The state of Ship Finance
13/06/2016

The state of Ship Finance

The markets have been riding on uneasy ground for some time now. The lack of clear direction and now major economy leading the way in terms of growth has left many sceptical in reference to what comes next. At the same time there are numerous risks that have swollen up over the past couple of months, risks such as the Brexit campaign for Britain to leave Europe and cause a long disruptive period in trade and financial markets. All this has been the prime reason why we have seen Ms Yellen (Chair of the Federal Reserve) take an abrupt change of direction and coming out and saying that she no longer favours a raise in interest rates this summer, while the price of gold (the usual safe haven for many investors for when risk is on the rise) has steadily risen over the past couple of days. Yet with all this in the air and having been discussed countless times amongst investor circles the biggest hurdle that remains for shipping at the moment is the prevailing state of the ship financing market.

The financing sector plays a very important role in the shipping industry, both in allowing for its growth and hold favourable returns for its equity stakeholders as well as taking the role as intermediary and “trust guarantor” between unfamiliar parties in a myriad of shipping related transactions. Issues as such related to the financial sector haven’t merely been limited to just the financing of new purchases or the ordering of new buildings but has also played their part in the ease of undertaking shipments as well as giving support to end buyers in the ship recycling industry in order for them to feed their business operations smoothly. One of the main issues that have been played out over the past 5 years has mainly been the labelling of shipping as a relatively high risk investment category which puts it in a disadvantageous position under new banking regulations. At the same time this has been happening under an environment where banks are still trying to shake off bad strategies of the past both within shipping and elsewhere in their portfolios and looking to get their house back into order. As a third hit, this has all been undertaken during a trough period in the shipping market cycle, while the fact that banks tend to be heavily procyclical in their involvement in shipping, means the gap between needed finance and available has widened considerable.

Since 2008 we have seen short waves of different investment vehicles try to play a part in plugging this gap, many failing in great disappointment to both them and the methods they proposed. Having gone through the difficulties involved in shipping in general and its large volatile nature has meant that we gradually move towards more innovative structures and solutions, however as of yet it has had little effect as we continue to see a fairly large pricing gap between what large shipowners pay compared to the small and medium sized entrepreneurs which have been the ones suffering the most during the downturn. Up to now cash reserves for some which were obtained during the peak market conditions have helped support their operations, especially in the case of most dry bulk players, yet even these reserves have either vaporised or are running very thin.

There is a considerable amount of liquidity out there for there to be extra to spare for the shipping industry and in cases as in Europe where the recent announcement by European Central Bank to further expand its quantities easing program over to corporate bonds (bonds issued by euro-area firms other than banks) things should continue to be positive on this front. The trick will be to find a right mix to be able to bring some of this liquidity over to shipping while meeting both the complexities of shipping as well as reflecting the “real” risk the industry is characterised with over to any new novice investor

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