
charterers, and port equipment
(Stopford 2009).
298
The World Merchant Fleet
• contracting and expanding in cyclical movements of
up to 20 years, and bringing about new ship types and
designs eventually while phasing out older designs or
vessel types.
• The Fleet Productivity
which may vary depending on the use of the vessel. The
effective transport capacity each vessel can provide during a
given period oftime is a function of the speed of the vessel,
the time the vessel is caught up in the cargo handling
procedures as well as the regular or non-regular
maintenance. All these elements can change overtime within
vestment in handling technology or changing demand
patterns of the ship buyers.
The Shipbuilding Production
• being a cyclical industry, where a time span between the placement of the
order and the actual delivery of the vessel can range up to 4 years.
Scrapping and Losses
• Which are the counter part to the shipbuilding production by
reducing the fleet capacity. While age is the primary factor
driving the demolition of the vessels,there are other factors
like the market prospects, scrap prices, financial situation of
the owners, etc. which play a role in the decision whether to
scrap a vessel or not.
The
• being probably the Freight
most Revenue
important element driving the
supply side. In the long run, there seems to be an evident
correlation between the earnings of a fleet segment and the
amount of investment that is taking place in this particular
market. Intheshortrun, thesupply-sidereacts to higher freight
revenues by speeding up the operation and thus delivering
more trading capacity.
World Seaborne Trade and Merchant Fleet
Development
• Whilst some figures related to 2011 are still estimated
and revisions of cargo handling statistics are a regular
phenomenon in the runner-up year, it seems that the
total amount of cargo trade has reached a volume of
9.1bn tons and is headed for the 10bn ton milestone in
the near future. As slightly more than 70% of the entire
seaborne trade (see picture on next slide) are raw
materials or energy sources (see Table on next slide)
Total seaborne trade by major
loading categories. Source: ISL 2012
based on Clarksons Research
Trends
• Traditional Bank Dept
in Ship Finance
Conventional ship financing deals with traditional banks
have now become few and far between.
Loan volume for syndicated marine lending was estimated
by Dealogic to be around $50bn in 2016, a significant
decrease from the loan volume of $120bn seen in 2007.
• A number ofTrends
the ship finance banks that historically
in Ship Finance
dominated the market, particularly the European banks,
have been announcing their intention to exit shipping by
actively marketing and selling their shipping portfolios or
allowing existing loans to amortise and not taking on new
business.
• Trends in Ship Finance
Although this has been triggered by the financial crisis, there
are other factors affecting the desire of the banks to shrink
their shipping portfolios. These factors include the increasing
regulation and scrutiny faced by the European banks,
particularly as a result of the Basel regulations and following
the substantial losses made by these banks in the shipping
industry over the course of the last few years.
• Alternative sources of financing
Following the substantial reduction in the availability of financing
from traditional banks, shipowners are increasingly having to turn
to alternative financing sources. This is particularly the case for
small to medium-sized shipowners, as traditional lenders are
generally focusing on larger shipping clients due to regulatory and
risk management requirements.
Alternative• As
sources of financing
a result of this, shipowners are now
becoming increasingly interested in
considering structures such as high-
yield bonds, convertible debt, capital
and operating leases, as well as
preferred equity structures.
• Alternative sources of financing
The last few years have seen some of the larger players within
the shipping market turning to the capital markets in order to
meet their funding requirements. Many of these transactions
have involved the US and Norwegian capital markets, with the
Norwegian bond market being seen as particularly favourable
for shipping assets.
Alternative sources of financing
• Export credit agencies (ECAs) have been common participants in the ship
finance industry in recent years, either via direct lending through bilateral
transactions or co-financings, or through guarantees and insurance policies.
• Private equity entered the shipping industry following the
global financial crisis and has prompted a great deal of
discussion around its long term role in shipping.
• Many private equity funds initially entered into joint ventures
with shipowners. Recently, however, we have seen that a
number of these funds are more interested in buying loans
from traditional banks, at a large discounts, in order to see
immediate profits.
• Along with these more traditional private equity players, a
number of new alternative financing outfits have recently
entered the market. These new entrants are targeting small /
medium-sized shipowners and are directly lending to these
companies through primary or, more typically, mezzanine
financing.
• Alternative finance tends to come with a higher price tag, so
it is often not as attractive to shipowners as traditional bank
debt. However, alternative capital providers may be long-
term players within the shipping industry particularly if
traditional commercial lenders are not be able to re-enter the
industry in the medium term due to the increasingly stringent
regulatory environment.
• Alternative structured capital providers are typically
interested in creative investment structures which will often
involve leasing structures and preferred equity as well as
more traditional debt structures.
• As asset values gradually rise, banking regulation becomes
ever more stringent and new participants enter the market
every sub-sector of the ship finance market, across banks,
funds and individual investors, will continue to feel the impact
of these changes, and no doubt be encouraged to evolve
further.
Dry Bulk Shipping
Markets
● Stopford (2009) defines bulk
commodities as cargoes which
are carried in bulk carriers. Their
common denominators are that
they travel in large quantities
and their physical attributes
allow for easy (automated)
handling.
319
Dry Bulk Shipping
Markets
According to figures from
Clarksons Research in the year
2011, roughly 3.6 bn tons have
been transported on the dry bulk
shipping markets. The volume
comprises of the major bulks: iron
ore, coal, and grain as well as
bauxite/alumina and phos- phate
rock.
