September 30, 2013 Leave a comment
Some Shipping Finance Conference Themes 2013 / 2014
The 6th International Shipping Marine ServicesCapital Link Forum event in London kicks off the shipping finance conference season. The Capital Link Forum event itself on Thursday 25 September was a slick affair, carefully managed by Nicolas Bornozis and his team. As usual, the event was held at the London Stock Exchange and takes the formula of a panel and a moderator for each section. Below are a selection of themes from the Capital Link Forum that are likely to come up throughout the coming 2013 / 2014 shipping finance conference season.
‘Amend and Pretend’
Amend and Pretend’ is a funky phrase mentioned by Elinor Dautlich (Holman Fenwick Willan LLP) which sums up neatly what the banks have been doing since 2008. The overall view is that amending and extending loan agreements is the default setting for many banks that did not make large enough provisions at the start of the Financial Crisis. Summarising comments from the panel at the Capital Link Forum, today, there are less banks in shipping finance, and the volume of lending is down 30% or more on 2008. On the sale of portfolios, which is the area of expertise of Mr Bart Veldhuizen, most of the available portfolios have been examined. The issue holding up further sales is documentation, in particular transfer restrictions. But restructuring loans will not last for ever. The question is; where is shipping finance in the debt cycle? Is is still ‘Amend and Pretend’ or foreclosures or is there a recovery taking place?
Regulation, Regulation, Regulation
Christopher Conway of Citibank noted that a large amount of management time is now spent of understanding and complying with regulations. This will be the main focus of banks going forward. This is something that shipowners are going to have to get their heads around in order to be able to present projects that meet the regulations. Is the newbuilding order a genuine business proposition, or it is a way of parking money away from the government? This is a great opportunity for conference organisers to find a regulator or a lawyer who can break the regulations and the consequences down into easily understood chunks.
Due diligence and compliance are the growth areas in shipping finance. The deals done in 2007 and 2008 would struggle to meet the new internal and external regulations. As Christopher Conway of Citibank put it at the Capital Link Forum “…if the client is not willing discuss (due diligence issues) before the money goes out of the door, what will it be like when there is a problem.” It is vital to your business you know who your ultimate counterparty is, and what assets (if any) can be attached when things go wrong. Of course, Infospectrum Ltd can help here.
Private Equity (PE) has spent two to three years understanding shipping, and is now ready to make a move. Are the expectations of returns too high? Is the shipping cycle time horizon is too long for PE?
Maybe shipping is not distressed enough yet. As Martin Stopford pointed out, we have not seen anything like the low prices (inflation adjusted or not) that shipping encountered in the 1980 recession. Another problem for PE is the business model. PE works best when adding value to the management – hacking out the deadwood, asset stripping and re-packaging a company. Doing all the painful things the original team failed to do. It is very difficult to add any management value in shipping where management teams have traditional been small and there is little excess.
Family and Friends
Who are the banks willing to finance? When asked who are the banks financing, the reply is now quite familiar. The lucky few are the core clients who kept the bank informed during the crisis, behaved transparently and in good faith. Newbuilding finance is restricted to projects with long term charters – no more deals centred around a two or three year timecharter then the vessel taking a chance on the spot market. Cash-flow and a conservative debt repayment profile are the key features. The number of banks remaining in shipping plus the new entrants is only between eight and twelve active participants.
Competition among Banks.
Having said there are fewer banks and fewer achievable projects, why is competition increasing among the banks? In the last six months pricing has fallen, with margins shrinking, leverage increasing, and tenors are getting longer. One reason is there are fewer clients who fit the required regulatory profile, and projects with realistic cash-flow and debt repayment profiles.
ECO-ships or Ego-ships.
ECO-ships have to make an appearance in any conference. The banking view was that the ECO label helps, and is even required on a newbuilding. Ship design is evolutionary, so a 2012-built ship is going to be more efficient than a 2000-built ship, but that doesn’t make it an ECO-ship. So what is a ECO-ship today. Is it just a modern ship, or are there distinct features that define an ECO-ship? What is the legal position if the ECO-ship fails to meet the criteria once it’s in the water?
What ships would you finance today?
This is always a good question to throw at a panel or an audience vote. At the Capital Link Forum the Capesize market was having a rally, with earnings reaching $40,000/day. Some participants saw this as a signal to order Capes. Are they mad or visionary?
Where would you build?
The LNG panel thought there were only eight yards capable of building a US$ 200m LNG carrier. How many “good” yards are there when it comes to ordering bulk ships? Is a multi-tier second-hand market developing?
According to Dr Martin Stopford, of the current fleet of 86,000 vessels, only ten are fitted with scrubbers. Will the industry be ready for 2015?
Oslo OTC Market
A hot theme at the moment is what is happening in Oslo, where US$3-400m can be raised in a few weeks. The key is short documentation (about ten pages), a pool of mainly US-based investors, but also locals looking for higher returns. It has mainly been an offshore play, but shipping is having a firm run at the Oslo OTC market, too. But what is actually going on here? Is this development an alternative for investing in shipping with a long horizon, or is it short term money looking for a fast return? What happens if (when) it goes wrong? Is this another one-night stand for shipping? We need a dispassionate explanation of the ABCs of the Oslo OTC market and what the dangers are (if any).
Is LNG being oversold or is it the lack of viable of suitable projects in mainstream shipping that is making this sector attractive? At the Capital Link Forum the panel produced some interesting numbers. Apparently every increase in production has been absorbed by the fleet. A 100m tonne/year increase in LNG production needs approximately two ships for the Middle East to Japan route. Other issues are how will new production affect tonne-mile demand and what is the size of the spot orderbook versus the timecharter fleet. What is the size of the independent fleet versus the cargo owners fleets?
Copyright: Craig Jallal, 2013