Some Shipping Finance Conference Themes 2013 / 2014


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

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

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?

Low Sulphur

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).

LNG

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

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LNG-Power – will it inflate residuals?


The LNG Question

Last Friday I was sent a question via LinkedIn from Anna in Russia asking about LNG-powered ships. I didn’t know the answer to her question so I started researching the use of LNG as a ship fuel. No sooner had I started writing up my findings when I opened a post on the LinkedIn Lloyds List Group to see a link from Peter Garth of Naftrade pointing to a new report on LNG-powered ships. The report has been produced by James Ashworth of TRI-ZEN International in Singapore (Tel. +65 6734 5550 James.ashworth@tri-zen.com). I admit I don’t know TRI-ZEN or James Ashworth, but the report “LNG Markets Perspectives” is excellent. I binned my own write up and will review the TRI-ZEN report instead, just adding in a bit of my left-over comments at the end. The TRI-ZEN report can be downloaded here.

Why LNG Powered Ships?

The TRI-ZEN report answers the questions I was asking myself. The driving force behind LNG-powered shipping is emission compliance, and in time honoured IMO fashion the legislation is complex, but the TRI-ZEN report breaks this down into manageable chunks. By the end of page three I had a clear idea of the background and aims of the legislation.   The key points are a maximum of 0.1% sulphur fuel burned in ECAs (including US), and 0.5% sulphur globally from 2020. Ships powered by natural gas will meet these standards.

The analysis then moves onto the cost implications. Lower sulphur fuel is more expensive, and distillate even pricier. Operating a large Containership (TEU not specified) on LNG will save $12-20m compared to distillate, and the savings on a VLCC are between $6m and $12m. The report considers the costs on providing onshore LNG bunkering facilities and offshore using LNG lightering. There is also a section on the onboard capacity required for LNG tanks. The last section is a technical analysis of how LNG bunkering would be achieved. I assume from this emphasis that this report is a smaller version of a feasibility study for the physical delivery of LNG at a bunker terminal. I bet the port finance teams in the major banks are now very active in this area. It is a good story.

To the list of bullet points at the end of the report I would like to add my own findings. There are currently only 157 LNG-powered ships in the world fleet. According to Dr Martin Stopford’s “Maritime Economics” (p25), in 1852 there were only 153 steamships listed in Lloyd’s Register. It took fifty years for steam to replace sail, but the main hindrance was technology. Technology is not the issue today. Most LNG Carriers use boil-off as a alternate fuel. Kleven in Norway are specialist in building LNG-powered offshore vessels and all the major engine builders, Wartsila, MAN Diesel and MHI have or are developing duel-fuel and single fuel LNG designs. The main issue is infrastructure, but as the TRI-ZEN report shows, it is readily addressable. 

Will LNG-Power Inflate Residuals?

From my reading of the TRI-ZEN report I think impact on residuals will apply to those vessels trading in the post-2020 era of global low sulphur fuel. This is only eight years away, which for some vessel types, might be the last time they get bank financing (see previous blog about Capesize scrap sales). Furthermore by 2020 the IMO may have introduced more ECAs, such as the Malacca Straits. This choke-point, plus the English Channel and the Panama Canal would pretty much force all tramp trading ships into the Tier III category of emission control. So equation to be run between now and 2020 is the cost of fitting scrubbers, versus the cost of conversion to LNG, versus the cost of an LNG-powered newbuilding. I found the following references to costs. In a worldbunkering.com article an indicative cost of a scrubber for a 34mW engine was given as $3.4m. The conversion of the “BIT VIKING” is believed to have cost EUR 8m (DNV blog). Although scrubbers are cheaper, with most shipping sectors in the trough phase of the cycle, owners are going to have to go to banks to borrow for such upgrades (and ballast water monitoring). It is not an easy story to sell to banks. Therefore, I think there will be a two tier market by 2020, with a premium for LNG-powered vessels. These will show stronger residuals than scrubber-fitted ships

Threat to LNG-Powered Ships

Apart from the lack of infrastructure, the main threat might be the abundance of natural gas. Now that the US is an exporter of LNG due to the “windfall” of shale gas I can see a wholesale move toward LNG powered ships for exclusive operation in the US ECAs. I notice in the Wartsila annual report there is reference to the development of LNG-powered Cruise Ships, which would be very suitable to operation in the US ECA. Cheap and plentiful supply has led UBS to estimate the lower energy prices will add 0.5% for US GDP over the next five years. A leading developer of the required infrastructure is likely to be the US trucking industry. The gas equivalent price is $1.70/US gallon compared to $3.91/US gallon for diesel. For a typical 120,000 miles/year this would be a significant saving, according to a report by IHS CERA. In another report by Michael Stoppard of IHS CERA, he postulates that by 2030 one third of the fleet may be LNG-powered. This begs the question will LNG remain a low cost fuel if a large part of the shipping fleet and US trucking fleet becomes a consumer along with the use of natural gas for energy production?

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