320
Dry Bulk Shipping
Markets
The remaining third of the dry bulk trade is
composed of a broad mixture of agricultural
products, forest products, steel products as well as
non-ferrous metal ores or scrap but also cement or
fertilizers. These commodities typically are required
in smaller quantities by the importing industries and
typically show a higher value per ton.
321
Dry Bulk Shipping
Markets
This changed radically around
2002/2003, when China, already
back then the largest producer of
steel, massively increased its
volume of iron ore imports at a
pace that was underestimated by
the largest parts of industry
observes.
322
Dry Bulk Shipping
Markets
According to figures from IHS Fairplay, this unprecedented
ordering boom has led to the dry bulk fleet surpassing the
tanker fleet as the largest segment of the entire world
merchant fleet, reaching a capacity of 602 M dwt early in
2012. The capacity growth of 17.1 % in 2010 and 14.8 % in
2011, respectively, has even surpassed the long term
average capacity growth of the rapidly expanding container
fleet, which grew by 11.5 % over the last 20 years
323
Dry Bulk Shipping
Markets
Whilst having been notoriously undersupplied with tonnage
during the years 2003–2007 and throughout most of 2008
(until the start of the global recession), the supply-demand-
balance on the dry bulk shipping markets has developed in
favor of the shippers in recent years, leaving shipping
investors with relatively poor earrings and – resulting from
the still filled orderbook early in 2012 only with medium-
term hopes for a sustained recovery.
324
Dry Bulk Shipping
Markets
During periods of fundamentally
oversupplied markets, it is not
uncommon for freight rates to
edge up sharply, as tonnage on the
spot markets may be tight
occasionally, resulting from
unforeseen demand spikes.
325
Dry Bulk Shipping
Markets
This has been observable, for example,
late in 2011, when Chinese steel-mills
stockpiled large amounts of iron ore,
sending the Baltic Dry Index and
especially capsize earnings to relatively
high levels but having only a modest
impact on the longer- term time charter
earnings, which incorporate the future
expectations of the market participants –
the latter ones being quite bearish
recently.
326
Dry Bulk Shipping
Markets
Although the longer lasting 1 year time-charter
rates regularly smoothen out the volatility of the
spot-market, time charter rates are quite volatile
too. In the case of bulk shipping time charter-
rates though, the volatility of the nineties is
dwarfed by the scaling required by the 2007 and
2008 spike in earnings
327
Dry Bulk Shipping
Markets
During periods of fundamentally
oversupplied markets, it is not
uncommon for freight rates to
edge up sharply, as tonnage on the
spot markets may be tight
occasionally, resulting from
unforeseen demand spikes.
328
• Liquid Bulk: “The Tanker Markets
When brokers or market reports discuss “the tanker markets”,
they are typically just referring to two particular trades, one being
crude oil, one being the oil products trade. Whilst it is true that
chemicals and liquefied petroleum gasses or liquefied natural gas
or even juices, wine, or beer may travelin vessels referred to as
‘tankers’, these latter vessels are operating in a different and
segmented market with virtually zero overlap.
• After initially having been transported only as refined products,
the crude oil transport soared in the 1950s, 1960s, and early in the
1970s. After the 1970s recession and oil price shock, the seaborne
crude oil trade fell sharply but has recovered since then and
stands—with some distance to the iron ore trade left— as the
largest individual commodity being shipped in bulk.
Liquid Bulk: “The
Tanker Markets”
When brokers or market reports discuss “the tanker
markets”, they are typically just referring to two
particular trades, one being crude oil, one being the oil
products trade. Whilst it is true that chemicals and
liquefied petroleum gasses or liquefied natural gas or
even juices, wine, or beer may travel in vessels referred
to as ‘tankers’, these latter vessels are operating in a
different and segmented market with virtually zero
overlap.
330
Liquid Bulk: “The
Tanker Markets”
After initially having been transported only as refined
products, the crude oil transport soared in the 1950s,
1960s, and early in the 1970s. After the 1970s recession
and oil price shock, the seaborne crude oil trade fell
sharply but has recovered since then and stands—with
some distance to the iron ore trade left— as the
largest individual commodity being shipped in bulk.
331
Liquid Bulk: “The
Tanker Markets”
Early in 2012, the capacity of “the
tanker fleet” has surpassed the
“half-a-billion- milestone”, the
relatively rapid expansion that
becomes noticeable around the
year 2004 is only partly
attributable to the increased
demand dynamics of the emerging
Asian economies.
332
Liquid Bulk: “The
Tanker Markets”
When brokers or market reports discuss “the tanker
markets”, they are typically just referring to two
particular trades, one being crude oil, one being the oil
products trade. Whilst it is true that chemicals and
liquefied petroleum gasses or liquefied natural gas or
even juices, wine, or beer may travel in vessels referred
to as ‘tankers’, these latter vessels are operating in a
different and segmented market with virtually zero
overlap.
333
Liquid Bulk: “The
Tanker Markets”
Looking at the development of time charter markets for
large crude oil tankers in the years 2008 and 2009 leaves the
reader puzzling. Based on the fundamental dynamics (an
economic downturn, colliding with an ongoing fleet
expansion), a more massive downturn in earnings would
have been expected. Yet, especially around the end of 2008,
large crude carriers earned surprisingly strong rates on the
spot markets.
