Changing face of shipping finance

The current finance model is not sustainable, a panel of experts asserted at the 8th Annual London Ship Finance Forum. Indeed, if the market were to collapse, even the biggest shipping banks which have lent to good owners in decent conditions would be in trouble, they said.

Subsequently, the panel agreed that the finance model banks have followed for the past 20 years will need to change, and soon, to something that will consist of more risk sharing, less leverage and more upside for the banks.

Andrew Hampson, managing director of asset-backed investment at Tufton Oceanic, said: “I left Bank of America 20 years ago after asking the chairman why B of A financed shipping companies at 1% over Libor, because the economics just do not work.”

While Mr Hampson does not necessarily think that the current model is bust, he does think that one has to accept that, even for good companies, the returns and the margins need to be considerably higher than they are currently.

“What tends to happen every time this comes around in cycles is that the banks get more selective and just go for the good companies and so the margins come back down again which, when you do the maths on it, doesn’t make a return for your shareholders,” he said.

“I think the model does need to change. We need to accept that if leverage is to be used, it needs to be used in a more effective way and it has to be costly.”

Aristides Pittas, chairman of Euroseas, meanwhile, depicted the changing landscape of finance: “Until 2010, banks hadn’t really taken losses. Without having taken losses they thought that shipping was a very good source of income. Now they have taken losses, they realise how risky their investment has been and things are beginning to change.

“The traditional Western world banks are retreating, and the Far Eastern and Chinese banks and leasing houses are coming into the picture. So, while debt financing will continue to be there, it may just be from other sources and there will certainly be competition for the Western banks.”

Falling into place

In terms of where capital markets are today, Todd Wilson, senior vice president of maritime investment banking at Jefferies, said that there are still companies able to raise capital. Mr Wilson added that the markets are there if the owners are willing to sell at the prices today. 

“If you invested in dry bulk in the last two years, you’ve made a lot of money. If you invested in tankers in the last two years, you’ve lost a lot of money, from a public shareprice perspective. I think investors are there but there’s got to be the right return for them.

“So, dry bulk is almost like an unlimited option that they’re buying again, I think because the banks are willing to work with the customers. They’re saying this thing is ‘going to last forever, eventually there’s going to be a recovery and my equity or option value will skyrocket’.”

From an IPO perspective, Mr Wilson said that while the overall markets are very good both on debt, convert and equity markets, they’re not great in shipping: “There are pockets of capital being raised but, from an IPO perspective, there’s a lot of things that need to fall into place. One, investors that have invested have to be making money; there has to be some positive momentum in the already public shares. And two, there has to be some forward prospects and a little more belief behind the demand story.”

For things to truly fall into place, he concluded, there needs to be some momentum in the markets driven by asset values and freight rates as well as a continued reduced orderbook and favourable demand growth.

Added to this, he said: “If President Trump does stimulate the US economy and there’s 3.5% growth in the US, that can trump any protectionist measures he takes or make up for any slack in demand in any other parts of the world.”

Today’s capital market

Euroseas’ Mr Pittas, who has placed capital in New York, added that the ‘Big Apple’ would be a source of capital for “quite some time”. IPOs are going to be difficult, he said, but foreign capital, private placements and similar finance schemes will still be seen.

With regard to private equity, Mr Pittas said: “Luckily, what saw three or four years ago has subsided because these people have taken big losses so there’s not as much private equity as there was.”

Indeed, private equity is very selective now, confirmed Mr Wilson: “There is private equity out there but they have a very narrow focus on a specific sector on their terms, meaning they’re not going to say ‘here’s a cheque, go out and order some ships, do what you want in the bulk space and we’re going to ride this cycle up’.

“Where they are active is if there’s a specific niche or sector where they can formulate an industrial view, meaning they can grasp the demand aspects of it as well as the supply aspects of it and create a story that isn’t just based on hope.”