Staying Positive

Close to 190 delegates gathered in Busan for Marine Money’s 5^th Annual Korea Ship Finance conference last Thursday and it was hardly surprising that the mood was less than optimistic, given what is happening in Europe. But it is not all gloom and doom. Korean shipbuilders for example have performed much better than expected this year, overtaking China in newbuilding orders. Estimates from Dr. Jong-seo Yang, Research Fellow at Korea Exim Bank pointed out that Korean shipbuilders have secured newbuilding contracts of at least USD 30 billion so far this year as demand for higher value and specialized vessels such as FPSOs, LNG carriers and drill ships remain bullish. He also added that the high oil price will continue to support the demand for offshore vessels and more fuel efficient ships – vessel types that Korean yards have a competitive advantage against their Chinese counterparts.

Korean shipowners are likewise happy to hear that quite a few sources of funding, be it government driven or not, are still available to them. This is despite a rising concern that Korean shipowners are increasingly relying on international funding than domestic banks (refer to accompanying table) as domestic lenders scale down their commitments to the industry. Korean shipowners’ funding from domestic banks has dropped sharply from 78% in 2007 to 40% last year. “It is probably not an exaggeration that the Korea Development Bank (“KDB”) may be the only commercial bank that is paying attention to the shipping industry,” quipped Mr. Yong Suk Hyun, Head of Shipping Finance Team at KDB. Korean banks are coping with increases in their cost of funds, resulting from the Eurozone crisis and tensions in the Korea Peninsula. Continue Reading

Opportunities Arising in the Shipping Industry for PE Funds and Others

Alastair C. MacAulay, Partner, Mayer Brown JSM

Background

At the height of the global financial crisis in the fourth quarter of 2008, shipping markets in all sectors experienced a dramatic free fall. For example, between June 2008 and December 2008 capesize day rates dropped from over US$230,000 to US$2,316, an all time low, representing a 99% loss of value in just six months. This marked the bursting of a bubble which had been growing for about seven years during which time many traditional ship owners were able to amass large cash reserves and reduce leverage.

When the crash came at the end of 2008, many players in the shipping industry anticipated a growth in mortgage enforcement and distressed sale activity. Continue Reading

Politicians Can’t Agree on Debt? Neither Can Economists

The global economy is seriously ill, and time is running out for politicians and economists to come up with solutions to solve the problems in the West. In July, the New York Times ran an article discussing the wide ranging  disagreements among economists despite decades of intensive research. In short, economists broadly agree that government borrowings must be kept in check, but they cannot reach a consensus over the proper mix of tax increases and spending cuts. The key point of contention lies in whether the government should pay any part of its debts by raising revenue, or solely by spending less during troubled times. Tax increases help reduce budget  deficits but have undesirable powerful negative effect on investment and disposable income, resulting in slower economic growth.

The lack of definitive answers simply reflect that economics cannot be as precise a science as physics, and economists will continue to bicker over any solution to the deepening sovereign debt crisis. Andy Mukherjee, a financial columnist in a recent article published in the Straits Times, describes the different camps among economists plainly as either those with Paul Krugman and a few like-minded economists of deep Keynesian persuasion (i.e. the view that countries should focus on  stimulating the real economy, and not be overly obsessed with debt reduction), or their enemy. There is no middle ground. Keynesian or not, we were very privileged over the past few weeks to listen to a number of reputable economists here in Singapore and we thank our friends at the Norwegian Business Association, Nordea Bank and RS Platou for the opportunity. To begin with, is the world in a global debt crisis? The economists do not have a consensus. Continue Reading

NEXI steps up support for Japanese shipbuilders

It has been a busy September for Nippon Export and Investment Insurance (“NEXI”), having participated in two ship export transactions. In the first transaction, a group of lenders, comprising Japan Bank for International Cooperation (“JBIC”), Sumitomo Mitsui Banking Corporation and BNP Paribas Tokyo Branch, have agreed to extend loans of JPY 9.4 billion (USD 122.6 million) to Korea’s Hanjin Shipping for the financing of four Kamsarmax bulk carriers. The ships will be built by Tsuneishi Shipbuilding in Japan. In a typical ECA arrangement for Korean shipowners, JBIC and commercial lenders will disburse the loan through Korea Development Bank and NEXI will underwrite the buyer’s credit insurance for the loans provided by the commercial banks.

