Raising Finance for the Post Liberalization Indian Shipping Industry

by Sanjay Mehta, American Marine Advisors

The rigidly controlled and regulated Indian shipping industry has undergone a veritable sea of change since the introduction of liberalization and free trade policies enacted in mid-1991. What has yet to be realized by the Indian shipping community, however, is that liberalization is a mixed package. It may take quite some time for the industry to adjust to the new economic environment, become truly self-reliant and internationally competitive, and learn to do without the government support and protection that it had long been accustomed to. But the effects of a prolonged recession, which Indian shipping companies have withstood quite well, have helped make them resilient and have developed their self-reliance and confidence. This will put them in good standing in the new environment of globalization and competitiveness.

The biggest challenge facing Indian shipping is marshaling the resources for replacing an aging fleet and increasing tonnage. An alarming 80% of the Indian fleet is over 10 years old and about 35% will have completed its normal economic life by the end of 1995. Indian fleet growth has been sluggish in the past decade. Between 1981-85, it increased from 9.08m dwt to 10.414m dwt. Over the following nine years, it fell back to 6.57m dwt, a result of fewer acquisitions and accelerated scrapping of aging vessels. Continue Reading

Overview of the Indian Economy

by Bridget Hogan

Economic reforms undertaken recently and now being moved by the new United Front government of Prime Minister H. D. Deve are obviously aimed at making the country’s economy one of the fast growing in the world.

The raw materials are surely there – there are major industries such as railroads, automobile manufacturing and banking – including SCICI the ship finance arm. Yet all are government run. At the same time, many consumer goods and agricultural activities are in private hands.

Today, India ranks as one of the top ten industrial nations of the world. For instance, it produces most of its own chemicals, automobiles, steel, textiles, computers and television sets. Steel production has more than doubled since 1960. India is rich in mineral resources. Coal and iron are abundant and located close to each other in the eastern peninsular at Chota Nagpur Plateau. Manganese, copper, lignite, bauxite and other minerals are found in large quantities. Oil and gas are found offshore in deep waters off of a range from Bombay to Gujarat – but do not make up large reserves. Continue Reading

India: Fiscal Incentives Are Hard to Come By

by Sunil Damodar

Sunil Damodar is a principal at EME Ltd., a country research and market data firm specializing in India. Telephone: (201) 945-7288.

Item: Great Eastern Shipping Co.

Ltd., the premier private sector shipping company in India, recently found its fleet expansion plans hobbled by domestic fiscal constraints. The Indian government cut the company’s request for clearance of a foreign currency borrowing program by a third. Great Eastern will now be raising only $50m instead of the originally planned $150m from foreign markets.

Item: The recent fiscal 1996 budget issued by the third administration to govern India this year (an election year) removes tax incentives affecting net profits and cashflows of local shipping companies. This is part of a tough, albeit fiscally prudent, plan to bring the entire corporate sector within the tax net.

Item: Collapsing infrastructure at the Calcutta port traps seven ships within its dock system. According to reports, no ships can now enter the Netaji Subhas and Kidderpore docks. Continue Reading

India – The Balance Between Subsidies and Entrepreneurs

by Bridget Hogan

In the past, India’s system of ship financing saw huge subsidies given to some, with a priority on protectionist measures aimed at preserving the national flag and employment for seafarers. If owners fell outside the subsidy sphere, then their only recourse was the international market. But with protectionist policies in force, it was hard for many to convince foreign banks that there was an attractive commercial operation to fund.

Other owners beat a path to the development aid funds of Western countries, or sought help from controlled economies of the former USSR or China. Now the world is maturing and, in India, there are changes to match. India’s ship finance structure somewhat reflects the way that the world in general considers the country to be – hugely bureaucratic and yet entrepreneurial as well.

Shipping Corporation of India
This dichotomy is illustrated in the fortunes of the country’s largest shipping line – the Shipping Corporation of India. It has 120 vessels, totaling about 5.2 million tonnes deadweight. Many are older, smaller vessels that are uneconomical to operate in modern terms. Continue Reading

Hats Off to INTERTANKO

We very much applaud INTERTANKO’s new “proactive” approach wherein it is “boldly opening up (the organization) to the scrutiny of the world tanker business.” (Lloyd’s List, September 27) To wit, we believe that a good time was had by all at the “Houston Tanker Event” held earlier this month – the first in a new series of international autumn tanker conferences being organized by the association, which will be open to the entire shipping community.