334
Earlyin 2012,the capacity of“the tanker fleet” has
surpassed the “half-a-billionmilestone”, the relatively rapid
expansion that becomes noticeable around the year 2004
is only partly attributable to the increased demand
dynamics of the emerging Asian economies (see Fig.1.7).
• Container Shipping Markets
The clockwork-like double digit growth of the container
shipping markets was fuelled by the globalization of trade flows
as well as the containerization of the
• already existing general cargo flows (see picture on next slide).
Whilst most industry observers expect both these demand
drivers to lose momentum eventually, they still expect the
container traffic to grow super proportionally in relation to the
global GDP. Whilst historically, there have been only few
opportunities to “mis-invest” in an industry with a regularly
reappearing demand growth, the sharp economic down turn of
2008/2009 has set back the long term growth path of the
demand side by approximately3 years.
Development of world container handling 1990–
2011. Source: ISL 2012
Looking at the development of time charter markets for large crude oil tankers in
the years 2008 and 2009 leaves the reader puzzling. Based on the fundamental
dynamics (an economic downturn, colliding with an ongoing fleet expansion), a
more massive downturn in earnings would have been expected. Yet, especially
around the end of 2008, large crude carriers earned surprisingly strong rates on the
spot markets (see picture above).
Container Shipping
Markets
The clockwork-like double digit
growth of the container shipping
markets was fuelled by the
globalization of trade flows as well
as the containerization of the
already existing general cargo
flows.
339
Container Shipping
Markets
Whilst most industry observers expect both these demand
drivers to lose momentum eventually, they still expect the
container traffic to grow super proportionally in relation to
the global GDP. Whilst historically, there have been only few
opportunities to “mis-invest” in an industry with a regularly
reappearing demand growth, the sharp economic downturn
of 2008/2009 has set back the long term growth path of the
demand side by approximately 3 years.
340
Container Shipping
Markets
According to preliminary estimates, world container
handling grew by 7 % in 2011, reaching a new all-time
high of 560 M TEU. Taking into account that at least in
the industrialized economies everything that may
reasonably be transported in a container is nowadays
being carried in such steel boxes as well as that the
soaring market penetration of Chinese manufactures
around 2002–2005
341
Container Shipping
Markets
Early in 2012, the fully cellular fleet has reached a
nominal capacity of 15.6 M TEU, spread among 5,000
units of different size classes, with the largest regular
units in service having slots for as much as 15,500
standard-boxes and a handful of even bigger vessels
currently on order.5 Unlike the more matured dry and
liquid bulk fleets, the containership fleet is still evolving
in its dimensions.
342
Container Shipping
Markets
The strong trade growth fuelled the charter markets,
peaking in 2005. Until early in 2008, the markets
remained in positive territory. Although the fleet
growth was catching up with the demand side, the
ever increasing fuel costs and record high bunker
prices of the years 2007 and 2008 made
“slowsteaming” an economic viable strategy
343
Container Shipping
Markets
Thus, part of the newly built tonnage could be
absorbed in the markets without increasing the
fleet effective transport capacity. Put precisely,
the fleet productivity (supply side) was shrinking
but freight and charter markets remained
relatively stable despite over-proportionate fleet
growth.
344
Container Shipping
Markets
Within a very short time, container ships with an
aggregate capacity close to 1.6 M TEU have been
reported as inactive and have pushed the time
charter markets into a long-lasting trough. The
increase in rates in 2010 came as surprising as the
strong recovery of the demand side. Yet, it proved
to be short-lived
345
Other Specialized
Shipping Markets
Next to the major shipping
markets of dry-bulk, liquid bulk,
and container shipping, various
smaller market segments with
individual ship designs and only
limited overlap exist. The most
important ones are the markets of:
346
Other Specialized
Shipping Markets
● Liquefied gas transportation. It should be
pointed out that the individual commodities
and vessel designs, as well as the parcel sizes
and typical ship sizes, differ strongly from
each other in this sector, as do the demand
and supply mechanisms of the commodities
347
Other Specialized
Shipping Markets
The chemicals trade consists of a
wide mixture of sophisticated
cargoes, which mostly travel in
small parcels, consequently, two-
thirds of all chemical tanker vessels
do not exceed a capacity of 20,000
dwt, whilst having several individual
holds (tanks) for cargoes, ranked in
grade by their hazardous potential.
348
Other Specialized
Shipping Markets
The car/vehicle trade is mainly done with specialized
vessels (PCC pure car carrier or PCTC pure car truck
carrier), which are especially designed for this purpose. They
are constructed as more or less huge multi-storey car park
with capacities up to 8,000 vehicles. In most cases, these
vessels are sailing on relatively fixed routes and in addition
in some cases there also exists a regional feeder network
like, e.g. from the northwest European ports to the Baltic.
349
Other Specialized
Shipping Markets
The reefer trade, being somewhat of a declining
phenomenon, whilst for many years the persistent
belief was that for a large part of the refrigerated
commodities, containerization is not an option, the
reefer fleet is currently declining whilst the reefer-
container fleet is constantly growing. In several ports
the removal of installations for handling of e.g. bananas
as typical cargo for reefer vessels has already started.
