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Guide To Tax-driven Finance Schemes
By Christoph Toepfer of Toepfer Transport
T he shipping industry is a highly capital intensive business. This is one of the reasons why, over the last 10-15 years, more sophisticated structures have been developed for the financing of ships, including off-balance sheet and leasing structures. Through these financial structures, the primary users of the vessels (e.g. container lines, oil majors etc) have increasingly become disconnected from their ownership.
In the case of container lines, they have operated in highly competitive markets with very small profit margins, often incurring losses. Capital requirements grew and to achieve economies of scale many lines have had to undertake such expansion with their own capital resources. Technical innovation and economies of scale have resulted in ever larger vessels being required; vessels which previously had not existed and therefore had to be built new. Hence, container lines have either been obliged build and finance these new types of vessel themselves or provide employment guarantees to third party investors in the form of long term time charters. In order to maintain the greatest operational flexibility and leave long term asset ownership and residual value risk to others, the lines have also used these financing schemes for smaller vessels.
The low return on capital from ship owning activities has increasingly led the oil majors to leave vessel ownership to others with the additional benefit of distancing themselves from the liability for pollution. As a result, oil majors have substantially reduced their owned fleets in favour of chartered tonnage in recent years.
Forget OPA, Meet Sarbox
By Gary J. Wolfe of Seward & Kissel LLP
he Sarbanes-Oxley Act of 2002 (“Sarbanes- Oxley”), adopted over a weekend at the end of July, 2002, hit the capital markets world the way the Oil Pollution Act of 1990 hit the shipping world 12 years ago. Everyone knew it was coming. Everyone pretended that it wasn’t. Therefore, it came “without warning”. Everyone then fell into a state of shock and wished it away. When it would not disappear, everyone learned to live with it. With Sarbanes-Oxley, the capital markets world is still in the wishing away stage. Public companies, whether U.S. or foreign, no matter what their industries, will have to learn to live with it.
What does Sarbanes-Oxley Do?
For those who do not have time to read a 200-page statute, the best way to understand Sarbanes-Oxley is to look at the Enron/Worldcom/Adelphi a/Global Crossing situations, and turn them upside down. The simple rule is: If something scandalous happened at Enron, Worldcom, Adelphia or Global Crossing that angered the investing public, then Sarbanes-Oxley forbids it or tries to make it much more difficult. We can examine the companies in order and see how Sarbanes-Oxley addresses their situations. We can then see how the Sarbanes- Oxley provisions may apply to public shipping companies, especially those that are not U.S. incorporated or headquartered.
LEASE FINANCING FOR VESSELSENGAGED IN THE COASTWISE TRADES
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Editor’s note: Passage of the Coast Guard Authorization Act of 1996 was to usher in a period where U.S. citizen domestic trade operators would have enhanced access to foreign financing sources through vessel leasing transactions. Instead, it resulted in the creation of non-citizen competitors for these U.S. operators, and fueled a bitter dispute at the U.S. Coast Guard over the extent to which these non-citizen owner-users should be allowed. Was this 1996 optimism misplaced? The author examines the origins this difficult situation and reviews its current state of play. He then suggests that the current dispute, and its vessel financing uncertainties, might best be resolved through the use of a Maritime Administration time charter review and approval process under section 9 of the Shipping Act, 1916. |
The overall purpose of section 1113(d) of the Conference substitute is to eliminate technical impediments to using various techniques for financing vessels operating in the domestic trades. At the same time, the Conferees do not intend to undermine a basic principle of U.S. maritime law that vessels operated in domestic trades must be built in a shipyard in the United States and be operated and controlled by American citizens, which is vital to United States military and economic security.
U. S. Code Cong. and Adm. News, 104 Cong. 2nd Sess., vol. 6 at p. 4325 (1996)
1. Section 1113(d): 46 U.S.C. 12106(e).
The Coast Guard Authorization Act of 1996 (the “96 Act”), “subsection 1113(d), Leasing” amended section 12106 of title 46 U.S. Code by adding a new subsection (e) to permit foreign ownership of U.S. coastwise trade vessels by entities primarily engaged in leasing or other financial transactions. This so-called “Lease financing” provision creates an exemption to the U.S. citizenship ownership requirement of the Jones Act and allows a foreign entity to own a Jones Act trade vessel if the vessel is “leased” or demise chartered to a section 2 citizen for at least three years.
Staggering Growth in the Sizzling Desert
by Kevin Oates
To get an idea of what Dubai is like right now, consider the following statistics:
• UAE growth was measured at 7% in 2003, estimated at 3.6% in 2004 and forecast for 4.5% in 2005.
• Jebel Ali was the first Free Zone in the 1980s; there are now more than 30 such zones in the Middle East.
• Estimates put planned aggregate Middle East regional investment in the energy sector, to meet demand growth, at $150 billion.
• Estimated capital required for oil projects by 2006 is $41 billion, for gas projects $19 billion and for petrochemical projects $13 billion.
• The container throughput in Dubai has grown from 1.16 million boxes in 2001 to 2.61 million boxes in 2004.
If you have ever visited Dubai, then the skyline alone should be enough to give you an indication of the amount of investment going on. New buildings are being constructed continually, each one bigger and better than the previous. Whole islands and landmasses are being created from the sea, destined to be home to luxury residential, leisure and commercial communities.
With so much going on, it was not surprising that our First Annual Marine Money Ship Finance Conference, held in the magnificent Grand Hyatt hotel in Dubai on 2nd February, was a great success. Over 167 shipowners, shipping bankers and shipping service executives spent the day with us. All the major players from Dubai and the region were represented, as well as local and international financiers. In terms of figures, over 60 representatives of shipping groups were there, 12 local and regional banks or financial institutions and over 15 foreign lenders.
