Bank Activity in the Ship Finance Market in the 1990′s

by Ted Petropoulos, Managing Director, Petrofin S.A., Greece

In covering the above topic, I will offer, first, a brief review of the Ship Finance Market in the 1970s and 1980s; second, a detailed review of bank activity over the last five years to where we are today; and third, some predictions for the rest of the decade and beyond.

As a general observation, bank activity follows shipping cycles and the performance of the shipping industry. As the shipping industry improves and its outlook appears secure, the interest of banks in shipping rises and vice versa. This is natural and to be expected. However, it takes time for banks to realise and respond to shipping industry cycles and prospects.

Invariably, by the time the message is received and realised, departments are set up, budgets are determined and lending commences, the industry’s course may well have changed. This phenomenon hits mainly the non-traditional shipping lenders who lack the long term experience and commitment to the industry and are most likely to overreact to changes and realise losses. This pattern has, unfortunately, been a prominent feature of shiplending over the decades and has added to the widespread belief that shiplending is a high risk activity for banks. I will return to this theme later. Continue Reading

Between Thanksgiving and a Prosperous New Year?

by Ian Bland, Freight Derivatives Manager, Clarkson Wolff, London

As we look back at 1996 and consider the chances for 1997, there are three easily available tools we can use to quantify and qualify the history and debate in respect of the larger dry cargo vessels. First is the Baltic Exchange’s Freight Index (BFI) which measures the health of the Panamax and Capesize market. This began life pegged at 1000 in 1985. It fell to an all time low of about 550 in 1986, and reached a peak in May 1995 of 2352. Its progress can be mapped and analysed; it has all the internal pressures, shapes, support/resistance levels and volatilities that a technical chartist needs to reach a state of academic nirvana.

Now is not the time or place to offer the light relief of a detailed exposition of theories of fermat or fibonacci – all that needs to be said is that the market had to collapse. There was no room on the up side; it was overcooked and all the signs were there loud and clear. Since May 1995, the BFI has dutifully shed its value – first to 1500 in January 1996, then to 1000 in September, courtesy of two retracements on the way. Since September, the index has neatly climbed back up to 1500 again, completing an almost obligatory reactive process. Continue Reading

1997 Should Be Another Bear Year for Dry Bulk Ocean Freight

by Dr. Martin Stopford, Clarkson Research, London

A year ago, in December 1995, the dry cargo market was just waking up to the harsh reality of a 35m dwt orderbook and a weak trade outlook. The turn was pretty much as expected. By the summer, Capesize rates had slumped to less than $9,000 pd, whilst Panamaxes were crawling along at $4,200 pd – a disturbing reminder of the grim summer of 1986. Perhaps it was this association which triggered a very prompt response by bulk carrier owners. As rates fell, almost 7m dwt of combined carriers switched out of the dry market, 4m dwt destined for the scrap yard, and 3m dwt switched into oil. Most of this was Capesize tonnage. Continue Reading

1996: What Goes Up Must Come Down

by Richard Harris, Maxwell Harris Company Inc.

From an owner’s perspective, 1996 began with great promise. The Chinese were in the midst of a grain buying spree. The benchmark 54000 long tons HSS Gulf/Japan was USD 28.00 per long ton. And the freight market was coming off record highs in 1995. However, as the year progressed, owners soon realized that 1996 would be a huge disappointment.

Not only did the Chinese stop importing corn, but they canceled wheat purchases made earlier in the year. Coal shipments slowed as end users drew down on stocks. North American grain prices rose dramatically and choked off summer demand for grain. Handymax, Panamax and Capesize newbuildings continued to be delivered onto the market at a steady pace. The rate of scrapping early 1970s built vessels was slow. Scrap prices fell and owners reluctantly started to use the ugly word. Continue Reading

The Impact of the Coast Guard Authorization Act on Ship Finance

The most sweeping changes to US maritime laws in many years are contained in the Coast Guard Authorization Act of 1996, enacted and signed into law on October 19th, according to Dennis Bryant, an attorney in the Washington office of the law firm Haight, Gardner, Poor & Havens.

Mr. Bryant spoke at a seminar given by the firm on October 25 for members of the shipping industry and the financial community.

The new law eliminates all restrictions on persons eligible to be mortgagees of US flag vessels, and allows leasing companies to own vessels operating in the coastwise trade under demise charter to US citizens. Further, it permits its use of ownership trusts with non-citizen beneficiaries in financing vessels involved in cross-border transactions – the US foreign trade – without restrictions as to who may be a charterer. Continue Reading

Significant Rise in Hong Kong’s Hull Insurance Capacity

by K.K. Chadha, Hong Kong

Hong Kong’s hull and machinery insurance capacity is estimated at US$35 million per vessel, according to a survey done by Lambert Brothers Insurance Brokers (LBI).

