Finance of the Chinese Fleet Build Up

by Yanni V. Bousnakis

In many ways, the Chinese shipowning group resembles the Greek shipowning group which, with 1,883 vessels, represents the largest shipowning group in the world. Both tend to be dominated by family-run businesses where relationships have developed over time and outsiders are often looked upon with a certain amount of distrust. Trade secrets are guarded assiduously because competition is fierce and interference can be damaging.

In fact, China’s shipowning companies own a total of 685 vessels, representing 19.3 million dwt and, along with US shipowning companies with a fleet of 687 vessels, is tied for second place as the world’s largest shipowning national group. With regard to deadweight tonnage, Chinese companies fall to sixth place, generally due to their ownership of smaller-sized vessels. The average size for Chinese vessels is 28,166 dwt, and it is the smallest among the countries listed in the top 10 in terms of fleet size. Continue Reading

Washed-Out Dollar: Dampening Effect or Fueling the Fire

The implications of the US dollar’s collapse on ship finance are subtle but considerable. International shipowners, like the Germans, with dollar-denominated revenue and Deutsche mark-based finance and accounting, have been particularly hard hit. At the same time, the weaker dollar is probably an answer to the prayers of many of the US Maritime Administration (Marad), where the Title XI financing program designed to kick start the US shipbuilding industry is foundering.

The dollar will affect different companies in different ways; and specific sectors are generally impacted only inasmuch as prices of commodities are affected. Owners of German-financed vessels will be looking to maximize earnings; and some fear the summerpool effect will come into play as the close-knit national group starts to feel pressure to maintain firm freight levels.  Continue Reading

They’re There

If OMI Corp. is a tanker play, it’s a bad one. When the most favorable comment a company elicits from the industry is: “they’re there,” the company’s future seems a little shaky. OMI is the largest tanker owner in the US, with national and international dry bulk and sundry businesses contributing more to the girth of the company than to anything else. Its strategy of diversification, both in terms of sectors and markets, US and international, is an idea that may be dated.

After the brief limelight of the COFR coup last autumn, in which OMI got self insurance on the soundness of its own balance sheet and a 20 point worldscale advantage based on market psychology at no extra cost, OMI is now destined for mediocre or loss-making operations for an indefinite period until the long-expected turnaround in the tanker market occurs. Continue Reading

Projections in Shipping Capital Sources

Due to an editorial error, charts 2, 3 and 4 of the article, “How Quickly Circumstances Change,” were labeled incorrectly (MM April 1-15, 1995). Because information on projected capital supply is so valuable, however, we’ve reprinted charts 3 and 4 and added a further chart which combines Citibank’s two capital supply projections into one graph for comparison’s sake.

The charts depict the dynamics between capital supply and demand – breaking total demand of some US$17-20 billion per year into four market sectors: cruise, liners & miscellaneous, dry bulk tankers and tankers. Supply is divided into private debt and K/S, public equity, public debt, banks and shipyard credit. Historically, banks and shipyards credit have made up the lion’s share of capital supply – $16.5 billion in 1994. At the beginning of last year, Citibank projected that this trend would continue, suggesting however that shipyard credit at $8 billion would outstrip bank finance by $2 billion and, with private debt coming on strong, providing $3 billion – or half the bank lending level of $6 billion. The average projected supply total was $19.5 billion for 1994-97. Continue Reading

Lease, Loan or Mezzanine? Different Types of Capital and Their Parameters

by Andrian Dacy

When a shipowner contemplates the best route to capitalize a project, ship purchase, or the entire company, it is faced with deciding from among a range of  finance options, each with unique characteristics and potential effects on the business.  Each option tends to offer specific parameters that impact the key financing categories:
•     cost of capital;
•     advance rate;
•     tenor;
•     security;
•     ease of accessing the capital;
•     effect on the shipowner’s control of the company.

Over the next two issues, Marine Money will provide an overview of the different types of capital available to shipowners. In this issue, we will focus on bank debt, finance company debt, and leasing. In the next issue, we will examine the costs and benefits of bond issues, private placements and private and public equity. Continue Reading

Individual Liability Under OPA and Cercla: Strategies to Limit Exposure

by Raymer McQuiston

The US Oil Pollution Act of 1990 (OPA) and its companion environmental law, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (Cercla), have increased dramatically the risk that directors, managers and officers of shipping companies, charterers and operators may be personally liable if a spill occurs from a vessel under their control or authority to control.

The statutes and US courts’ expansive interpretation of the statutes – liability of individuals has not been consistently made in various federal jurisdictions – now provide a broad pool of potential claimants with the right to seek and, in some instances seek aggressively, damages and clean-up costs against a director, manager or officer (corporate individual) even where the involvement of the corporate individual was relatively passive.

