If banks are gone for good – what’s next?

While traditional banks continue to pull back from ship financing, private equity providers are searching for the fastest exit solutions, leaving shipping companies in doubt over what finance options are still available to them.

Those traditional lenders that are still out there are certainly more cautious today. In the past, they have willingly, and many would say recklessly, lent money when the markets were good and prices were high. But the market crash piled pressure on both the banks and their relationship managers. Speaking at the Marine Money Ship Finance Forum in London, Tor Kildal, senior partner at Fearnley Project Finance AS, noted from his own interactions with traditional lenders that they are pulling back and are only investing in new buildings.

Historically, some of the best investment sources have been found in the US equity market, but that run seems to have come to an end. Last year, a number of companies tried and failed to secure finance within the US equity market, according to Heidmar chief financial officer and treasurer, Kathleen Haines. She added that there was now limited financing to be found in the US. Other panellists at the conference agreed with Ms Haines’ statement and predicted little activity or competition from the US in the year-ahead. But even if finance could be found in North America, the panel questioned why ship operators would choose to accept financial deals from a primary market when they could opt for a secondary market, where they’d likely find bargains, instead.

Private sources

Private equity as an alternative ship financing option was also up for debate. Tufton Oceanic portfolio manager Paulo Almeida said that a number of private equity firms had descended on shipping when the market was high, attracted by firm financials and long term returns, but he warned the market not to rely on their staying power. Those that do stick around will be “increasingly selective” on the deals they choose to finance, he added. His colleague, Andrew Hampson neatly summed up the sentiment: “Private equity is not, and I doubt it will ever be a game changer for financing the industry in the future.”

Meanwhile, Ms Haines pointed to another alternative option for securing finance: pooling arrangements. Pooling has seen something of a return to favour over the past few months as a response to extremely challenging market conditions characterised by low freight rates, increased competition, and increasing specialisation of tonnage. Pooling, she said, represents an alternative to, although can sometimes be a precursor to, corporate consolidations.

Committing ships to pooling arrangements had lost its appeal as ship owners made attempts to optimise the returns on their vessels amid challenging spot market conditions. But some owners are starting to appreciate the benefits of pooling again. Aggregating owned ships in pools with ships of similar specifications, age profiles and sector operations offers a competitive product that can provide better availability and positioning to potential charterers, said Ms Haines. For owners, the incentive is that the revenues of a ship operated in a pooled fleet will out-perform those of a ship traded as a single unit in the spot market. The pool also mitigates against the risk of repetitive periods of unemployment.

With revenues pooled and allocated according to the pool agreement, this solution offers a viable alternative to private equity, said Ms Haines. If nothing else, pooling can provide a solution, on an operational level, to the issue of size and market relevance.

Location, location

When it comes to finance there is also a geographical bias to contend with as well. Asian owners, it seems, may have a slight advantage over European owners when it comes to finance availability.

Comparing banks in both regions, Michiel Steeman, managing director of shipping finance Europe for DVB Bank, said that those in the EU have certainly been more affected by issues such as the credit crunch.

Mr Almeida agreed with Mr Steeman’s assessment and added that the EU is simply less attractive to Asian banks. He said: “Historically, the EU has been attracted to smaller, single ship companies which Asian banks do not want; they prefer corporates.”

In addition, Export Agency Finance managing director Christopher Conway said that there was still a huge amount of capital investment in the Chinese market specifically. “To put this into context, in the last three years China has consumed 6.5 billion tonnes of cement,” he said. “That’s more than the US consumed in the entire 20^th century.” That said, both regions are still experiencing pressure on financing, added Mr Conway; there is ultimately no escape from the current weak economic climate.