350
Other Specialized
Shipping Markets
The general/project cargo trade. The general cargo trade
has experienced a bit of a renaissance despite the
unstoppable success of the container shipping markets,
which have transferred the liner connections between the
major trading partners. Whilst general cargo liner trades
have become a niche business, the general cargo spot
market has benefited strongly from the growth of project
cargo shipments. This sector of the shipping markets is
particularly hard to gauge or quantify.
351
Intra-Competition of Shipping Markets
• The modern merchant fleet is divided into clearly distinguishable vessel designs,
which cater to a particular type of shipping demand. Additionally, major shipping
markets are typically disaggregated by size and each vessel is involved in the
transportation of certain commodities. Yet, there is possible competition from the
adjacent segments within the fleet, as the tonnage is generally substitutable,
particularly in the bulk shipping markets where the spot demand for a vessel size
may occasionally outweigh the spot supply by so much that the freight rates justify
using larger vessels (with a resulting deadfreight) or two (or even more) shipments
using smaller vessels.
Container shipping
market share
• This intracompetition of vessels goes a long way in explaining
why the peaks and troughs of certain vessels sizes are mirrored
by the adjacent segments. When, for example, capesize-
tonnageis in such short supply that shippers start employing two
panamax units, this additional unusual panamax-demandis
driving the rates up for panamax bulkers as well.
Correspondingly,if the spot-rates for the large capesize-vessels
are low, they place a lid on the rate-levels, which the smaller
panamax-bulkers could potentially reach (see picture above).
• On top of the intra-competition there is also a certain amount of
Inter-Competition of Shipping Market
inter-competition from different vessel types, which may be
employed in the same trades. Products tankers, for example, may
be used for crude oil transport, but because the cleaning of the
holds after the crude oil transport is quite expensive and likely to
wear down the coating and the products fleet has higher capital and
operation costs, it is seldom done (read: when the price is right).
Similarly, the chemical tanker fleet will often accept product
cargoes to avoid dead freights or to subsidize the repositioning to a
different trading area.
(this picture) illustrates
how the time charter
rates for multi-purpose
vessels have been
affected by the all-time
highs of the container
shipping markets
(around2 005) as well as
the sky-high earning of
the dry-bulk shipping
markets
Introduction to Loans and Risk Management
• All shipping projects are based on ideas, facts, expectations, and
Considerations
financial data. The attractiveness of a project depends on its terms
and assumptions as well as on the expected results. Apromising
project might easily allure investors and financiers even in periods
where the markets are weak or funds are scarce. The accuracy of
the data provided as well as the rationality of the assumptions
determine the quality of the business plan. Therefore, it is crucial
to present all parameters validly and transparently in the plan, and
test key assumptions by selecting various scenarios and
performing a sensitivity analysis, thus highlighting the possible
limits between success and failure.
Reviewing Loan Calculations
• All loan agreements feature a schedule of payments. The terms of the loan
determine the necessary parameters,
which are:
• the amountof the loan (principal): A (commonlyin USD in shipping projects)
• the interest (yield): r (a percentagebased on Libor and/or Euribor1)
• the duration(tenor): N (commonlyin years)
• the instalments: capital and interest outlays
For simplicity, in the following
example, it is assumed that the
capital should be repaid in equal
annual installments. It is easy to
express the fixed amount of
installments mathematically, given
the A, r and N parameters.
Financial
• The NPV and IRR Criteria
Viability Criteria
Given the schedule of the loan, it is possible to proceed to more
complicated calculations related to the project. In shipping
projects, the NPV, RFR, and IRR criteria are considered more
frequently. The NPV and the IRR are directly interrelated,while
the NPV and the RFR are also conceptually intertwined.
• The required analyses for the ship finance are briefly classified into (1) grasping the project scheme,
• (2) analysis of the charterer, (3) analysis of the cash flow, (4) analysis of the project structure. The core of
• the repayment resources are the charterage and it is important to analyze the credit worthiness of the
• charterer as well as scrutinizing the spec of the ship and the overall project scheme. Then analysis is to be
• made focusing on what measures are to be taken to mitigate the fluctuating risk of the cash flow.
• Furthermore the contractual relationship is examined in view of whether the generated cash flow is surely
• sized and appropriated for the repayment of a loan or for the case of failure of the repayment whether the
• mortgagor’s right can be swiftly exercised.
Required for the ship finance clasified
Shipping finance is often classified within the Specialised Lending asset class
and is a type of object finance .
• IN terms of order of magnitude for market size, the construction of new
vessels amounts to an underlying new building market valued in three-digit
billions of dollars (about USD 100-125 billion per annum) and the annual
sale-and-purchase activity amounts to a notional of one-fifth to one-fourth
of such amount.
• Ships are mobile units operating in international waters with
global trading patterns. They are the conveyor belt worldwide
industrial and commercial activities, providing transportation
services and floating infrastructure to clients (shippers) across
the globe.
Interest
• A potential significant increaseRate Risk
in the cost of money will
burden the company’s financing expenses, thereby
negatively affecting financial results. In practice,
borrowers and lenders can only monitor the cost of
funding and, when necessary, agree on corrective
measures (i.e. hedgingpolicies).
Vessel (Asset) Values
• Many projects will rely on an essential supply of fuel such as coal, oil, gas
or wood in order to operate the facility. Both the project company and the
lenders will be concerned to ensure that the project has access to a
reliable and secure source of fuel for the entire duration of the project.
