The prolonged trough of the shipping industry has drawn the attention of many newcomers to the industry, from distressed instrument investors to third-party vessel managers and operators. It’s not only that all these newcomers (along with existing players) position themselves for a market recovery; a sea change has taking place in the shipping industry, from shifts in shipping finance to competition from more fuel efficient newbuilding designs to geo-political issues such as China’s support of domestic shipbuilders and their fostering of a local shipping industry that create business and investment opportunities.
Among the participants in the shipping world, traditional shipping finance, and namely the shipping banks, like a modern day Aeolus – the Greek god of winds – have the power, whether actively or passively, to shift the market at will. With an outstanding shipping loan portfolio of more than $500 billion at the top of the market, at present, shipping banks have been trying to find their balance while having one eye on the rear view mirror and their ‘legacy issues’ (shipping, but also sub-prime, real estate, sovereign bonds, etc) and the other eye on Basel III and the new capital requirements.
Institutional investors have been drawn to shipping partially because of the collapse of the asset prices and partially because the lack of debt had opened the doors for alternative sources of finance such as mezz financing, leasing, yield-driven equity, alpha-seeking private equity, etc
Recently, the private equity firm KKR announced the formation of the Maritime Finance Company with the funding of a few hundred million dollars for the purpose of primarily filling the gap left by the lack of capacity from the traditional shipping banks. The concept of institutional investors with private equity minded returns entering the debt financing market in shipping is not exactly unique. Based on our experience and dealing with small banks and seasoned shipping bankers, the concept has been around at least for the last two years and we are aware of institutional investors providing small funding to boutique shipping banks for origination of new loans for double-digit returns (returns on the equity investment, not necessarily double digit interest rates). No doubt that such debt financing cannot be replicated on a massive scale given the cost of financing. On the other hand, it has been calculated, that for banks to fully comply with Basel III capital requirements, their spread on shipping loans will have to be more than 600 basis points. If one were to calculate the total cost of debt financing on a historical average of LIBOR, that numbers would not be much lower than 10%.
Probably in the near term of the next two years it will be difficult to deploy large amount of capital as debt financing for new projects while charging interest rates high enough to generate double digit returns. After all, current undertakers of new projects in shipping usually have their financing in place and access to different and cost competitive forms of capital from many geographic markets (such as export credit, Norwegian bond markets, highest priority receiving debt financing from shipping banks to the extent possible, etc). On the other hand, there are still plenty of ‘legacy projects’ with banks and shipowners from the better days of the cycle, projects that are not completely doomed but definitely could utilize some restructuring and some capital injection, not exactly equity but neither debt, mostly around the ‘mezz’ section of the capital structure, that could deliver low double-digit returns with low risk while bypassing most of the ‘issues’ an institutional passive investors loves to hate in shipping.
© Basil M. Karatzas 2013. All Rights Reserved.
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