The asset financing that caused such huge losses for many of the European banks is not long for this world. Instead we should expect a more corporate finance approach to the business of shipping and the value it adds it in the global supply chain.13 Dec 2018
THE forward-looking view of shipping finance depends largely on what time scale you are looking at.
The number of deals overall has reduced this year, but the size and complexity of the transactions that have been completed continue to grow while financiers and lawyers grapple with the immediate trends of M&A work, restructuring, insolvencies, Chapter 11s and the occasional portfolio acquisition by private equity and hedge funds.
Looking at the longer-term trends, the rise of leasing companies, notably in China will continue alongside investment by equity funds which will in turn encourage the now established move towards consolidation as companies seek scale to access capital markets and shipping looks to compete with other industries.
Taken to its natural conclusion that will ultimate see shipping finance by banks merged into the wider finance supply chain.
The near-term view
Generally speaking there has been a dearth of shipping finance activity in the western markets this year. That’s not surprising - the banks are lending less and sources of capital are getting tighter.
The improved climate in shipping has certainly helped banks justify their exposure to shipping, but by and large it would be fair to say that the international banking environment remains “challenging”, especially for western banks.
While some newer banks have increased their exposure to shipping, their overall contribution to the ship finance picture remains relatively modest. Likewise, ABN Amro, Credit Agricole and, interestingly, Macquarie have been active this year, but the volumes have been small.
Ask those in the thick of it how the past year has fared, and a telling global patchwork of regional trends emerges.
European teams report a mix of consolidation work, some new financings, heavily structured financings, refinancings and complicated restructurings. In Hamburg portfolio sale and acquisitions have kept the banks and lawyers busy.
In Asia the focus is more on sale and leaseback and export credit work driven by Chinese financial institutions and, in the case of Tokyo, Japanese banks and trading houses and the usual amount of export credit business.
Some new entrants in the Gulf and a very small number of Islamic financings is the limit of what we have heard about this year from that region, although we have heard a few murmurings from the offshore sector and some nascent optimism that work might start emerging.
Over in New York the M&A work and Chapter 11s stand out as the most obvious notable activity, because despite a couple of false starts, the US capital markets do not seem to be quite ready for more shipping stocks just yet.
A three-year drought for shipping IPOs in New York looks set to continue after both the GoodBulk and Navios Maritime Containers deals fizzled out earlier this year.
Despite the well-timed acquisitions of both companies and the articulate demonstrations of lucrative potential gains, investors were not swayed in sufficient numbers.
To get investors really interested it seems they will need to see money being made for more than six months.
The ever-present optimism in New York’s finance circles means that there is a belief that shipping’s current troubles in accessing the equity capital markets are a temporary condition, which will be reversed when cash flows return. No doubt this will be proved right eventually, but longer term there are bigger trends to consider.
The long-term view
Extend your shipping finance horizon beyond the quick-fire asset play of New York’s equity markets and the picture changes.
According to Citi’s global head of shipping Michael Parker, shipping finance as we know it will disappear over time.
The asset financing that caused such huge losses for many of the European banks is not long for this world. Instead we should expect a more corporate finance approach to the business of shipping and the value it adds it in the global supply chain.
The maritime legal and secured aspects of how a vessel is financed will not change but that will become less relevant as companies consolidate to create larger enterprises that can access capital markets for long term debt on an unsecured basis.
That’s not just an issue for the banks – it calls into question traditional business models and the value that shipowners are bringing to the deal.
As we move into trade processes being managed digitally, so the role of the shipowner and operator in doing more than owning the steel becomes key.
While some have argued that European financiers now have little understanding of how to lend to family-run shipping companies and fail to consider owners’ track records when making lending decisions, the days of traditional relationship baking beyond a small-scale elite have been over for some time now.
That’s bad news for smaller operators, but overall there are upsides to this more conservative approach that had little to do with shipping and more to do with the fallout from the last financial crisis.
Banks are facing their own regulation. The European Central Bank stress tests on European banks confirmed the European regulator’s continued dislike of banks holding large shipping portfolios which will maybe help prevent the usual support for ordering new vessels speculatively.
Bank exposure has continued to decline. Greece-based consultancy Petrofin Bank Research estimated in September that another $10bn was knocked off the portfolios of the industry’s top 40 banks last year.
But after a decrease of $42.5bn in 2016, the decline in lending may be bottoming out.
Petrofin’s global ship finance index has lost 25% of its value since 2008.
But even that does not capture the hole that has appeared in financing the industry. The global fleet has increased in size by 28% during the same period.
According to Petrofin, the gap has primarily been filled by leasing firms, mainly in China, Japan and Korea, with their total financing for shipping last year reaching $47bn.
It’s also worth noting that the Norwegian bond market also remains active in helping European owners needing to refinance and there is some hope that other capital markets in Europe and Asia may see Norway as a model to follow and compete with the US and Nordic bond markets.
Overall, if we have a prediction to make when it comes to ship finance it is this: subdued financing and improved freight rates will help the essential deleveraging of shipping which will then make it more attractive to debt and equity investors.
Shipping finance will adapt and thrive in the new digital economy but as the non-performing loans of German banks get resolved and the industry no longer represents a threat to the stability of the European Banking sector, capital will be priced appropriately to the quality of the risk and that will further accelerate the consolidation and improved governance public markets want to see and the remaining bank lenders now expect.