Ship from dollar paper in the money sea concept composition photo

High interest rates have prompted a shift in financing options

 

By Carly Fields
 

Rising interest rates have sparked a profit surge for many banks, leveraging the spread between increasing interest income and slowly rising deposit funding costs. This trend has led banks to adjust their portfolio strategies, moving towards assets with stronger cashflow generation potential, such as shipping, while reducing exposure to more stressed asset classes like real estate, according to Hamburg-based ship finance company oceanis.

In its Q4 State of Ship Finance Report, oceanis noted that shipowners have responded by utilising cash to repay debt amid higher financing costs and limited investment opportunities. Consequently, banks have faced pressure to maintain portfolio size, leading to lowered pricing and the introduction of new products. 

For shipowners, this has been an excellent development.

These banks have decreased their pricing to maintain and grow portfolio size,” said oceanis. These lower margins have three main causes. First, shipowners’ increased credit quality, as well as strong underlying markets, mean lower risk to the lenders. Second, banks reduce pricing to attract new clients and reverse the trend of loan prepayments. Third, the decreased margins remain profitable for these banks because interest rate paid to depositors has not risen as quickly as the interest rates which apply to the loans these banks provide, oceanis said.

 

Question of age

Banks' vessel age policies are playing a significant role in portfolio development, with a focus on newbuild vessels, often for environmental reasons. Shipowners, when “flushed with cash”, prioritise repaying debt secured by older vessels, capitalising on current high base rates. “This debt is normally the most expensive and it is prudent with regards to the vessels’ cash break evens. The fact that debt is currently expensive, as base rates are high, makes this easy to justify,” oceanis said.

To navigate the competitive landscape and sustain portfolio growth, banks are exploring innovative financial products tailored to the prevailing interest rate environment. Non-recourse senior-secured revolvers and construction finance are among the offerings gaining traction, providing shipowners with flexibility and readiness to seize investment opportunities as they arise.

Erlend Sommerfelt Hauge, managing partner at oceanis, noted: “The non-recourse revolvers are very helpful for owners that want to be ready once the opportunities arise. You avoid paying the full interest rate on funds you have easily available, saving the time of getting approval once the investment opportunity is presented.” 

Moreover, projections indicate a downturn in Secured Overnight Financing Rates (SOFR), presenting an opportunity for shipowners to lock in low margins. Interest rate swaps offer another mechanism to mitigate near-term interest costs, further enhancing borrowers' financial positions in anticipation of market shifts.

Focusing in on the two main bulk sectors, oceanis sees earnings across dry bulk vessel categories improving, driven by factors like increased demand from Chinese steelmakers and a resurgence in Pacific trade.

Earnings are now ‘ok-to-good’ from handysize to capesize, though capesizes are the largest positive outlier of the bunch,” oceanis said. 

Financing options for newer dry bulk vessels are becoming more attractive, with Chinese lessors offering superior terms compared with their European counterparts. Similarly, older dry bulk vessels seeking lower leverage benefit from decreasing interest costs, signalling a positive trend in financing accessibility.

 

Minimal movements

For tankers, movements in financing have been “minimal” over the past three months as financiers have “taken a pause from the previous race to see who can offer the lowest pricing”.

In tanker financing, stable high earnings are supporting confidence in asset values, although longer-term charters of three years or more face challenges in providing sufficient rates for high leverage. 

Similar to the container financing markets of mid-2022, almost all refinancings have now been completed in the sector with new loans only being requested for acquisitions and newbuilds

As acquisitions are now more commonly made by Middle Eastern buyers which often invest only with equity, the number of debt transactions in the sector has fallen,” said oceanis.

Despite this decrease in transaction rates, pricing is around the same levels as it was at the end of 2023 with no large changes seen for the “most vanilla of transactions”.

There has, however, been a split in the opinions of higher-cost financiers on whether the tanker bull market is here to stay. “Some lenders, which invest both equity and debt in the sector, are becoming very confident in future asset values and can offer high leverage at competitive pricing.

“Others, whose backers see the tanker market as being at a peak and potentially declining from here, are finding it more difficult to lend at these levels. These more cautious lenders are maintaining pricing levels while slowly reducing the leverage available and requiring multiple vessels per facility to diversify earnings sources,” said oceanis.