Already cautious about operating in US waters with respect to the threat of high court awards and punitive damages, corporate individuals must now deal with divergent court standards adopted as a basis to establish individual liability. Continue Reading

Enforcement: It Need Not Be A Lender’s Worst Nightmare

by Geoffrey D. Ferrer

It is a lender’s worst nightmare to learn that a borrower is in trouble and the lender’s loan is, as a result, at risk.  Yet, with proper planning – which begins even before a loan is booked – the probability of the nightmare becoming reality can be substantially reduced, though not totally eliminated.  Enforcement planning, to be effective, must be put into place during the due diligence phase of a transaction and must be continued throughout the transaction’s life.  It is impossible in this short article to provide a detailed road map of the subtleties and nuances of maritime enforcements and workouts, yet it is possible to provide some of the basic building blocks from which to construct an effective enforcement strategy.

Pre-Closing Activities
If a lender waits to begin its enforcement planning until it receives word that one of its borrower’s insurances is about to be canceled because of non-payment of premiums or that a borrower’s vessel, over which the lender holds a ship mortgage as security, is about to be arrested because of mounting trade debt, it may be too late.  Therefore, a lender should do itself a favor and begin its enforcement planning while undertaking due diligence with respect to a loan to a new or existing client.

This due diligence should include a thorough review of the prospective borrower’s and any accommodation parties’ financial statements and records, and confirmation that their financial picture is accurately presented.  If a lender needs additional information, it should speak up immediately.  A lender’s due diligence review should also focus on any additional assets of the borrower which may be available should the lender’s primary security – the vessel – be worth less in a forced sale than originally anticipated. Continue Reading

Divided We Fall

In an industry where not a little finger-pointing goes on, an evolving response to today’s environment of spill liability and oversupply has probably neared its fullness, with oil majors, tanker owners, class societies and even trade associations in their respective mudslinging corners.

The oil transportation industry has undergone a transformation in the last five years since the US passed the Oil Pollution Act of 1990 (OPA). Companies like Texaco and Amoco have followed Exxon and Arco out of the tanker-owning business. Shell, BP and Mobil seem to cut their core fleets almost monthly. And, traditionally stalwart industry associations like the American Petroleum Institute (API) have been abandoned in the heat of battles like the US Certificates of Financial Responsibility. API even canceled its tanker conference scheduled for Hilton Head in 1996.

At the same time, the tanker market is expected to remain flat in 1995, with moderate improvement anticipated for 1996-97. Future expectations, however, are clouded by an overhang of capacity which threatens to entice owners beyond what they can bear in terms of newbuilding prices offered below cost. Continue Reading

How Quickly Circumstances Change

by John Newbold

Through knowledge of and access to a variety of capital sources, a shipowner can over time  knock $1,000 per day or more off the fully loaded cost of operating a ship. The operative words are: over time.

Capital sources are dynamic; and they have an evolving nature which is and will continue to be advantageous for the world’s shipowners. Prior to the oil shock of 1973, most shipping debt came from banks, and was based on long-term charters from large, highly creditworthy public companies. So, early risks taken by the providers of capital were usually only on the operating capabilities of shipowners, and not on their financial capacity. The banks, which had been for all practical purposes the only providers of such capital up to that point, were faced in the 1970′s with two new elements. First, they had to look to the shipowners’ balance sheets to support the financing when long-term charters started becoming a thing of the past. (Cash flow became more variable and ships tended to be bought and sold more often.) Second, the ship finance market, led by the Japan Exim Bank, saw the advent of government supported credit at prices generally cheaper than could be provided by the commercial market. Continue Reading

Access and Application of Existing Financial Tools: An Owner’s Wish List

by Anthony Gurnee

I think the shipping industry will face many financially-related challenges in the coming years; most importantly, each shipping company will need to build sustainable operating profitability. A full list of financial challenges might include raising capital for fleet replacement, compliance with regulations governing evidence of financial responsibility, controlling costs in an evermore challenging operating environment, and even the application of electronic commerce technology.

The financial challenge of immediate interest to me and Teekay Shipping is the challenge of transforming a shipping company’s financial position into a resilient, liquid and conservative structure able to support a company’s overall business strategy through the application of financial tools that exist today, but are difficult for shipping companies to access. Put differently, I believe that one of the key financial challenges for bulk shipping companies over the next 10 years will be to gain broad and continuing access to existing financial structures presently available to investment grade industrial companies and use these instruments to their advantage. Continue Reading