Spotlight on Banks

Every day we speak with bankers, owners and a wide variety of intermediaries in the business of ship finance.  We have been warned about “dabblers,” seen the growing involvement of regional banks, watched banks with taxes to pay establish tax driven asset finance divisions, heard whispers of increasingly fierce competition from Japanese Trading Houses, but no two communities have been so much talked about as the Dutch and Germans.  It does not matter where you are – Greece, Hong Kong, the US – their involvement is global.

Not surprisingly, the Dutch and German banking communities, depending upon whom you speak with, represent the best and worst of the current surge of bank debt financing. We found them open, generally well informed about the market, certainly competitive, hard working for their clients and in most cases with sufficient corporate memory to know how painful a down market can be.

Our rolodexes are becoming so tightly packed with new players arriving at traditional institutions and well known faces turning up at new locations and new players at new shops that we thought it might be helpful, if we occasionally brought some of those participants in the market into a bit clearer focus.  Below are three of the names turning up more and more frequently on the “in favor of” line on mortgages we review.     Continue Reading

Participations and Syndications – Subtle but Noteworthy Distinctions

by Brad Berman

In the same way that investors employ portfolio diversification in financial transactions to reduce risk, lenders attempt to diversify loan portfolios by lending to borrowers from a number of geographic regions across several market segments.

Prior to the 1950′s, ships were financed predominantly by equity. Owners, quite simply, purchased new vessels with capital or retained profits. By the 1960′s, debt emerged as a significant means for financing ships, however. As lenders took a more active role in ship financing, and the value of ships and their replacement costs increased, it became necessary for lenders to develop a means of funding loans together with others.

With the cost of a new vlcc in excess of US$100 million, many lenders interested in lending to ships in this segment will do so only in concert with others. However, as highlighted in the chart accompanying this article, not all lenders have the same appetite for such combinations. Continue Reading

The “Other” Winners From Global Offerings

In the perfect offering, there are no losers. The company making the offering gets much needed capital to improve operations, acquire new or additional vessels, or take care of general corporate needs. The investor gets a sound investment presumably where returns might be better than “average.” Vessel management companies involved get an extra piece of business. And lesser known, but no less important winners are the underwriters, attorneys, brokers and accountants, who put the deals together.

Seldom does the reader of the prospectus get any information on these fees other than a statement of the gross and net fee amounts of the offering. Specifics are carefully buried inside the prospectus, written, not surprisingly by financial advisors and their attorneys.  Continue Reading

New Product: Risk Profile Analysis Available for Ship Purchase Negotiating

Finally, a statistical tool geared specifically to ship financing variables has been developed. The technique, devised by Shipping Intelligence, Inc. of New York, addresses the difficult-to-quantify risks of concern to capital investors and equity participants involved in vessel purchases.

“Old standby statistics like internal rate of return (IRR) do not entirely satisfy the needs of ship purchase decision-making,” Shipping Intelligence’s Sydney Levine said. He decided an analysis was needed that goes beyond IRR and its variables of purchase price, financing parameters, time charter rates and running costs. His Risk Analysis, which includes a base case and variations thereof, profiled over a spread of equity levels from 10 to 60%, accounts for risk factors considered unique to the purchase and operation of ships – namely, residual value fluctuations and the difference between estimated and actual charter/freight rates. Continue Reading

Every Step Means 10 Less Basis Points

The bank credit boom, which unfurled to the shipping market over the last 12 to 18 months, has now reached the point at which some veterans in the ship finance banking community are beginning to sound warning bells.

Almost without exception, banks around the world have extended their ship mortgage lending portfolios. From the strongly-capitalized Royal Bank of Scotland, which boasts the largest number of customers in the Greek market, to Greece’s own Euro Merchant Bank, which started lending to the shipping market only last summer, there is no shortage of eager bankers with loan agreements ready to sign.

Euro Merchant’s fledgling portfolio consists of just three deals for secondhand vessels totaling between $10-12 million. It’s small when compared to Deutsche Schiffsbank’s DM4 billion ($2.9 billion) loan portfolio or Citibank’s $3 billion shipping allocation, but expansion by many banks is expected to continue. “There is no shortage of business, and no problems in growing our book,” the Royal Bank of Scotland’s Lambros Varnavides commented recently. Continue Reading

Updating the Arrest Convention

In many ways, the 40-year-old international convention on vessel arrest is no longer compatible with today’s global shipping industry, and efforts to update the convention – its rules being the usual means of enforcing maritime liens and mortgages – are important to both shipowners and lenders.