Having obtained a secure source of fuel supply, the next key issue will be
whether the project company is able to contract with an agreed supplier
on a long-term basis on a pre-agreed price structure. If the project
company is unable to achieve this, then it will be forced to purchase its
fuel requirements on the spot market, which will expose it to both fuel
availability and fuel price risks.
• Bonds Project Structures
A potential source of finance for projects is the bond market. In the
US, many projects have been funded by bonds and in the UK a number
of the Government’s Private Finance Initiative (PFI) projects were
funded using bonds (the majority with monoline insurance cover and
some where the bondholders were taking pure project risk). However,
whilst the bond market has been an important source of funds for
projects, it is likely that the vast majority of projects will be financed
through loans rather than bonds as loans are seen as more flexible.
“Build Operate Transfer” “BOT” Model
Many projects around the world are structured and financed on the BOT model. There are a great number of varieties (and accompanying acronyms) and some of the more
common are:
• DBFO: design, build, finance, operate
• DBOM: design, build, operate, maintain
• BOT: build, operate, transfer
• DBOT: design, build, operate, transfer
• FBOOT: finance, build, own, operate, transfer
• BOD: build, operate, deliver
• BOO: build, own, operate
• BOOST: build, own, operate, subsidise, transfer
• BOL: build, operate, lease
• BRT: build, rent, transfer
The basis for all projects structured on the BOT model is likely to be the
granting of a concession or licence (or similar interest) for a period of years
involving the transfer and re-transfer of all or some of the project assets.
Forward Purchase Model
• Under this structure, sometimes known as an “Advance Payment Facility”, the project
lenders will make an advance payment for the purchase of products generated by the
project which will be deliverable to the lenders following completion of the project.
The project company will utilise the proceeds of the advance payment towards
financing the construction and development of the project. On delivery of the
products following completion, the lenders will either sell the products on the market
or sell them to the project company (or a related company of the project company)
and use the proceeds to “repay” themselves. Alternatively, the project company may
sell the products as sales agent for the lenders. Some structures entitle the project
company to make a cash payment to the lenders in lieu of delivering products.
Sharing Of Risks
There are some ground rules that should be observed by the parties involved in a project when
determining which party should assume a particular risk:
• A detailed risk analysis should be undertaken at an early stage
• Risk allocation should be undertaken prior to detailed work on the project documentation
• As a general rule, a particular risk should be assumed by the party best able to manage and
control that risk, e.g. the risk of cost overruns or delay on a construction project is best
managed by the main contractor; in a power project, the power purchaser (if a state entity) is
in a better position than others to assume the risks associated with a grid failure and
consequent electricity supply problems for any reason
• Categories of Project Risks
The following is a list of some of the key project risks encountered in
different types of projects. Of course, not all of these risks will necessarily be
encountered in each project, but it is likely that most participants in projects
will need to consider one or more of these risks and decide by whom these
risks are to be assumed and how. It has already been seen in section 3 that,
once these risks have been identified, it is through the various contractual
arrangements between the parties, and insurance, that these risks are, for
the most part, apportioned and assumed.
Legal and Structural Risks
• there is some overlap with both
of these risks with some of the
risks itemised above. Legal risk is
the risk that the laws in the host
jurisdiction (and any other
relevant jurisdiction) will be
interpreted and applied in a way
consistent with the legal advice
obtained from lawyers in the
relevant jurisdiction at the outset
of the project. (Change of law is
really dealt with under political
risks.) Of particular concern will
be the laws relating to security
and, in particular, the security
taken by the project lenders over
the assets of the project.
Insurance Issues
The supply of reliable and accurate information in connection with a project is of crucial importance for the
lenders and their advisers. Likewise, access to the project and its facilities will also be important for the lenders
to be able to check regularly on progress and to monitor compliance with the terms of the documentation. The
following are examples of the type of information usually required by lenders:
Advantages
Disadvantages
- Private equity funding provides the ease of - Usually it is more difficult to obtain
partnering with peo- ple who know about the high amounts of money pri- vately, as
industry –not bankers or inves- tors/stockholders.
- The regulatory framework is less strict than in the it is publicly.
case of public placement, where the company - Large investors may monitor the
must fulfill certain criteria. company’s performance more than
- Company’s inner information is not spread at
large.
the public and achieve voting control.
- The brokerage commission and underwriting - Investors cannot easily resell their
fees necessary for the registering and selling of securities.
the stock, are considerably less.
International capital markets assist industry to raise equity capital
to finance expansion. Nevertheless shipping, being traditional and
old fashioned, has not so far exploited the dynamics provided by
the stock markets up to the extent that it is possible. Oslo, New
York, Tokyo and London hold major capital markets where shipping
issues are traded. Until recently, the listing in the Athens Stock Ex-
change of shipping companies other than the few Greek passenger-
transporting was forbidden. Now however, a new form of legal
entity has been introduced that enables such a listing, indirectly.
Shipping companies’ stocks may be traded through a special type
of holding company developed for this reason.