In the second transaction, NEXI provided a USD 27.5 million buyer’s credit insurance for a loan to a Singaporean subsidiary of Wallenius Lines AB, a major shipping company in Sweden, for purchase of a pure car & truck carrier (“PCTC”) built by Mitsubishi Heavy Industries. The loans are provided by JBIC and the Bank of Tokyo-Mitsubishi UFJ (“BTMU”). PCTCs are designed to carry a spectrum of vehicles including automobiles, trucks, buses, and tall construction/heavy machinery. And just on Wednesday, NEXI participated in a loan provided to Mundra Port & Special Economic Zone limited, Indian subsidiary of Adani Enterprises for the purchase of a tugboat built by Kanagawa Dockyard. JBIC and BTMU were the participating lenders. Continue Reading

Swiber Seeks Shareholders’ Mandate for Preference Shares Issue

Perpetual securities are uncommon in Asia, but this has not deterred a number of offshore services companies in Singapore from looking into tapping this source of liquidity. Singapore listed offshore services firm Swiber Holdings is seeking shareholders’ approval to allot and issue convertible preference shares, which if converted in full into conversion shares at the conversion price, will not result in the issuance of not more than 40% of the enlarged share capital of the company.

Preference shares belong to a hybrid investment class, which is senior to common shares but are subordinate to bonds. Analysts generally perceive preference shares as a loan to the company, because preference shareholders are not entitled to normal voting rights but are entitled to dividends. In Swiber’s proposed issue, the company is offering convertible preference shares that provide investors the option to exchange for a predetermined number of the company’s common stock. A convertible preference share has features similar to a convertible bond. The differences lie in that preference shares are subordinated to debt of the issuing company and are usually perpetual securities with no maturity date.

Dividends to Swiber’s preference shareholders are cumulative and payable semi-annually at a fixed rate per annum, and there is a built-in dividend step up which may be activated upon events such as the deference of dividends. The issuer may, at its sole discretion, choose to defer dividend payment to the next dividend date. However, during this period, the dividend stopper will kick in and the issuer will not be allowed to declare or pay any dividends, or repurchase or redeem shares ranking junior to the preference shares.

Preference shares are and are not redeemable at the option of the preference shareholders. The issuer has the right but not the obligation to redeem the preference shares on any stipulated optional redemption date, occurrence of a tax event (any change in any tax law or regulation in Singapore) or occurrence of an accounting event (any change in the accounting standards applicable to the company). For the benefit of preference shareholders, preference shares are convertible into fully paid conversion shares during the conversion period. This means that there could be an increase in the number of shares outstanding in the future, and may be earnings dilutive to the existing shareholders. We expect more details to be announced at a later date.

Swiber intends to distribute the preference shares to institutional and accredited investors on a private placement basis and proceeds will be used for general working capital and capital expenditure.

Business as Usual for Now

Shipowners in Asia are bracing for the potential negative repercussions from the worsening banking crisis in Europe. After all, it was not too long ago when the lack of trade finance caused the BDI to plunge to a low of 663 points on 5 December 2008. Thankfully, a quick check with a number of commodity traders has suggested that the situation is still healthy on the ground. Trade finance is still available and cargoes are moving.

Even so, there are increasing worries that the major European shipping banks might no longer be able to continue provide funding to the shipping industry. Financial institutions in Asia and elsewhere have been reducing credit lines and exposures to European banks in the recent months and this have forced many European lenders to swap lines offered by the European Central Bank for US dollars. Bank of China for example is said to have stopped the counterparty dealings with several European banks. And if more banks are to follow suit, European banks will find it even more difficult to raise US dollars due to concerns over counterparty credit risks. Anxiety about the European debt crisis is driving up sharp spikes in the credit default swap spreads on major shipping banks, suggesting that the markets are increasingly cautious about the credit prospects of these lenders. Continue Reading

Introduction of the Maritime Sector Incentives Scheme

Author: Ben Rose

Introduction

For a number of years Singapore has worked to establish itself as a major international shipping centre and has introduced a number of tax incentive schemes to achieve this goal. In an effort to consolidate and simplify the regime of maritime tax incentives available to maritime industry participants in Singapore (Tax Incentives), the Singapore Government has recently introduced the Maritime Sector Incentive (MSI) Scheme.

