Taking Exception…

No one is likely to disagree with the idea that quality management is a crucial element in bank lending decisions. However, some take exception to Anne Oian’s suggestion that lending only to integrated shipping companies is the ideal.

“I agree that banks tend to feel a greater level of comfort with the control of in-house shipping companies, but as a general statement, it is not right,” Anders Bergh-Jacobsen of Acomarit AS said. Bergh-Jacobsen, the shipmanagement company’s managing director in Oslo, pointed out that out-sourced shipmanagement can be an asset to bankers. “With informal contact through the shipmanagement company, a bank can often access operations personnel who may be shielded by executive managers in an integrated company structure,” he said. Continue Reading

Matching Financial Structure to Credit

World trade volume has grown 6.8% per year since 1988. Key areas of growth include steel and coal, LNG and grains. Also, product tankers are enjoying the effects of the US Clean Air Act, which drives refined products demand offshore. 

The preceding remarks from Dr. Hans Peters, principal maritime specialist of the World Bank, at the sixth annual Ship Finance conference in New York June 22-23, were encouraging for the shipping industry. But what do they mean for ship finance? Continue Reading

Learning Lessons From Past Mistakes in Ship Finance

by Anne Oian

Oversupply is currently plaguing the banking industry the same way it has plagued tanker owners. The number of banks willing to lend to the shipping industry has increased as shipping markets improve. But demand for loans has decreased because many shipping companies don’t think the timing is right for new investments. The situation, which has resulted in dramatic changes for loan terms, has spurred reflection on previous shipping market downturns and the lessons that may or may not have been learned. 

Refinancing Under-performing Loans

The downturn in shipping in the beginning of the 1990′s affected most banks involved with the industry. At the same time, the world fleet in most segments was still increasing as deliveries of newbuilding orders – placed when the outlook was more favorable – were completed. 

Several problem situations were also created by old ships at the top of the market in 1989-90. Owners did not assure themselves of the quality and condition of the ships, and they did not have the necessary experience and know-how to manage them. For example, Norwegian players, unlike many Greek owners, acted more often like financial investors than dedicated and experienced shipping people. They made mistakes accordingly. Continue Reading

Folly or Foresight? Prospects for the Jones Act Tanker Trade and Title XI Guarantees

When the number of newbuildings proposed in a recent Title XI application for product tankers, aimed mostly at the Jones Act tanker trade, exceeded the number of vessels of the market’s largest player, red flags were bound to go up. 

Van Ommeren Tankers filed for a US government guarantee to cover the construction of five with an option for five more tankers – sending shivers down the spines of those operating in this fragile market where even one ship long or short seems to make a difference.

Seventy-five product tankers and 85 barges, totaling approximately 4 million dwt, were eligible for the trade as of April, according to one source. The US Maritime Administration (Marad) puts the number at 79 including integrated tug barges; while industry players put the number at 39 or 40 for product tankers up to 50,000 dwt. Continue Reading

Owners To Play Financial Cycles: Warren Buffet Is No Role Model For Shipping Investors

by Bern E. Blikstad

To continuously lower total capital cost, successful shipping companies of the future will play the financial cycles as skillfully as they now play the shipping cycles. Traditional bank lending and capital market products will play complementary roles, as they both expand and contract cyclically. And the US capital market will not be a major source of funding for shipping in the short term, but rather function as a product developer for structured finance solutions. 

Business Environment, Capital and the Shipping Industry

Capital is more available today than ever. In an era of venture capital, high-yield bonds and global capital flow, money is in constant search of investment opportunities. Access to funds is no longer restricted to large, established companies in well-established industries. Continue Reading

Shipping and the Internet

Banking and ship finance is one of seven sections of the new online service called NS Net.  Other sections include: shipyards, government, maritime, research and development education, general news and market analysis. NS Net is the US government-sponsored cyberspace location which intends to propel the maritime industry into the 21st century with electronic commerce and information technology. (It is also closely aligned to the US shipbuilding industry – the government determined to push US shipbuilding into the international arena of commercial shipbuilding.) 

