Ship Finance Under Siege
November 7, 2012 Leave a comment
Ship Finance Under Siege
Part Three of the Mare Forum Amsterdam Ship Finance.
Ship Finance Under Siege was chaired by George D. Gourdomichalis and it was the turn of bankers to explain what they were doing at this stage of the Crisis. Paul Aerts of Rabobank wanted to get a message to owners. Don’t wait and see what happens, come and talk to your banker early and frequently. Bankers are aware of the problems, and are concerned with the direction of operating costs (Richard Greiner of the shipping accountants Moore Stephens, the publisher of Opcosts was also present at Mare Forum), and falling levels of maintenance. Rabobank is aware of these problems and is focusing on quality owners (aka Snaterse’s Prudent Owner) with vessels from top yards. These include the big Japanese and South Korean yards, and the state-owned Chinese yards.
Remco Steger, Director of Shipping at ING laid out the factors that the bank examined;
- Quality of management
- Modern assets
- Market share
- Access to cargo
Funding ship finance is now expensive compared to other activities in the bank and pricing and commitment fees will continue to rise. There is now a two-tier market, and those owners who are “out-of-bank” will find funding very difficult.
(There was also a discussion about the Dutch shipping finance cluster and the Dutch CV scheme, but I think I will cover this in a separate blog).
George Xiradakis is a favourite on the conference circuit. As a former seafarer turned banker he has the authority and licence to say what some are only thinking. Xiradakis is working with Chinese banks and showed that while equity and bond finance has been falling in the US and Europe, it is on the rise in Asia. However, it is not large enough to take over all the funding required. He had an interesting slide showing the five-year CDS spreads for the currently active Norwegian and Asia Pacific banks, and the 50 bps spread with the barely active in shipping North European banks. Is shipping under siege? In a series of slides he showed the pre-2008 active banks has shrunk from 38, to 28 to around 20 at the moment. In summary, in his opinion, the growth in shipping finance will come from Pacific Asia while European banks will concentrate on restructuring and supporting a few key clients. The banks make fees on the restructuring but after four years the traditional shipping banks are fatigue, and it is time to ask the question. Can shipping finance be excluded from the forthcoming Basel III process? Shipping is a necessary function, but the extra burden of Basel III will push more banks out of the market.
John Hartigan is a Senior Investment Manager with Northern Fund Management. He was at Mare Form to represent the alternative investment category. The rationale for investing in shipping assets was based on timing the purchase. Using the Clarksea Index as an indicator Northern Fund Management showed that even with a 50% miss rate it was possible to generate the high level of returns required (25-30% IRR). The system employed looked similar to Price / Equity paper by Nikos Nomikos et al I reported on in an earlier blog.
In the debate that followed some of the bankers were remarkably frank. Marco Albers of Dekabank stated that 45% of the portfolio was with KG businesses. Rory Hussey of ING Shipping in London said that their capital allocation was surprisingly good (cue rush by owners to get Rory Hussey’s business card), and that the more assets they took on the higher the level of income. Others pointed out that new business had to be ECA (export credit agency) backed, so in a way it is the taxpayer of the bank’s home country that is supporting the bank. Gust Biesbroeck of ABN AMRO was more sanguine. “You cannot stop people ordering ships. A large number of ships in the water may be wrong sort of ship. But you cannot tell people what to do.” This attitude can explained on several levels. First, a banker cannot be seen to be a “shadow” director, orchestrating a company. This would raise liability issues for the bank. Second, owners tend (or did pre-Crisis) to order the ships first, then look around for the financing.
Our leonine chairman, Gourdomichalis, had the last word. He reminded us we were all wrong. Once the market turns and the boom days are here again, we will have forgotten all the discussions that have taken place and we will return to our old ways. In shipping, it is ever thus, and so the cycle continues.