In December, an Intergovernmental Group from the United Nations Conference on Trade and Development (Unctad) and the International Maritime Organization (IMO) met in Geneva to begin the task of updating the 1952 International Convention for the Unification of Certain Rules Relating to the Arrest of Sea-going Ships. The arrest convention’s primary objective was to promote the interests of owners of ships and of cargo by securing free movement of vessels and by promoting arrests for claims not related to the operation of ship. However, under most national legal systems, arrests continue to be permitted for any claim regardless of its nature. Continue Reading

To Build or Not To Build

Oil freight and charter rates, while getting stronger, cannot support the cost of owning and operating new vlccs (very large crude carriers). Yet the fleet is aging, and oil majors want newbuildings to comply with US OPA 90 regulations and avoid the environmental liability risks associated with older tonnage.

What is the best strategy for independent tanker owners? Should they run older ships as long as possible, or build new vessels? The breakeven rate for running a well-maintained,1973-built vlcc of nearly 300,000 dwt can be as low as $19,000 per day, while the breakeven rate for a newbuilding of approximately the same size is more than twice that amount – between $40,000 to $45,000 per day time charter equivalent. (This assumes 70% borrowing at about 9% interest). Continue Reading

The Difference $5,000 A Day Makes

In the last issue, Marine Money compared the costs of running a new vlcc versus running an old one, and explored many of the variables which factor into the shipowner’s decision regarding investment in newbuildings (see “To Build or Not To Build,” February 1-15, 1995). We discovered neither venture is a money maker in the present market. On one hand, you have a new vessel with high capital cost but lower maintenance; on the other hand, you have low capital cost but high operating costs because of increased maintenance and repair. But freight rates are not strong enough to support either profitably, even given premium for newer vessels.

The only solution is scrapping older vessels. Oversupply must be corrected before shipowners can make money transporting crude oil. Speculation abounds as to when all this extra tonnage will actually drop off the market, so Marine Money decided to focus instead on what it would take vis-a-vis rates and leverage to make money running either a new vlcc or an old one with different gearing levels. Continue Reading

Put on Your Negotiator’s Cap – It’s P&I Renewal Time Again

by Bridget Hogan, London

Things are now slightly quieter on the P&I front in comparison to the scene four years ago when rates seemed to be spiraling ever upwards. Quieter it maybe, but as the dreaded February 20 deadline for renewals approaches, complacency is certainly not the name of the game.  It is clear that, although rate increases have softened, there is much bubbling under the surface.

On the one hand, Clubs have strengthened their balance sheets, particularly over the last two years.  On the other, they face a period of uncertainty over the number and size of claims and the regulatory world they will have to inhabit.  Overall, general increases are ranging from zero for members of at least two Clubs – Gard and Britannia – to 7.5% at the top end – notably West of England – with a 5% median for the rest.

However, according to Joe Hughes at leading broker Jardines Insurances Services, it seems that, once again, shipowners have been successful in individual negotiations and that, overall, Clubs are struggling to get any increase across the board. Owners, particularly of tankers trading to and from the United States have felt the cool winds more. Continue Reading

Maritime Security and Marine Financing

by Kenneth Gale Hawkes

At 2300 hours, a container ship lies anchored outside the Port of Santos, Brazil.  The night is overcast, the sea is dark, and this is the third night at anchor for the vessel and her nervous crew.  Her presence is no secret, nor is the cargo carried in the shipping containers lashed on deck and secured in her holds.  The manifests have been circulating throughout the port community for weeks.

The master has posted an additional security watch to warn of the pirates – or are they assailing thieves, he can’t remember which legal term applies – he fully expects to appear, but he knows the gesture is useless in any event.  He has no means of protecting his vessel, her cargo, or even her crew.  He carries no firearms or other weapons of any kind.  His instructions, as always, are to let any pirates who come aboard take whatever they wish, and he is not to allow any member of his crew to resist.  The shipping company will reimburse the crew for any lost personal items, and the cargo underwriters will cover the losses to the cargo.  So, in the long run, everyone will be made whole, and there is no reason to try to thwart an attack that might otherwise be perfectly preventable.  The crew remains safe.  Consignees are only slightly inconvenienced.  Cargo underwriters and P&I clubs will eventually fight it out in court, which will make the lawyers happy and rich, and the pirates – poor, downtrodden scoundrels that they are – will be able to feed and clothe their impoverished families until the next ship arrives. Continue Reading