Navigating the next phase in shipfinance
The industry’s recapitalisation is well underway but the gap left by traditional shipfinancing still persists, writes Soo Cheon Lee, co-founder and chief investment officer of SC Lowy
Ship finance has its narratives, just like other finance niches. The recent story goes like this: over time, the post-Lehman Brothers financing gap left by the exit of traditional shipfinance banks has been filled by Asian banks and export-import policy institutions; bond and equity investors; and the entry of private equity (PE). After banks’ retrenchment, distressed loan portfolios were sold into a now-lively secondary market.
There are fewer traditional shipfinance banks in action today but they still exist and some are “back in business”. Arguably, the situation is now better than it was before the global financial crisis. Orders picked up again in 2013 to 2014, as owners, able to find financing, took advantage of low asset prices to modernise their fleets — a sure sign that financing is available. Shipowners today have more choices.
But are things really as good as that? Money may be available on several fronts for fleet expansion but, more often than not, it has been reserved for spectacular deals supported by indirect state aid in the form of export-import banks or other policy-bank financing and guarantees. The growth in financing options has been a mixed blessing — the orderbook in several crucial ship classes now looks as bloated as it ever was.
These shipowners now face a difficult market, with capital structures much different than in the past. PE’s ownership in the industry is now a serious factor but financing from PE is an entirely different animal from that provided by banks. PE firms expect higher returns and a lucrative exit, usually in the form of a public offering.
However, the capacity scenario confronting the market in 2015 to 2017 suggests that rates in key sectors will not improve to the degree that shipping stocks will have an attraction for investors. PE firms have been patient so far. But shipowners who have relied on them for financing may find their patience wearing thin if conditions for an exit appear too long in materialising.
Traditional banks lose appetite
Support from the traditional shipfinance banks has changed, too. Before the global financial crisis banks could be relied upon for much more financial support than today. The European banks’ exposure to sovereign debt post-crisis limited their appetite for the relationship business of shipfinance. German banks were traumatised by lending to KG (limited partnership) houses, which largely collapsed.
The Basel III guidelines haven’t even come into effect yet, and many banks have already opted to pare down or exit their shipfinancing businesses. Still, markets have a way of plugging gaps, and recent developments point to a next phase in ship financing. The emergence of a robust secondary market for distressed debt in shipping has added resilience to the industry.
The sales have provided the liquidity allowing firms to restructure. Numerous cases of the contribution of the secondary market can be cited: from Korea Line Corp (where, full disclosure, SC Lowy played a major role both as buyer of the loans, advisor and underwriter of a debtor-in-possession issuance) to First Ship Lease, Torm and Berlian Laju Tanker.
This alone is not enough. What vanished with the global financial crisis was the tradition in banks to understand and price shipping risk accurately and provide advisory and liquidity solutions all along the capital structure. Under current strictures it may not be worth their time but there will be plenty of room for a new type of player to bring value.
This could surface in several areas: in bridge financing allowing shipowners to sustain PE exits if equity financing in the stock market is not available; in equity partnerships with shipping firms; in buying claims and therefore providing liquidity to strapped counterparties; in providing financing for operating purposes (such as retrofitting and upgrading for compliance for low-sulphur regulations coming into force); and even lending for working capital purposes. The key will be an old-fashioned understanding of shipping risk. The ground is ripe for independent players willing to take the time to do this. But how many will answer the call?