Effective from 1 June 2011, the MSI scheme (operating under the auspices of the Singapore Maritime Port Authority (MPA)), offers both local and international entities a more concise and clearer picture of the Tax Incentives.  The MSI Scheme is intended to simplify and enhance the existing regime and further promote Singapore as an international maritime centre, but it remains to be seen whether the amendments made by the MSI Scheme will in fact promote or hinder the expansion of the maritime industry in Singapore. Continue Reading

Singapore business trusts – is this the time for ship owners to consider this innovative structure?

For some years now Singapore has had a unique structure called a business trust, which is a hybrid combining elements of a company with elements of a unit trust.

Whilst the business trusts launched up until the beginning of 2011 have been relatively small scale and have not had the same market recognition outside Singapore as their more established cousin, the real estate investment trust (REIT), this has recently changed with the spin off by Hutchison Whampoa of its port assets into a business trust in March 2011 and the subsequent US$6 billion initial public offering of that entity on the Singapore Stock Exchange (SGX).  This listing, together with several other high profile potential business trust launches in the pipeline, has increased the profile of this structure with sponsors and investors in both the shipping and infrastructure sectors globally and has also lead directly to the Hong Kong Exchange considering whether to adapt its listing rules to permit the listing of business trusts there.  Continue Reading

High Bunker Prices Hurt 1Q Earnings

In the last few months, bunker prices have risen sharply at the back of upward pressure on oil prices and once again undermine shipowners’ ability to break even on their operating expenses. Last week, STX Pan Ocean, Hapag-Lloyd and Neptune Orient Lines (“NOL”) have all warned investors that ever rising bunker prices will continue to hurt their results, moving forward.

South Korean shipper STX Pan Ocean reported a larger than expected first quarter loss of USD 48.5 million in 2011, due to lower freight rates and high fuel costs. Gross margin was adversely hit by a 36.4% increase in bunker fuel cost, up to USD 341 million compared to the same quarter last year, which can be attributed to the increase in both price and consumption of fuel (see accompanying table).  In its presentation slides, the company said that the high bunker price was a “major negative factor” for the poor 1Q11 results. And even though its long term contracts are tied with the bunker adjustment factor (“BAF clause”) to cover the hikes in the cost of oil, short-to-medium term COAs do not, and hence the company will have to grapple with increases in bunker prices on the latter. Continue Reading

Asian Liners Get Their Game On

Soaring bunker prices have motivated container liners to re-examine their strategy with a renewed focus on operating efficiency, cost reduction and high fleet utilisation. When market leader Maersk Lines announced its plans to pay USD 1.9 billion for 10 new generation 18,000 TEU vessels, it totally changed the rules of the game and has to some extent prompted other major carriers to look into ordering larger and fuel efficient vessels. Today, there appears to be some form of consensus among liner companies that they would need big ships that are over 10,000 TEUs to ply the Asia Europe trade by 2015 and possibly the Trans-pacific trade by 2020 to stay in the game. At the same time, some liner companies have also expressed their intention to build and own vessels to replace chartered-in vessels, so as to maximise their ability to manage excess capacity. During the shipping downturn, liner companies have realised that the decision to layup or sell vessels becomes much easier if they own the ships themselves.

At Marine Money’s conference in March, Kenneth Cambie, Executive Director and CFO of Orient Overseas International (“OOIL”), told delegates that he believes that container shipping is entering a watershed and it will be clear over the next six to nine months who is in the game and who isn’t. He reckoned that those players with the access to capital will be ordering larger ships and preparing themselves for 2015. The spate of newbuilding orders and the seeming lack of capacity discipline among liner companies have sparked market concerns, but while we leave the arguments and controversies to the industry experts, we agree with Mr. Cambie that the access to capital has become increasingly important to survival and in this aspect, Asian liner companies have the competitive advantage.  Continue Reading