The new ship finance paradigm

When JP Morgan Asset Management closed the capital drive for its Global Maritime Investment Fund II earlier this month, it did so having smashed its $400m targeted capital raise, attracting $480m in capital commitments.

The Fund, with an objective of investing in modern vessels operating in shipping sub-sectors that are going through substantial distress and with values trading at near-historical lows, saw commitments from different international institutional investors including pension plans, insurance companies, and endowment and health care entities. The initiative, one of the largest of its kind, has already invested $312m by acquiring 14 assets.

The success of the fund coincided neatly with an improvement in the physical shipping market: the Baltic Dry Index was 473 on the day the fund opened on January 1, 2016. By the closing date on June 20, 2017, it had reached 847. That said, the BDI is still a long way off from the heady highs of 2008, when, at its peak, it reached a staggering 11,771. So, while the physical shipping market is improving, it still has a long way to go to reach the lofty heights of 2008 – this untapped potential upside was likely a key attraction for the Fund’s investors.

Good company

JP Morgan is not the only fund manager putting its faith in the shipping industry. Northern Ship Funds, based in Stamford, Connecticut in the US, is currently actively seeking investment opportunities for its Northern Shipping Fund III LP, which has already garnered over $505m of committed capital. This alternative, asset-secured capital provider offers loans and leases for maritime offshore vessels.

COSCO Shipping Development has also announced the launch of two shipping funds, which will cover ship leasing as well as allowing the firm to invest more capital in non-performing shipping assets, asset restructuring companies and asset-backed securitisation. The two funds comprise a Chinese renminbi-denominated fund for investments in China’s domestic business and a US dollar fund for international projects.

“Our plan is to align with financial institutions in China and expert partners in the world at a high level to ensure companies are not only well-funded, but have the best chance of success in the Asian market,” fund general manager Jin Hai told delegates at the China Maritime Finance Summit in Tianjin.

A surprising move

Yet, these funds seem somewhat at odds with the current state of more traditional ship financing. According to Moody’s, by the end of 2016, Germany’s five biggest ship lenders reported outstanding loans relating to ships of E59bn, with an average problem loan ratio of 37% that year. This was up from 28% in 2015. The rise forced a number of banks to raise reserves and, in part, experience losses during 2016. While this move improved the banks’ aggregate problem loan coverage ratio to 51% at the end of last year, Moody’s feels banks need a coverage ratio of at least 60% to ensure they are adequately provisioned for potential losses from shipping loans.

“Despite measures taken by individual banks in recent years, some German lenders to the shipping industry will face incrementally higher credit costs as long as the industry fundamentals remain weak and supply outstrips demand,” says Michael Rohr, vice president senior credit officer at Moody’s Investors Service.

Meanwhile, in Greece, bank ship finance into Greek shipping contracted 8.77% during 2016, the biggest contraction since the beginning of the financial crisis in 2009. The top 10 Greek ship financing banks also collectively reduced their loan portfolios by 5.36%, drawn loans were down 5.34% and commitments were down 38%.

“This confirms the underlying contraction of bank ship finance, as well as a switch to other forms of finance like funds, Chinese leasing, etc, which are rapidly expanding,” Ted Petropoulos, head of Petrofin Bank Research, pointed out in a research note.

Efforts are being made to reduce the damage to bank ship finance in Europe with the European Central Bank (ECB) launching a review of lending of banks to the shipping industry. According to Reuters, in mid-June, the ECB’s supervisor sent an email asking a number of European banks to provide details of their shipping loans and the status of their loan loss provisions.

However, despite the negativity surrounding traditional ship financing, there is room for a modicum of optimism about the future. In the same Petrofin Bank Research report, Mr Petropoulous expected that the quality of banks’ lending portfolios will eventually recover and bank financing will become attractive once more.

But, while the market waits for that recovery, funds are gaining at the banks’ expense, picking off distressed assets for discerning non-shipping entities to profit from. The Global Maritime Investment Fund II sought to make investments in the industry including dry bulk carriers, oil tankers, container ships, offshore vessels and distressed assets, as well as looking to buy lower-priced shipping assets and lease them to companies that needed marine transport infrastructure. As traditional avenues of ship financing fail, shipping funds like JP Morgan’s will likely reap the benefits of more distressed assets on the market.