Keynote addresses were given by Mr Sultan Ahmed bin Sulayem, the Executive Chairman of the Ports Customs and Free Zone Corporation, and by Mr Yusr Sultan, Board Member of GEM and CEO of Terminals, Shipping and LPG, Emirates National Oil Company. The words that come to mind from both addresses are optimism, opportunity, pride, potential and quality. Dubai is going places, and not least because the government and major private players in shipping have plans for greater things to come. A UAE flag, to be recognised internationally as a state flag, is on the agenda. Such an achievement could only serve to pull even more local investment into shipping.
Local and regional shipping companies including Emarat Maritime LLC and Emirates Ship Investment Co. presented the initiatives they have taken to reap the potential rewards that stem from Dubai’s unique shipping environment. We were privileged to hear an enlightening presentation by IRISL (IR Iran Shipping Lines), a company with 87 vessels, more being built and expansion plans for another 40 vessels by 2007. IRISL cannot always get foreign finance because of the lack of an Iranian national credit rating by the international agencies. To get around this, IRISL has set up a company in Germany that will own vessels, fly acceptable flags and be able to attract the type of investment and banking interest its parent requires, a solid and creative example of forward thinking.
Dubai Maritime City gave us an update on their plans to create a unique shipping service environment on land currently being reclaimed from the sea. The area will house a shipyard and repair yard, commercial space for all types of shipping activities, a maritime academy, a marina and state of the art office space for shipping companies. It is planned to be ready by 2007!
National Bank of Fujairah and DVB Bank AG held an intriguing discussion about their different approaches to lending in the region. Both have a great deal to offer, and the point was emphasized that there is every opportunity for local and international banks to link up and complement each other’s strengths, thereby providing optimal service to the region’s shipowners.
Our final session, titled alternative finance, included a discussion by our anchor sponsor, Tufton Oceanic, about Islamic Finance, a new and huge potential source of finance to our industry. The session also featured a talk by CAT Finance, which baited the audience with discussions about building ships in the region and getting suitable finance.
Dubai makes things happen was a slogan used by one of our speakers. Well, we at Marine Money are convinced of this, and our second annual Marine Money Gulf Ship Finance Conference is already booked for 1st March 2006, at the Grand Hyatt Hotel. Hope to see you there!
Asset-Light Niche Player Times the Market
Following quickly on the heels on a multitude of successful follow-on offerings and the Safe Bulker IPO, Britannia Bulk Holdings, Inc. has decided to test the waters here in New York with its IPO. Led by Goldman Sachs and Banc of America Securities together with the support of Dahlman Rose and Oppenheimer, the company is selling 8,333,333 shares at a price range of $17 to $19 and is seeking a listing on the NYSE. The proceeds of this primary offering will be used to de-leverage the balance sheet giving the company access to additional capital resources to grow the company. Management will retain an approximate 70% interest in the company. The terms of the offering are summarized in the Guts of the Deal table contained herein.
Bank Debt in 2006: Public Companies Take on Dry Powder & Lenders Wander the World
If the international ship finance business is a body, comprising complex system of vital organs, then commercial bank debt is its heart – and as you can see from looking just about every single transaction highlighted in this special issue of Marine Money – nothing functions without it.
Whether you are talking about XL Capital’s $1 billion investment grade credit wrap for CMA-CGM, Top Tankers sale/leaseback in Korea, Odfjell bonds in Norway, Quintana’s acquisition of Metrobulk or the dozens and dozens of public and private equity deals living and breathing in New York these days, the reality is that the financial returns needed to create virtually every capital structure in the global shipping industry are nourished by leverage – and that leverage comes from the bank debt market.
And so long as transaction activity is increasing in size and complexity, as it has been for years, we think that the market for bank debt will become even more vibrant. Continue Reading
Doing Business After the Credit Catharsis
Bank debt has long formed the sturdy foundation of the shipping capital markets. Exotic instruments come and go, but the ship mortgage and the syndicated bank loan remain and thrive. Typically banks fulfill their role quietly, helping clients to grow and modernize their companies without fanfare. At times, perhaps, they help a little too much. Continue Reading
THE RISE OF ASIAN SHIPPING GIANTS
It was only a decade ago when an unexpected financial crisis gripped Asia and pushed the region into recession. Since then, the Asian economies have resumed strong economic growth with the renaissance of China and India. Companies are once again expanding, and stock markets in the region are skyrocketing driven by the influx of foreign capital and optimism over Asia’s future.
While the current sub-prime crisis does pose a downside risk to global economic growth, underlying fundamentals of the Asian economies remain robust and sound. In its latest Global Economic Prospects report, the World Bank estimates the Asia-Pacific region to have grown about 10 percent in 2007, the strongest performance since 1994. Continue Reading
The Week in Review
The relatively quiet ship finance market over the past couple of months is beginning to show signs of life. The equity market this week picked up when K-Sea GP Holdings LP has filed for an IPO. Lehman Brothers and Citi are running the deal, which is set to raise up to $100 million. The company’s cash generating assets consist solely of partnership interests in US-listed K-Sea Transportation Partners, which currently operates a fleet of 73 tank barges, one tanker and 59 tugboats that serve a wide range of customers, including major oil companies, oil traders and refiners. We look forward to exploring this very interesting deal in more depth next week.
Advisory & Consulting Services
Marine Money has a proven track record of assisting shipowners and capital providers in originating and executing marine financing transactions. Whether you are a finance provider interested in developing deal flow, a shipowner/charterer looking for vessel financing or a private or public equity investor considering making an investment in the marine sector Continue Reading
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