Sources of Finance and Capital Structure in
• Τhe inherently capital-intensive nature of the shipping industry places at
Shipping
the forefront of the shipping finance research agenda issues directly
associated with shipping financial management decisions, such as the
financing choice and optimal capital structure. The sector’s distinctive
characteristics, among which capital intensiveness, play a key role in these
decisions. Contracting a single new-building vessel typically requires
capital expenditure of more than $40mil (depending on size, type and
market conditions), aggregating to total investment of around $130 billion
per annum, while there is also an active second-hand S&P market, adding
further to the heightened demand for capital.
Public Debt and Shipping Bond Pricing
• banks may be subjected to. For example, the amount of loan to be granted to a shipping company is limited, de-
pending on debt-equity ratios such as the ratio of deposits to the total loans at the time being.
The Portfolio Proportion
that has already been allocated to shipping loans. When many ship-owners have been offered credit,
the bank may choose to save loan power to support the existing loans in case it is required in a
distress or a low market.
• Not all banks are loyal to their clients up to the same extent. Some, once
they have granted a loan, will intensively support the project both in good
and in bad times.
• Forms of risk
RISK
For an efficient risk management, a comprehensive
approach must be adopted to enable the risk manager
achieve the desired outcome. This is why risk has been
divided into 4 fractions named after the sector they affect.
They are listed below and are brought together by the
departments that asses, measure and manage the total risk
to which an enterprise is exposed to.
• Credit risk the risk that a counterparty might become unable, or less
likely, to fulfil its contractual obligations.
• Business risk the risk that change in the variables of a business plan will
destroy that plan’s viability, including quantifiable risks such as business
cycle or demand estimation risk, and unquantifiable risks such as step
changes in com- petitor behaviour or technology.
• Market risk the risk to a financial position from changes in market
factors such as interest rates, foreign currency value, and/or prices of
commodities or equity.
• Operational risk the risk of loss due to physical catastrophe, technical
failure and human error in the operations of a firm in- cluding fraud,
failure of management and process er- rors.
Some shipping financing deals are structured
on multiple assets and/or tranches:
Fleet financing is a way for ship-owners to raise a revolving credit
facility, whereby the drawing under the loan is controlled by a Value-to-
Loan covenant to be tested at drawing (borrowing base). Alternatively,
(or in combination with the former structure), a term-loan on multiple
vessels is often used to turn to the syndicated loan market in order to
raise substantial amount of financing and achieve economies of scale in
terms of financing transaction costs. In any case, the loan is split in
tranches by vessel for ease of loan management and lenders take a
pro-rata share in the loan. Sale of any collateralised vessel by the ship-
owner will generally lead to an early repayment under the loan
enabling the maintenance of the same value-to-loan level.
• In the case of Export Credit Agency (ECA) financing, a
commercial loan tranche can be combined with the ECA loan
to allow for a longer tenor / slower amortisation than a 12-
year full-pay-out OECD-conventional ECA financing. ECA
financing and commercial loans generally have pari passu
treatment and share same security package.
• Financing with tranches benefiting from a differing level of
subordination is not very common:
• o In a few case of a stressed newbuilding market, a shipyard can
offer seller-loan type financing to borrowers. Such financing are
secured on the assets, but based on a second-ranking mortgage
and subordinated bullet repayment.
• o When these types of financing are implemented, securities will
generally be differentiated (2nd ranking mortgage, 2nd ranking
assignment of earnings, 2nd ranking insurance assignment, etc.)
and an intercreditor agreement will co-ordinate both first and
second mortgagees’ rights (2nd mortgagee being generally deeply
subordinated and having no rights to arrest vessels, but rather buy-
out rights of the first mortgagee).
The risk benefits of the structures underlying
Shipping Finance deals
Shipping finance benefits from tools enabling the
tight supervision and management of the exposure
• Some practitioners, looking through the history of major market and credit losses,
have begun to wonder whether all major losses that come as a surprise to the
stakeholders in a firm are, in essence, operational risks. According to this logic, if the
institution has lost more money than it intended to put at risk then necessarily
something has gone wrong in risk reporting and corporate governance. If the most
important lessons that can be learned from the failure lie in these areas, rather than
in the measuring or interaction of a credit or market risk, then the failure might best
be treated as a failure in operational or enterprise-wide risk management.
Business Risk
• Many institutions argue that this risk is quite distinct from operational risk
in terms of identification and risk management - and that managing it
forms a core competence of senior executives. Banks are fiercely resisting
the idea that they should reserve regulatory capital against business
strategic risk in addition to the capital they might have to reserve for core
operational risks.
• Risk models potential
Risk models are of key-importance to ship-owners as well.
Fundamental in- vestment decisions are simplified up to a
substantial extent; choosing the market, the charter (SPOT or time-
charter) and the finance options (high-yield bond or bank debt)
have proxy values that simplify the decisions. Even freight traders
need to assess and monitor risks to evaluate the per- formance of
the market.
Problems with models
• If regulatory risk management fulfils its objectives there will
be no systemic failures, but the converse is not true; absence
of systemic failures does not mean that the system works.
Should senior management discover that the risk model is
faulty, it may be too late to do anything about it
Correlation risk
The following table shows the Net Debt at the end of the fourth quarter
2017 compared with the figures at end of the third quarter of the same
year. The substantial increase in current financial debt from 30
September 2017 is due to the reclassification of US$ 44.2 million
outstanding debt on the three additional vessels classified under Assets
held for sale as at the end of December 2017.
Consolidated Income Statement
The most obvious way of financing ships is with the owner’s private resources.
