Has the world tilted east?

THE GLOBAL ECONOMIC downturn has hit the shipping sector as hard as anything over the past few years. New orders have been put on hold and vessel values and charter rates have plummeted. This, however, has created opportunities for savvy investors who understand the sector and are looking for a bargain.

As the shipping markets turn the corner, we will likely see more industry players getting back into the game.

Though financing has become increasingly hard to obtain, putting a further squeeze on operators and owners, ‘shipping’ banks and equity funds have not turned their backs on the market. They are pushing a harder deal, as is to be expected, but those who understand the cyclical nature of the business seem to be taking strategic positions.

Given that an increasing percentage of financing deals are being done in the Far East, in the following article, we take a look at some of the trends from Europe and China and consider if we are looking at the beginnings of a shift in the balance of power from West to East.

TOUGH TIMES IN THE EUROZONE

There is no doubt that the European shipping banks are facing a tough time.

To a greater or lesser extent, all are affected by the economic woes currently facing the Eurozone, either by direct exposure to government or central bank debt or as a result of the current lack of liquidity in the US dollar inter-bank market, which has left many banks struggling to obtain long- or even short-term
funding. As a result, many European banks are finding it difficult to refinance their outstanding debt and will therefore be forced to reduce their lending or sell assets.

The new Basel 3 regulations will also impact heavily on the banks in the coming years with banking analysts predicting that the new increased capital requirement ratios will require European banks to cut anywhere between $1 trillion to $4 trillion from their balance sheets.

Deleveraging on this scale will undoubtedly mean less money to go around in the shipping markets.

BUT ALL IS NOT LOST…

That said, the message coming from the main European shipping banks is that while there will be some contraction in lending in 2012, few intend to signifi cantly reduce their exposure to the shipping market from current levels. With record high fees, margins on shipping loans greatly increased (currently anywhere between 300 and 400 basis points), shorter tenors (a 5-year term replacing the pre-crash 8-12 year terms previously offered by the banks) and far tighter loan covenants becoming standard, the banks have the opportunity to build up a profitable and high quality loan portfolio which could pay dividends when the shipping cycle finally turns upwards.

In order to do so, however, it is likely that the banks will focus on lending to existing clients and to blue-chip owners with good credit records, deep pockets and secure employment for their vessels.

In terms of their existing loan portfolios, the banks seem relatively sanguine about recent drops in vessel values and charter rates and appear to be adopting a conciliatory but burden-sharing approach to consequent breaches in loan covenants. No doubt aware of the impact that a rush of tonnage for auction could have on the market as a whole, forced sales are very much regarded as a last resort.

However, with the industry predicting another tough year ahead in 2012, the banks’ patiencewill be tested to the limit.

CHINESE BANKS SEE AN OPPORTUNITY

With China’s developing focus on international ship finance, as well as the government’s aim to continue building on China’s position as a leading global shipping hub and shipbuilding stronghold, an increasing number of international ship buyers are now seeking financing in China — one of the few places where there is still relatively ready access to capital.

In response to this demand, and recognising the lack of liquidity in the Eurozone and beyond, Chinese banks appear eager to fill the perceived financing vacuum and have begun adapting their lending policies to make Chinese financing, and the process to access such financing, accessible to global players rather than just local interests.

Though precise statistics are difficult to come by, our sources show that ship owners tapping the Chinese debt markets face slightly higher margins and fees than they would in the Eurozone – but this is counter-balanced by rather longer tenors of up to 10 years.

WHO’S WHO IN CHINESE SHIP FINANCE?

According to recent statistics, Chinese banks have provided several billion dollars of loans to western ship buyers since September 2008 and loans for ship financing purposes have increased by roughly 10 percent over the past few years, occupying around 5 percent of global ship finance share to the end of 2010. By 2015, the global ship finance share of the Chinese banks is predicted to rise to between 10 percent and 15 percent. This is an impressive growth trajectory.

With a total aggregate portfolio of ship financing estimated at $88 billion to $102 billion, the Export and Import Bank of China (CEXIM), the Bank of China (BOC) and Industrial and Commercial Bank of China (ICBC) account for 75 percent of Chinese ship financing. CEXIM, especially, has played an instrumental role in supporting China’s maritime industry, available figures for 2009 showing that it granted hipping/shipbuilding – related loans of over RMB116.8 billion ($17.1 billion) in domestic currency and $8.5 billion in dollar loans.

BORROW CHINESE…BUILD CHINESE

An increasingly important financing solution for the shipping sector is the Export Buyer’s Credit for Ships (EBCS). This is a loan facility provided by CEXIM and other state-owned and commercial banks to foreign shipping companies for the construction, conversion or repair of ships by Chinese yards.

Perhaps responding to wider governmental economic policies, China Development Bank (CDB), CEXIM and ICBC – plus an increasing number of commercial banks – appear extremely keen to support Chinese private shipyards and to develop the Chinese shipbuilding sector as a pillar of the Chinese economy. To this end, the availability of vessel finance is being used as a mechanism to divert construction work to Chinese yards.

THERE’S BIG MONEY OFFSHORE

Following global trends, there is also an increasing interest among Chinese banks in the offshore oil and gas market. In 2010 CEXIM provided $400 million in financing for Bourbon’s $1 billion deal with Sinopacific to build 62 offshore vessels. ICBC, one of the biggest shipping finance and offshore project banks in China, has financed 150 vessels and offshore projects to the value of over $3.2 billion.

SKIN IN THE GAME

Ship leasing (mainly finance leasing) is also increasingly being used as an alternative source of funding for shipping companies, commodity traders (like Brightoil), and industrial users (such as China Huaneng and CNOOC) in the Far East, and Chinese banks are increasingly getting in on the act by establishing ship leasing divisions.

WHERE WILL WE BE IN 2020?

Notwithstanding the fact that Chinese banks are playing a greater role in global ship finance, their exposure to Western shipping companies remains limited.

Operationally there are still frustrations – the credit processing time is at least three or four times longer than at Western banks and, with their goal of turning into the world’s pre-eminent ship financing centre by 2020 in mind, Chinese banks still have a long way to go. But with their scale, increasing economic might, and strategic willpower, who would bet against the rise of China as a new centre of global
ship finance with an ever-increasing market share of the global ship finance portfolio?

Given the relative infancy of the ship finance market in China, our view is that Chinese banks are currently going through an understandable maturing process, but that in the near future they will emerge as a sophisticated, alternative centre of ship finance which will be accessible to players from the West and the East. This is positive news indeed for the shipping community.