Be that as it may, the international shipping industry should reap some benefit from the Maritech online service. Several shipping and shipping-related companies have already been invited to put up home pages on NS Net at the expense of the US government. One million dollars have been dedicated so far to the NS Net project. Continue Reading

Rolling Out the Red Carpet

Many find the paper ships idea intriguing, but most look to more standard instruments when managing risk. Commercial shipping banks, as well as an array of smaller financial boutiques and investment banks, offer risk management advisory services. 

Many shipowners pine for the red carpet treatment from banks. The treatment would be defined by these utopians as long-term unsecured swap lines which provide the full range of risk management alternatives. Citibank N.A.’s global shipping department provides the red carpet treatment to carefully selected clients. Loans, revolving credit facilities, cash management and risk management products are provided. In fact, Citibank’s shipping department has one of its members acting as a “transactor,” working on the bank’s trading floor to manage swaps necessary for clients’ charters and other business. The transactor structures charter hedges and does other deals in the derivatives area. Continue Reading

New Products for Risk Management or Stick to Basics?

A slightly new version of a derivative product linking cashflows to tanker indices is on the horizon which could help shipping companies better manage the risk inherent to freight markets.

Beyond typical risk management tools used by and developed for the shipping industry – currency and interest rate swaps and bunker hedges – there has been little success with hedges to manage what is, by far, shipping’s biggest risk exposure: freight rates. 

“The greatest source of volatility in bulk shipping is the freight market, and the only effective way to hedge today is by physically time chartering out,” Chief Financial Officer Anthony Gurnee of Teekay Shipping (Canada) Ltd. said recently. Gurnee suggested that financial institutions develop new risk management products to alleviate this kind of shipping-specific problem faced by today’s corporate shipping managers. 

“Bulk shipping’s biggest challenge is achieving a financial position, which is resilient, liquid and conservative, and through which existing financial tools to lower the overall cost of capital can be applied,” Gurnee said. Continue Reading

The Growth of Leasing – A Better Choice?

by Struan Robertson

Lease or borrow? Today’s owner is looking at an increasingly competitive market for finance and, while the terms offered in the traditional ship finance market are attractive, there is a trend towards the use of a lease as an additional or alternative structure.

Most owners have an objective and will seek to find a structure that meets that objective. The most obvious is the cheapest finance available in the market place.  Another is the ability to keep the shipping activities of the company off the balance sheet.

Different lease structures produce different consequences for tax and accounting purposes.  In the case of the finance lease, where substantially all of the risks and rewards are taken by the lessee, the accounting owner will be the lessee, whereas the lessor may well be the tax owner.  Under a hire purchase agreement, the lessee is both tax and accounting owner; whereas, in a lease purchase structure, the lessor will be the accounting owner and the lessee the tax owner. The most recent development on leasing has been the rebirth of the operating lease, where the lessee agrees to take the ship for a limited period and the lessor retains the risk and reward of the residual value – here both the accounting owner and tax owner will likely be the lessor. Continue Reading

Death of the Pickle Lease

Just when the shipping industry was beginning to take notice of a financing structure commonly used by the aircraft and railroad industries, the US Internal Revenue Service (IRS) put the kibbosh on it. 

New IRS rules, which effectively eliminate the Pickle lease and its key feature, the replacement lease, were proposed in April.  A public hearing is scheduled for July, and even if the final rules change substantially- which is not anticipated – the Pickle is banned for transactions from April 20. 

At least one deal is rumored to be on ice due to the rule changes. Other financiers who have been proponents of the structure say it won’t be used anymore, but the impact is insignificant. One firm, Kleinwort Benson Ltd., had anticipated the changes and, therefore, had tempered prospective market benefits so as not to deter lessees with any bad news. Continue Reading