- New building slots will be available form 2019-2020 in major shipyards.
- Funding is difficult in Europe as new banking rules are in force.
- China is financing vessels under construction in their shipyards and leasing them out to others.
- An alternative project is gearing up for five- to 10-year-old secondhand purchase.
Analysts report a slide in the forward order book as new slots open up in the major tanker-building shipyards in 2019-2020. Although newly built ships are drawing attention, yet funding their construction is becoming an issue.
Problem With The New Banking Rules
Under new banking rules, the European banks must maintain a much higher level of capital while shipping performs poorly in the internal race for capital. In addition, the internal structure of shipping department is more expensive.
One banker stated that half his staff members were engaged in meeting KYC, FACA, tax, ethics and compliance regulations. Banks favour corporate finance and ongoing fees and margins from the cross-selling of services and look to scale up through organising consolidation and mergers of clients. This favours the larger US$250M-plus capitalised client base, at the expense of the smaller clients. Banks still provide the majority of finance in shipping, but it is much harder to find.
China Plunges Into The Market
Chinese companies have filled in the gap by financing vessels under construction in Chinese shipyards and then leasing them out to others. The Chinese leasing companies face rapid growth. ICBC Leasing head of shipping Yang Changkun revealed that the portfolio is now US$7.1Bn, which is approximately the same size as that of Fortis Bank’s shipping book in 2008. Mr Yang’s pitch was that ICBC Leasing is looking for more co-leasing partners – a partner runs the ship while ICBC Leasing enjoys the stability of earnings.
But the problem remains with small and medium enterprises (US$20-200M capitalisation), which dominates the shipping industry. Alternative finance arrangers have stepped in to fill the gap left by the effective closure of the KS market and the retreat of the banks. The alternative finance providers combine layers of finance from different sources.
Alternative Funding
The alternative financers help by arranging funds from different sources. Presently they are thinking of tapping sources from the US market as. US capital markets are at an all-time high. However, their shipping sector is fairing very badly, which some investors see as an indication that there is latent value in investing in shipping funds. Another source of funds for the alternative finance provider are pension funds looking to invest a tiny proportion of their funds in high-risk alternative investments, for which shipping fits the profile.
Other sources include high-net-worth individuals in traditional maritime nations such as Norway and Denmark who understand the shipping cycle and wish to invest indirectly via funds created by the alternative finance provider. The alternative finance providers maintain a wide-ranging network of investors to assemble the required level of funding.
This is a complex process, and not cheap. Alternative finance is project-led, and mainly geared toward the five- to 10-year-old secondhand purchase. Newbuildings can be entertained, but as one alternative finance provider stated, anyone who has pursued a new building strategy in the last 20 years has not made the expected returns, and such projects cannot be justified to investors.
Thus, the investors are looking for exposure to earnings, which needs operators with a good track record. The exit strategy which including liquidation through the sale of the asset, sale and leaseback of the asset, or even an IPO, needs to thoroughly taken into account before plunging into the sea.
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Source: Tanker Shipping