The advantage is that close friends and relations who understand shipping are
more likely to tolerate the volatility of its returns.
FINANCING SHIPS WITH BANK LOANS
Bank loans are the most important source of ship finance. They provide
borrowers with quick and flexible access to capital, while leaving them with
full ownership of the business. There are three main types of loans available.
Those are mortgage-backed loans, corporate loans, and loans made under
shipyard credit schemes.
Mortgage-backed Loans
A mortgage-backed loan relies on the
ship for security, allowing banks to
lend to oneship companies which
would not otherwise be creditworthy
for the large loans required to finance
merchant ships.
The borrower is a one-ship company
registered in a legally acceptable
jurisdiction such as Panama.
Trend Extrapolation
Because time series mix trends and cycles, extrapolation must be carried out with
care. A forecast based on one phase of a cycle, for example between points B1 and
B2 in Figure 17.5, is highly misleading because it suggests faster growth than the
true trend A1A2. In fact the cyclical component Ct changes from negative at B1 to
positive at B2. Just after point B2 the cycle peaks and turns down, so it would not
be correct to extrapolate this trend.
Time Series Analysis
Now we will analyse a time series in a
different way, known as ‘decomposition
analysis’. Figure 17.6 shows a 16-year series
for the freight rate for grain from the US
Gulf to Japan. Brokers watch this series
carefully for signs that rates are moving in
or out of a cycle. We have three
components to think about: the trend;
some big cycles which seem to peak in
1995, 2000 and 2004; and what looks like
short-term volatility which may turn out to
be seasonal.
The next step is to calculate the seasonal
cycle by averaging the deviation from the
trend for each calendar month, to produce
the pattern shown in Figure 17.7. By the
magic of statistical analysis the random
fluctuations of the dotted line in Figure 17.6
are transformed into the well-defined
seasonal cycle in Figure 17.7. The cycle in
Figure 17.7 can be used to ‘correct’ trend
forecasts and make allowance for seasonal
factors. The dip over the summer is quite
significant.
Regression Analysis
Regression analysis is a useful statistical technique for
modelling the relationship between variables in the
shipping market. Spreadsheets make estimating
regression equations straightforward and, with so much
data available in digital form, regression analysis has
suddenly gained a new lease of life. Developing big models
has become much easier, but regression can also be used
for simple jobs. So it is worth looking carefully at the
application of this technique. There are excellent
textbooks which discuss the methodology in detail, so here
we will only deal with the broad principles
Multiple Regression Analysis
Regression analysis can be extended by adding more explanatory variables. Continuing with
secondhand prices, we can construct a time series model to forecast the price of a five-year-old
Aframax tanker using the data shown in Figure 17.9. This time series starts in 1976, showing many
fluctuations in the price over the years which the model needs to explain.
When we compare the
estimated past values shown by
the dotted line in Figure 17.10, it
is clear that the fit is reasonably
close. Throughout the 22-year
period the equation explains the
main cycles in second-hand
prices very well. Its weakness is
that it sometimes overestimates
the second-hand price at the
peak of cycles, and
underestimates it at the trough.
These are quite significant
differences.
Probability Analysis
The basic technique involves taking a sample of
data, either a time series or a cross section, and
calculating the number of times a particular event
occurs. For example, if the basic data is a time
series of tanker freight rates, you calculate how
often during the sample period freight rates were
above or below a particular level. If VLCC freight
rates exceeded $60,000 per day 10 times in a data
series with 100 entries, then on the basis of this
sample, you can say there is a 10% chance that
freight rates will exceed $60,000 a day As an
example, suppose we take a time series of monthly
earnings for tankers and bulk carriers, and analyse
them into the histograms shown in Figure 17.11.
Ship Finance
The ship finance is one of a fund raising method backed by the cash flow generated
from an acquisition and operation of ships. It includes such a financing method relying
on the credit worthiness of the specific company as shipowner but this report is
drafted for the credit rating method in the premises of such fund raising solely relying
on the value of the ship and the cash flow generated from the operation of a ship.
General Scheme
Although the financing scheme varies in each project, the basic scheme of the core
part is as bellows,
The shipowner company raises fund by a loan and then purchases, owns and let
out a ship to the charterer. The charterer pays a charterage to the shipowner
company. The shipowner company repays the principal and interest of a loan from
the cash flow after deducting necessary expenses from the charterage. The
shipowner company is incorporated in abroad such as Panama and in many cases
it is SPC for purely limited to owning ships.
Analytical Points
The required analyses for the ship finance are briefly classified into (1) grasping the
project scheme, (2) analysis of the charterer, (3) analysis of the cash flow, (4) analysis of
the project structure. The core of the repayment resources are the charterage and it is
important to analyze the credit worthiness of the charterer as well as scrutinizing the
spec of the ship and the overall project scheme. Then analysis is to be made focusing on
what measures are to be taken to mitigate the fluctuating risk of the cash flow.
Following to the examination of the foregoing points, in the premises of no material defect to
the project structure, the credit rating will be assigned by taking account of the analyses of
the chaterer and the cash flow.
• Grasping the Project Scheme
Any possible impacts on the repayment resources are examined by analyzing the type, size
and spec of the ship to which a loan is considered to extend and also by collecting necessary
information about the shipping market situation and the related laws.
