Shipping Money is Gone, But Banks Are Still Enchanted

Shipping finance markets for the rest of 2023 look positive, with a depth of lenders, banks, leasing houses and alternative credit funds all seeking to grow their portfolios and offer the best terms to win projects. Competition between lenders in the improving Tanker markets is especially fierce.  While financing volumes available for each individual vessel have plateaued as asset values rose over the past quarter, margins have been under severe downward pressure as banks have started to explore financing cases further from their previous comfort zones.

Meanwhile, opportunities remain in the less liquid Dry Bulk and Container markets.

Erlend Sommerfelt Hauge, Managing Partner at oceanis, says:

“Base interest rates, while currently high, are projected to fall from the second half of 2023. While the ‘free money’ era has ended for now, financing costs can be expected to decrease in the near to medium term as central banks react to the decreasing inflation we are seeing today as well as being spooked by the financial turbulence triggered by higher base rates.”

He adds:

The first quarter of the year has seen huge volatility in Tanker markets. While rates dropped around the 5 February cut-off date for EU shipments of Oil products, the recent rebound has proven that the market remains resilient.

Asset values continue to race upwards, and have now detached somewhat from current earnings, leading financiers to reduce their maximum LTV (loan-to-value) offerings both for vessels with and without long-term employment.

While in January it was possible to arrange 70% Loan-To-Cost for 16-year-old spot-trading MR (Medium Range) tankers on a non-recourse basis, with similar terms available for vessels from Handysizes up to Aframaxes, the dollar value of the financing available seems to have plateaued at this level.

Now, with the same dollar amount being equivalent to circa 65% leverage, this is the upper limit on leverage without employment for older vessels.

With employment, however, the story starts to change. Increasingly bullish medium- and long-term earnings projections are resulting in highly attractive long-term charters being available even to older vessels. The increase in firm cashflows available can give banks the ability to provide loans at up to 120% of historic average valuations and even more in some cases.

From a financing perspective there is a feeling that this market is now similar to the container market of 2021, where the majority of the financial analysis is related to the charter rate, duration and counterparty quality, with loans amortising to $0 or a low scrap value for older vessels under such fixed employment.

In the same way, oceanis is now seeing incredibly attractive pricing for Tanker vessels from commercial banks, who only one year ago would never have been able to offer terms at more than 70% of historic average valuations.

After more than a year of steady decline, Dry Bulk markets seem to have finally bottomed out over the past two months.

Earnings have rebounded across the Dry Bulk fleet from Handys to Capes; though these increases have been outpaced by increases in asset values, with vessels being sold at prices which are hard to justify by period rates let alone spot rates.

While there remains a strong belief from shipowners that the long-term rates currently available are well below the spot rates which will be realised in years to come, financiers are constrained by currently realisable earnings and in several cases this has resulted in reduced financing amounts.

oceanis sees this as being particularly important for alternative debt funds, where the ability of these more expensive financiers, in comparison to conventional banks, to provide additional capital is limited by the need to maintain positive cashflows. Some debt funds can structure repayments around this issue, offering an increased financing volume against the security of an additional pool of pledged cash, but this is far from common.

While high leverage is difficult in today’s markets, low margins for more conservative financings are increasingly attainable with many banks and funds becoming highly competitive. In particular, shipowners with established fleets are able to access highly competitive terms for smaller vessels from specialist regional banks.

With charter-free market values returned to pre-pandemic levels, and earnings higher than during those pre-pandemic times, the financial world is bravely resuming loan provision to vessels with less fixed employment and those on charter to lower tier counterparties.

German borrowers in particular are able to take advantage of highly attractive terms for acquired vessels with outstanding charters, with financing at 65% LTV yielding margins in the mid-3% region when employed long term to a Tier II charterer.

There remain serious questions over the long-term earnings of older vessels in the spot market, which is reducing lender willingness to provide funds for acquisitions without firm employment, resulting in lower LTVs becoming more frequent.

Fewer LTV covenant breaches and charter renegotiations from mid-tier charterers, suggests the majority of existing financings seem to be secure for the time being. However, further degradation in container markets cannot be ruled out.