A Silver Lining in the Bond Market

For the fortunate few, there lies the silver lining in the bond market. Records were shattered in 2009 in the Asian shipping bond arena with over USD 7.26 billion in new issuances. This is a historical high which represented an over 350% increase from USD 1.59 billion in 2008. Clearly, the need for capital has never been stronger as companies grit their teeth against the harsh operating environment.

Transactions in the Asian shipping bond market ran the gamut from the simplicity of straight unsecured issues to the complexity of Islamic debentures. Korean shipping companies top the list, by issuing bonds with 1-3 year maturity and interest rates of 7-8%. Hyundai Merchant Marine, Hanjin Shipping, STX Pan Ocean, SK Shipping, Korea Line and EUKOR Car Carriers have all tapped the bond market more than once this year, having raised over USD 2.9 billion in total. Top Korean issuer HMM raised KRW 1.06 trillion (USD 899.9 million) through eight bond issuances between February to November this year. Continue Reading

Bank Debt Returns to Normalcy?

One of the major concerns on the minds of many would be the pile of toxic collateralized mortgage paper that remains on banks’ balance sheets and this will continue to restrict the banks’ ability to extend new credit. Likewise, shipping banks face the same tricky task of valuing the shipping assets on their books based on current market prices. Basel II requires banks to set aside more capital to riskier assets whenever the security cover reduces, and this could potentially limit capital for lending. The process of writing down book values has yet taken place and moving forward, it is absolutely crucial that bank losses on shipping remain limited or the industry could risk losing a number of lenders. There has already been a material contraction in ship lending capacity among major shipping banks.

2009 has been a busy year for the ship financiers, not so much for lending but more in terms of restructuring and workouts. Lending terms as one would expect have become more stringent in 2009 and not only has the advance rate been lowered to 50-60%, banks prefer shorter tenors between 3 and 5 years. This is in stark contrast to the 10 to 12 year tenors banks were offering shipowners during the shipping boom just a couple of years back. Bankers call this a return to basics. Continue Reading

Asian Shipping Bond Issuances Hit USD 7.3 Billion In 2009

With bank debt being still hard to come by, the bond market for shipping companies in Asia continues to be active with transactions that ran the gamut from the simplicity of straight unsecured issue to the complexity of Islamic debentures. Bonds have become an extremely important source of capital for both shipbuilders and shipping companies in Asia and many are still working hard to seize this fund raising opportunity before any sudden changes in investors’ risk appetite. Continue Reading

Let Us Get Together

The Korean shipping finance market remains challenging but it is heartening to note one Korean financial institution is thinking out of the box and supporting its core clients. On the second day of Marine Money Asia Week, we had the pleasure to listen to Mr. Dong Hae Lee, Head of Shipping Finance Team at the Korea Development Bank (“KDB”). Mr. Lee told the audience that Korean shipping companies continue to suffer losses from operations which have led to several cases of corporate restructuring and liquidation in the country. But the good news is there are several avenues for Korean owners and operators to strengthen their balance sheets now.

For the big boys, self help is important. Korea Line, Hanjin Shipping, STX Pan Ocean, Hyundai Merchant Marine, SK Shipping and Eukor Car Carriers have raised over KRW 2.93 trillion (USD 2.5 billion) from the domestic capital markets. And if the shipping company has secured Contracts of Affreightment (“COA”) earnings from the big freighters such as POSCO, KOGAS and KEPCO, asset-backed securitization and asset-backed loans can be arranged by the banks to enhance the operator’s liquidity position. In terms of sale and leaseback structures, both KDB and Korea Asset Management Corp (“KAMCO”) have introduced shipping funds to provide further financial support to the shipping industry.  Continue Reading

Clarification

Last week, we had the privilege to discuss with KAMCO about its shipping funds and here is an update for our readers.

To recap quickly, the KAMCO fund structure resembles the Korean Ship Investment Company scheme that is incidentally modeled after Germany’s KG fund and Norway’s KS fund. Firstly, a ship investment company (“SIC”) is established with equity financing from KAMCO funds, pension funds, insurance companies, investment companies and individuals looking for tax benefits. Depending on each shipping fund, KAMCO’s own restructuring fund along with other investors (if any) will provide 40% junior loans to the SIC set up to own the vessel. Financial investors including Hana Bank and Korea Exchange Bank will provide senior loans of up to 20% of the ship’s market value to the SPC.

With the funds from the SIC and financial investors, the SPC will next execute a sale and bareboat charterback with the shipping company, in most cases BBCHP (Bareboat Charter Hire Purchase) for a minimum of 5 years. The BBCHP model allows rates to be set so that owners can continue to operate ships reasonably in the current environment. Typically, only interest payments are to be made over the life of the loans with a balloon payment at the end. The investors will be exposed to minimal residual and equity risks under the BBCHP structure as the shipping company will be obligated to purchase the vessel at the end of the charter. KAMCO can accommodate bareboat charters in the structure as well, depending on the preference of the shipping company. Continue Reading

Watson, Farley & Williams LLP Advises in High Profile KOGAS Project Financing

The Singapore office of Watson, Farley & Williams LLP (“WFW”) advised on the high profile Korea Gas Corporation (“KOGAS”) refinancing for three 1999 built LNG carriers.  The 138,200 cbm built LNG carrier “Hanjin Muscat” is on bareboat charter to Hanjin Shipping Co., Ltd, the 138,100 cbm built LNG carrier “SK Summit” is on bareboat charter to SK Shipping Co., Ltd. and the 135,000 cbm built LNG carrier “Hyundai Technopia” is on bareboat charter to Hyundai Merchant Marine Co., Ltd.  All three LNG carriers are operating under long term contracts of affreightment with KOGAS. Continue Reading

Course Deviation

Buried in financial transactions all the time, one often forgets that there are other aspects to the business that are not only interesting but in fact have an important role in the investment decision. Or if you will “all work and no play makes Jack a dull boy.” So, if you will forgive us we would like to deviate for a moment and relay a conversation we were fortunate to have with Dr. Kurt Klemme of MPC who is more involved on the operating side and who provided us with insights into the liner business and its evolving trades.

We were, of course extremely curious about their recently announced transaction for nine 13,100 TEU container vessels which will be chartered by Hanjin for 12 years. The cost of the vessels is in excess of $1 billion with delivery expected in 2011 to 2012.

Size matters and these are mammoths. It is all about cost per slot. Putting on our credit risk hat, which until recently was very hard to come by, we naturally raised the question of the limited trades, China to the United States and Europe, and redeployment. MPC, too, saw the risks in the larger sizes and chose to mitigate this risk by focusing solely on projects with long-term employment with a creditworthy counterparty. Moreover, we expect given the debt market these days that much of the risk will be taken out of the transaction through an accelerated amortization of the debt, during the contract period, to a reasonable residual.
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