• Analysis of the Charterer
Analysis is made based on the “Rating Methodology (Corporate)” by JCR.
When the charterer is the SPC of a shipping company, in some case guaranty from the
shipping company is required for the payment of the charterage.
• Analysis of the Cash Flow
In an ordinary ship finance, during such period when a ship has been let out without any
trouble, the repayment of the loan is made by appropriating the remaining amount of the
cash flow after deduction of necessary costs. For the case when a certain amount of the loan
is still outstanding at the final maturity of the loan (balloon portion), then the loan shall be
repaid fully by refinancing the loan or disposing the relevant ship. When some repayment
trouble occurs during the loan outstanding period, the loan shall be repaid by a voluntary sale
of the ship or an exercise of the ship mortgage.
Therefore in a cash flow analysis of the ship finance, it is essential to
analyze the cash flow which is to be received either from a sale of or
let out a ship.
• Cash Flow from letting out a Ship
In an analysis of the cash flow from let out a ship, the following
points are examined such as the level of the cash-in, cash-out, the
risk of its fluctuation and the measures to mitigate such risk. In
addition to a standard case analysis, by assuming various scenarios
of stress and by utilizing a cash flow sheet, a quantitative analysis
will be made so as to assess the capability for debt services.
• As to the cash-in, the analysis of the charterage is most
important. In the analysis of the level of the charterage and risk
of its fluctuation, the following points are diligently examined
based on the charterhire contract.
• Whether the charter hire period covers the entire period of the
loan?
• Whether the level of the charterage is fixed for the entire period
of the charter hire contract and whether any adverse change of
the contract for the shipowner company is restrained?
• Whether the off-hire or the cancellation clause in the relevant
contract is deviated from a standard clause.
When the currency of the charterage differs from the currency of the loan, it is examined
whether resilience for the exchange fluctuation is secured? In the situation where the shipowner
company receives the charterage in US$ then converts to Yen and applies the proceeds to the
repayment of a loan, the shipowner company owes a currency exchange risk.
Actually there is a risk that the cash-in amount in term of Yen will be decreased when Yen is
appreciating. In this case, it is examined under which exchange rate level the shortfall of the loan
repayment will occur. And also if any counter measure to mitigate such risk is provided under the
situation of Yen appreciation, the efficacy of such counter measures is assessed.
Industry-Related Risks
Many projects around the world are structured and financed on the BOT model. There are a great number of varieties (and accompanying acronyms) and some of the more
common are:
• DBFO: design, build, finance, operate
• DBOM: design, build, operate, maintain
• BOT: build, operate, transfer
• DBOT: design, build, operate, transfer
• FBOOT: finance, build, own, operate, transfer
• BOD: build, operate, deliver
• BOO: build, own, operate
• BOOST: build, own, operate, subsidise, transfer
• BOL: build, operate, lease
• BRT: build, rent, transfer
The basis for all projects structured on the BOT model is likely to be the
granting of a concession or licence (or similar interest) for a period of years
involving the transfer and re-transfer of all or some of the project assets.
Forward Purchase Model
• Under this structure, sometimes known as an “Advance Payment Facility”, the project
lenders will make an advance payment for the purchase of products generated by the
project which will be deliverable to the lenders following completion of the project.
The project company will utilise the proceeds of the advance payment towards
financing the construction and development of the project. On delivery of the
products following completion, the lenders will either sell the products on the market
or sell them to the project company (or a related company of the project company)
and use the proceeds to “repay” themselves. Alternatively, the project company may
sell the products as sales agent for the lenders. Some structures entitle the project
company to make a cash payment to the lenders in lieu of delivering products.
Sharing Of Risks
There are some ground rules that should be observed by the parties involved in a project when
determining which party should assume a particular risk:
• A detailed risk analysis should be undertaken at an early stage
• Risk allocation should be undertaken prior to detailed work on the project documentation
• As a general rule, a particular risk should be assumed by the party best able to manage and
control that risk, e.g. the risk of cost overruns or delay on a construction project is best
managed by the main contractor; in a power project, the power purchaser (if a state entity) is
in a better position than others to assume the risks associated with a grid failure and
consequent electricity supply problems for any reason
• Categories of Project Risks
The following is a list of some of the key project risks encountered in
different types of projects. Of course, not all of these risks will necessarily be
encountered in each project, but it is likely that most participants in projects
will need to consider one or more of these risks and decide by whom these
risks are to be assumed and how. It has already been seen in section 3 that,
once these risks have been identified, it is through the various contractual
arrangements between the parties, and insurance, that these risks are, for
the most part, apportioned and assumed.
Legal and Structural Risks
• there is some overlap with both
of these risks with some of the
risks itemised above. Legal risk is
the risk that the laws in the host
jurisdiction (and any other
relevant jurisdiction) will be
interpreted and applied in a way
consistent with the legal advice
obtained from lawyers in the
relevant jurisdiction at the outset
of the project. (Change of law is
really dealt with under political
risks.) Of particular concern will
be the laws relating to security
and, in particular, the security
taken by the project lenders over
the assets of the project.
Insurance Issues
The supply of reliable and accurate information in connection with a project is of crucial importance for the
lenders and their advisers. Likewise, access to the project and its facilities will also be important for the lenders
to be able to check regularly on progress and to monitor compliance with the terms of the documentation. The
following are examples of the type of information usually required by lenders: