The Role of Easy Access to
Maritime Capital: Opportunities and
Challenges in the Maritime Business
The IMO World Maritime Day
Parallel Event
Istanbul, 4-6 November 2016
Ilias VISVIKIS, Ph.D.
Professor
Director, Executive and Professional Development
1 Sweden
World Maritime University,
AGENDA
1. Today’s Market Situation
2. Where is Capacity Flying to? – Where is Money Coming
from?
3. Developments & Challenges in Bank Maritime Financing
4. The Future and Challenges of Maritime Finance
5. Opportunities Ahead ...
2
1. Today’s Market Situation
• Longest downturn in sector’s history and slow market recovery expectations:
– From the Supply side:
• Newbuilding prices are on the low side (resulting in oversupply in past years)
• Outstanding orderbook is 10-30% of the current fleet, depending on asset class
• Renewal of fleets and scrapping led to young, modern world fleet (< 10 years old)
– From the Demand side:
• Growth in global trade has significantly slowed down
• Demand for commodities has peaked in advanced economies (Europe, North
America) and not returned to pre-crisis levels.
• Slower growth in developing countries. China’s economic growth has slowed
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1. Today’s Market Situation (cont.)
Freight Rates & Asset values plummeted in all three main shipping sectors
Shipping Charter Rates (Indexed - as at Q.1 2005)
Asset Values (US$ mm - as at Oct. 2016)
Dry
200
Tanker
Bulker
Container
150
( 84% )
24
5-Year old Capesize
150
July 2008
Container
65
Oct 2016
( 85% )
100
10
5-Yr 3,500 Teu vessel
50
% Change
(74%)
(76%)
(78%)
0
July 2008
Tanker
79
2005-Q1
2005-Q3
2006-Q1
2006-Q3
2007-Q1
2007-Q3
2008-Q1
2008-Q3
2009-Q1
2009-Q3
2010-Q1
2010-Q3
2011-Q1
2011-Q3
2012-Q1
2012-Q3
2013-Q1
2013-Q3
2014-Q1
2014-Q3
2015-Q1
2015-Q3
2016-Q1
2016-Q3
5-Year old Aframax
July 2008
Oct 2016
( 60% )
31.5
Oct 2016
Source: Eurofin Group (Clarksons data)
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1. Today’s Market Situation (cont.)
• Vessel values and freight rates are at barely operating breakeven levels for
quite some time now (“too low for too long”):
– Shipowners facing weak cash-flows renegotiate as cannot perform on their loans
– Investors faced with below-target returns likely to start sell vessels and exit
– Shipbuilders faced with defaults and cancellations on existing orders have seen
newbuilding orders to fall – focus on retrofitting and specialist work / alliances
• Consolidation and mergers (size, scale, route coverage and bigger ships).
• Defaults and bankruptcies – Less competition may exist in the next decade.
• Maritime financing is very expensive and scarce as:
– There is lack of complete availability of financing for most shipowners
– Lack of long-term and reliable employment for vessels makes financing even harder
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2. Where is Capacity Flying to?
Traditional Shipping Sectors:
Not a Priority (low freight rates-overcapacity)
Dry bulk:
Tankers:
Crude tankers:
Containerships:
Offshore:
Energy:
No interest
Older that 8 years are too old to lend
Too risky
Need for secured long-term charter
No appetite
Some interest
Clients:
Financially solid / Transparent corporates / Credit quality
Assets:
Specialized / High Quality specification vessels
Employment:
Long-term with high credit rating charterers
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3. Developments in Bank Maritime Financing
• Shipping banks are very selective on their (core) clients and conservative:
– Some shipping banks were nationalised and other faced over-exposure to unique
conditions in home markets
– Bank finance has became scarcer and more expensive
– Confidence must be restored among banks in order for lending to start again
– Restructuring of deals to meet new market conditions, with stricter covenants:
• Loan pricing spreads have doubled (2% - 5%)
• Arrangement fees have increased
• Finance amounts have fallen (to around 50%-65% LTV)
• Amortization tenors have fallen (to around 5 years)
• Covenants tightened
• Credit standards tightened
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3. Developments in Bank Maritime Financing
• Many traditional shipping banks have already left shipping, and few more
have been divesting shipping loans:
– Distressed vessel loan portfolios are sold to private equity and hedge funds
– Traditional banking relationships have been damaged
• Banks face increasing capital requirements from expanded Basel III rules and
compliance issues, resulting to an increase in the cost of bank finance.
