Shipping is a worldwide industry vital to the world economy. Shipping makes up over 90% of the world’s trade. Shipping is the lowest cost per unit moved of any form of transportation. Demand for oceangoing vessels, as measured in ton miles, has outpaced average global GDP growth of in the past several years. The maritime sector is one of the few asset classes that has not appreciated in the low interest rate environment of the last several years as unlevered yields on maritime assets are higher than other real asset classes. The shipping industry is highly fragmented and includes dry bulk, container, tanker, and offshore vessels. Each category of vessel is then split into multiple sub-segments. Because of this, the maritime industry provides diversification opportunities that are hard to be matched in other transportation sectors.
Ships are expensive and require large amounts of capital to operate and maintain. Containerships and tankers can cost up to $150 million each, while LNG tankers cost upwards of $225 million per vessel. Second hand ship sales make up a large portion of ship investments. The cost of a new very large crude carrier (VLCC), a ship that is a third of a kilometer in length, and that can carry XXX barrels of crude oil, can be in excess of USD 100 million. That’s a huge figure. But, sometimes ship owners and operators will order these grand ships in bulk, perhaps in a block of seven or more and suddenly the price tag on the deal escalates towards the USD 1 billion mark, making capital costs an owner’s largest expense. Ship cost will continue to rise as demand for larger ships, capable of increased cargo loads, continues. However, shipping differs from other capital-intensive asset classes, such as real estate and aircraft because ships are internationally mobile and their owners can choose their legal jurisdiction, allowing shipping companies to adopt less formal corporate structures than found in other business. This leads to high levels of risk and volatility playing a large role in maritime finance. To finance a ship purchase, or indeed any asset purchase, today’s shipowner will scour the global finance markets looking for the least expensive and most flexible source of capital. International banks will often be the first port of call, as they provide a full range of specialist banking and finance facilities. Traditionally, ship finance markets have been centered in Germany, the Nordic countries, New York and London, but with Asia’s importance in the shipping and ship building markets, increasingly finance options in China, Singapore and Hong Kong have grown in competitiveness.
Traditional sources of finance were owner’s equity and bank finance. Given low cost bank financing, owners had little incentive to seek other sources. Between the 1950s the start of the 21st century financial techniques changed dramatically. From self-financing and bank loans in the 50s and 60s to charter backed financing and higher risk asset-backed financing of the 70s and 80s till the evolution of corporate financing and subsidized shipbuilding credit of the 90s, ship financing evolved with the rapid growth of the shipping industry. As the maritime industry continued to grow so did the gradual migration into other forms of financing.
Current methods of raising ship finances include private funds, such as private equity and private debt; bank loans, with four types: mortgage loans secured against the ship, corporate loans secured against the company, shipyard credit, and mezzanine financing; and capital markets which can provide equity through an initial public offering (IPO) of shares or debt by issuing [high yield and corporate] bonds. Using public equity through the capital markets has a mixed history. Two particular problems are the small size of shipping companies, which exclude them from public equity finance, and volatility of earnings and asset values. In a traditional bank loan financing transaction, the bank and the borrower will negotiate a loan agreement in which the parties will assign various forms of collateral (including a mortgage on the vessel, shipbuilding contract, and charter fee receivables) as security for the lender’s payment. The borrower then charters the vessel out for a fee determined by the parties. The charter fee will be used to pay off loan and can last as long as fifteen years in some cases.
In the private sector, Private equity investments allow small specialized companies who understand the shipping industry and the volatility invest in long term marine financing opportunities. Some private investors use debt financing, in which companies raise money for working capital to invest in the shipping industry. Private debt financing includes senior secured loan, mezzanine loan, and sale and leaseback transactions. Mezzanine financing refers to high-yield debt in which the lender obtains the right to take an ownership or equity interest in the vessel. A sale and leaseback transaction involves the leveraged lease of a vessel with a potential purchase option for the lessee. Today, ship finance is as global and competitive as are the far flung markets which international shipping serves.
Information was provided by Marine Money and Northern Shipping Funds to learn more about these companies and finance in the maritime sector visit their websites at www.marinemoney.com/ and www.northernshippingfunds.com/