To be sure, there was the usual smorgasbord of topics ranging from the complex (changes in the Coast Guard’s Oil Spill Removal Organization (OSRO) program) to the more easily comprehendible (current issues on ship vetting and inspection, implementation of the ISM Code). Further, INTERTANKO should be praised for its bravery in holding a town meeting for the general public to raise their own concerns about the sea transportation of oil so near to their own backyard – which just happens to be one of the busiest tanker ports in the world. Continue Reading

Financing the Cruise Industry

by Bridget Hogan

There is something about the cruise industry that makes detractors feel that it should not be taken seriously. Somehow it’s too frivolous to be a real business – that label is for the grownup industries – such as the wet or dry bulks.

With investments for new cruise projects running into several hundreds of millions of dollars, it is difficult to see why this image persists. There could be more than a little envy involved. For, while there are certainly some cruise companies with less successful records, the strong ones have managed to generate very healthy cash flows. Their returns on capital have been good enough to turn any cargo shipping operator’s brown eyes green. Continue Reading

Expansion in the Cruise Industry

In the past decade, the world cruise industry has grown considerably as cruise vacations have gained in popularity and affordability. While the industry is still centered around the North American market, in the face of increasing competition and discounting, and a possible drop-off in the high passenger growth rates recorded in recent years, cruise lines are attracting a variety of potential passengers by expanding itineraries around the world and building new and larger ships. Meanwhile, new companies have been able to take advantage of these developments to establish their own niches in the world cruise market, thereby adding further to the growth in the industry.

In its August 1996 report, Cruise Lines International Association (CLIA) reported on the overall growth in the North American cruise market. According to its survey, the average annual passenger growth rate between 1980 and 1995 was 7.6%. While some of the prominent cruise companies have been able to ride along on the back of this growth in demand, other cruise lines have suffered, reporting losses or near losses for several years running. How will the strategies of these companies respond to developments in the industry in order to achieve or retain a place at the top? Continue Reading

Cruising the Mediterranean

by P.G. Wild (International) Ltd.

The growth of the cruise industry has been an important phenomenon in international shipping during the past decade. While merchant shipping remained subject to the usual peaks and troughs, the cruise industry continued to expand and, in spite of a decline in the key North American market during 1994 and 1995, it has now evidently resumed its growth.

However, with nearly 50,000 new berths being added to capacity between now and 1999, it is clearly important that this growth is sustained and, in particular, that the North American market resumes earlier growth levels averaging around 9% per annum. Continue Reading

Credit Risk Revealed

Marine Money and Marsoft have recently undertaken a joint effort to describe and evaluate risk management practice in ship finance. Our two groups bring together a unique range of information on mortgage practice and shipping earnings, valuation and risks.

This article focuses on actual lending practices in the dry bulk market and their consequences for credit risk. The companion piece from Alan Ginsberg looks at how the recent collapse of the dry bulk market is affecting banks today.

The Ship Mortgage “Model”
Most shipping bankers describe the terms of a “model” ship mortgage (for an existing vessel) along the following lines. The typical advance rate (the ratio of loan to market value of the ship) is between 60% and 70%. The tenor of the loan is five to ten years, with a margin over LIBOR of between 75 and 200 basis points. There is often a balloon payment at the end of the loan period, for 20% to 30% of the ship’s purchase price (less for older vessels). Continue Reading

Congress Clarifies Lender and Lessor Responsibility for Hazardous Substance Spills

Watson, Farley & Williams reported on October 8 that Congress had enacted an important amendment to the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) which clarifies the scope of the potential liability of lenders under CERCLA’s “security interest” exemption. The amendment effectively results in the statutory enactment of the Lender Liability Regulations – the so-called Lender Liability Final Rule. While this new law does not apply directly to OPA ’90 liability, courts are expected to refer to it when analyzing a secured creditor’s risks under that law.

The amendment addresses the activities in which a lender who holds indicia of ownership primarily to protect the security interest in a vessel or property, may participate without being considered an “owner or operator” under CERCLA. Continue Reading