Finance is the lifeblood of any capital-intensive industry, especially one as diverse and fast-moving as shipping. In recent years, many maritime stakeholders across main markets such as second-hand sale and purchase, new building, or recycling, have faced repeated hurdles in accessing finance under beneficial terms, reports Seatrade Maritime.
1. Identity and Track Record of the Borrower
The most crucial factor in securing funds is the identity of the shipping company, its track record, and the market segment in which it operates. Niche players often leverage agility and superior knowledge to their advantage, despite the commodification of finance contracts that might suggest little variation in available terms.
2. Industry Segment Cycle
Where an industry segment is in its current cycle profoundly impacts the availability, structure, and terms of finance. For instance, high demand for cruises or a shortage of container vessels can drive up the need for additional finance.
3. External Industry Competition
Shipping is a global industry, and owners can access various finance markets outside their domestic sphere. However, if financiers find better returns in another industry, such as property, it leaves less availability for shipping. A corporate-based strategy might help unlock finance in such scenarios.
4. Value of the Asset
The returns a financier expects significantly influence availability and pricing. Historical performance is often more critical than future predictions due to its tangible nature. Loan-to-value rules, though not always effective in downturns, still provide a guideline and can boost transaction pricing.
5. Size of the Borrower and Operation
The scale of a borrower’s operation and their ability to upscale further drive the terms of finance. Consolidation in some market segments can change the type of finance used and influence the ease of availability across the sector.
6. Type of Finance Requested
Various financial instruments, such as mortgage-backed vanilla loans, syndicated semi-corporate loans, finance leases, or operational leases, offer a diverse market. The appropriateness of these instruments varies depending on the shipping company’s needs. For instance, sale-leaseback financing might not suit participants requiring flexibility but could be ideal for those seeking long-term, high loan-to-value ratios and attractive pricing.
7. Risk Assessment
The question of asset safety is crucial for both owners and lenders. Blue-chip insurance for hull protection and indemnity is a key consideration in any finance transaction. Proof of appropriate insurance is mandatory to make a transaction financeable.
8. Reputational Risk
Company and sector reputation play a significant role in lending decisions. The shipping industry, particularly the offshore segment, is often viewed as an environmental polluter. Financiers avoid investing in projects that could lead to reputational damage, influenced by environmental concerns, anti-money laundering, and sanctions provisions.
9. Geopolitical Factors
Geopolitics significantly influence financial arrangements. Sanctions, the fear of war, and protectionist policies affect the viability of transactions. Protectionism, in particular, opposes the global nature of the shipping industry, which relies on the free transportation of goods and services.
10. Market Volatility
The volatility of the shipping market, characterized by fluctuating freight rates, fuel prices, and demand for shipping services, plays a critical role in finance availability. Financial institutions are cautious in volatile markets, preferring stable returns over high-risk investments. This volatility can make securing finance more challenging, especially during downturns or periods of uncertainty. Financial strategies need to account for potential market shifts, ensuring resilience against unforeseen economic changes.
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Source: Seatrade Maritime