• Banks still active focus serving existing clientele. New clients have to be
“strategic”, with large fleet of vessels, sound business prospects,
recognizable names, strong business models, and risk management focus.
• Over-concentration on one account:
– Thus, “big gets bigger”, as the market is structurally changing:
– Banks are looking for a “certain critical mass” in size (over 10-15 vessels)
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3. Developments in Bank Maritime Financing
• According to Petrofin Global Bank Research, between 2014 and 2015, the
total number of vessels in the world fleet rose by 1.76% from 89,676 to
91,256 vessels (Clarkson’s World Fleet Register).
• However, this growth in fleet investment was achieved without an increase
in bank ship finance (as per the previous figure).
• Therefore, there was more reliance on non-bank finance sources and owners
equity.
• The next figure presents a consistent decline by Western banks over the
years and an increase by Far Eastern and Australasian banks:
– Need to support their own local shipping
– Solution to a number of owners with local newbuilding orders
– Despite the above, some Western banks found the correct formula to
grow during this difficult period
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3. Developments in Bank Maritime Financing
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3. Developments in Bank Maritime Financing
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4. The Future of Maritime Finance
• New business model:
– Traditionally, a shipowner with a decent record and credit would knock on
a bank’s door, put down 30% equity and borrow 70% as a mortgage to
buy a ship, mostly on a hand-shake and name-lending (“My Word, My
Bond”)
– This now is not working and likely will not work for some time
– Banks do not have liquidity to lend, and any money they have, they give it
to caliber names at LIBOR+100 bps
– Also, new regulations and Basel III make loans too expensive for the banks
– Thus, the traditional ship finance model is changing ….
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4. The Future of Maritime Finance (cont.)
• When economic market conditions improve ... ship finance will improve.
• Shipping companies will need to evolve same as the shipping industry and
evolves, and react quickly to change and market disruptions.
• Transparent corporate structures and better corporate governance are
factors for successful ship financing.
• Development of new financing sources and diversification of existing capital
structures.
• New banks may also join shipping, aiming for the small to medium owners.
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5. Opportunities Ahead …
• Little appetite from financiers to invest in shipping. Lack of cheap financing
functions as a cap on tonnage supply:
– “Return to profitability in 2019 if shipowners deliver zero supply side growth, year
on year … assuming 2% per annum trade growth” (BICMO dry bulk report, 6th Oct
2016)
• Sustained orderbook decline and scrapping could lead to long-term
rebalancing of oversupply post 2018/2019 period.
• Multi-year low asset prices for new vessels, allowing for favorable entry point:
– Buyers diversifying portfolios, with risk appetite
• Market consolidation could give growth for well capitalized shipowners and
new entrants, with risk management, forecasting and ROI focus
• Shipping is a segmented market – search for opportunities in niche markets
2-
Where do we go from here?
OPPORTUNITYISNOWHERE
One may read this as:
Opportunity is NOWHERE
or
NOW HERE
THANK YOU
Alternative Sources of Maritime Finance
• Export Credit Agencies (ECA) – e.g. Korea, China, Japan, Norway, Germany
–
–
–
–
–
Availability, long-term horizons, high loan amounts (70-80%)
Countercyclical role with activity in difficult times
Becoming more careful as to counterparty risk – need financially solid clients
For LNG, tankers, drilling rigs, floating production, among others
Annual volumes of about US$ 15bn
• Chinese Leasing firms
– Looking for: assets with long-term charters, stable cash-flows,
creditworthy charterers
– Often a Chinese “element” is needed (i.e. vessel build, charterer)
– Deals more than US$200m (LNG, chemical tankers, large containers)
– Well supported by local banks (providing liquidity, expertise)
– Since 2013, newbuilding orders of around 12.2m GT and secondhand
orders of around 3.3m GT under operating lease models
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