The figure is much higher than the $15-20 million estimated by the Asian Shipowners Forum (ASF), which has proposed the creation of a regional hull and machinery insurance market. ASF has appointed London-based Sedgwick Energy & Marine Global Group as consultant to formulate plans to set up an Asian market. Continue Reading

Mixed Feelings Towards OMI Stock Offering

Before we begin our analysis of the proposed OMI common stock offering, we need to make a few things clear: we are not investment advisors; we make no markets; our clients are our readers whose subscriptions form the bulk of our revenues. If our readers wish to know whether to accumulate or divest themselves of a company’s shares, we direct them to Furman Selz, Lazard Freres or Smith Barney, all of whom issue such reports on a regular basis.

We view our role as independent commentators. Using Marine Money’s ten-year publishing history as a base, we value our ability to read between the lines and perhaps comment more sharply than those who may be one day competing for the next underwriting. We are always consistent in our line of attack: we want not only to see industry standards upheld, but we want to see them raised.We view ISM Code compliance as serious an issue as the Adriatic debacle. We view the tanker industry’s willingness to deal with the public on oil spills as every bit as important as any one company’s decision to sell shares to the investing public. The common thread is full and complete disclosure. Continue Reading

Hong Kong Owners and Managers Staying Put

by K.K. Chadha, Hong Kong

The exodus of shipowners and managers from Hong Kong, expected by some in the run-up to the British colony’s handover to China next July, has not materialized. But some companies have, over the past five years, relocated their technical and operations divisions to other countries, mainly Singapore and Canada, while retaining their corporate headquarters in Hong Kong.

At the time of writing, 82 shipowners and ship managers were among the 220 member companies on the register of the Hong Kong Shipowners Association. The attractions of Singapore and Canada are mainly the tax breaks, but most companies did not consider them tempting enough to make the move. Among the big owners, bulk carrier operator IMC Holdings, which is listed in Hong Kong, and tanker and bulker operator World-Wide Shipping Agency, have moved some operations to Singapore. Continue Reading

Can Vietnam Attract the Ship Finance it Needs to Build up its Fleet?

by Bridget Hogan

Vietnam may on the surface look like a poor candidate for attention from the ambitious bank or ship finance institution seeking to expand its international portfolio. True, the need for finance is there as the fleet is made up of older, smaller vessels in need of renewal and trade is expanding, particularly throughout the region and to Japan. In addition, containerisation is nudging forward. While this has been held back by the dire lack of infrastructure, it once again shows that funds will have to be forthcoming to solve these problems. Finally, there are efforts on behalf of the communist state to move the country further towards market socialism.

Yet, all this has not been enough to entice international banks or finance houses into the Vietnamese scene. What are the stumbling blocks as they see them and what are the prospects for the future?

According to one commentator on the scene, despite business practices beset by bureaucracy and outdated laws on mortgages and security, now is the time for the foundations to be laid for future business in the country. Mr. Milton Lawson of the Sinclair Roche & Temperley (SRT) office in Hanoi, comments: “The point that is often quoted about anyone planing to do business here in the future, not just in ship finance, is that you should be making the move now rather than in five to six years time.” He continues: “Relationships here take a long time to build and business is done on the back of relationships, rather than simply the cheapest deal.” Continue Reading

Should Bankers Have Butterflies?

Freight rates in the dry bulk markets are at or closely approaching levels not seen for the past ten years. The Baltic Freight Index has now fallen below the 1000 level for the first time since the onset of the Gulf War in 1987. The only issue left is how much further the index will fall, or more specifically will it, when adjusted into time charter equivalent per day terms, drop below what owners need to cover their operating costs.

The reasons for the sharp downturn are largely agreed upon: newly delivered tonnage exceeding expected scrappings coupled with reduced tonne/mile demand. While the major information houses see “some more positive signs…emerging in the macroeconomic picture that could provide a boost for demand” (Clarkson’s), the reality is that “dry cargo market confidence continues to be undermined by supply-side worries” (Drewry’s). We believe the real issue has now focused on whether the upturn will, in fact, occur in 1998 or beyond.

What impact is the decline of the dry bulk market having on the ship finance markets today? Is perhaps the more appropriate question to ask whether it should have an impact at all? Continue Reading