The forward orderbook is diminishing and the major tanker-building shipyards have newbuilding slots open in 2019/2020. As a consequence, newbuildings are becoming more attractive.
Finding funding is the issue. Under new banking rules, the European banks must maintain a much higher level of capital, and shipping performs poorly in the internal race for capital. In addition, the internal structure of shipping departments 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.
Chinese leasing companies such as ICBC Leasing have stepped into the void left by the departing shipping banks. Naturally, they are financing vessels under construction in Chinese shipyards, but not exclusively, and the ship leasing side of the business is growing rapidly. 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 what about small to medium enterprises (US$20-200M capitalisation), which comprise the bulk of shipping companies? Who will finance them? 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.
Tapping the US market can be one source. US capital markets are at an all-time high, but not the shipping sector, 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 newbuilding strategy in the last 20 years has not made the expected returns, and such projects cannot be justified to investors.
Investors are looking for exposure to earnings, which requires operators with a good track record. It is expensive ship days that kill these sorts of projects, noted one participant. Finally, the exit strategy must also be clearly defined at the start. Exit strategies include liquidation through the sale of the asset, sale and leaseback of the asset, or even an IPO, although that is seen as an unlikely event in the current climate.