Leasing units step up to the plate for Chinese yard finance

This week marked the second deal in a month, that the leasing unit of Chinese conglomerate China International Marine Containers (CIMC) has sealed with No 2 container line Mediterranean Shipping Company (MSC).

The $425m sale and leaseback deal for five 8,800-teu container vessels to be built at New Times Shipbuilding follows closely on the heels of a similar $595m seven-ship deal for vessels to be built at Dalian Shipbuilding Industry Corporation (DSIC) signed with MSC earlier this month.

It has also been reported that the finance arms of other big Chinese corporations such as Bank of Communications have been doing the same thing for MSC. The finance leasing unit of this bank was reported to have sealed a deal worth around $320m for four 9,400-teu ships to be built at Shanghai Waigaoqiao Shipbuilding which would then go on charter to MSC.

The common denominator with all the deals has been the exceptionally low downpayment terms negotiated by the finance firms of less than 5% and usually at 2%.

While this has not done much to solve the yards' problems of a liquidity squeeze, what it might have done is to at least provide some clarity on order flow and put the strength of their credentials behind the orders.

Meanwhile, the credit tightening in China continues, with banks putting more pressure on shipyards to negotiate better contracts asking at least 15% downpayment in order to secure loans.

There have also been reports of the banks cutting credit lines and moving to recover outstanding loans, according to the China Association of the National Shipbuilding Industry (Cansi). Other tightening measures include withdrawing loan approval rights which branches had previously.

Analysts have suggested that in a protracted way, this could achieve the government's aim of weeding out the weaker shipyards as those with stronger financial standing would be the most able to withstand the credit crunch.

This is even more so as the pressure has built to reach even provincial government level. The eastern province of Jiangsu, which is home to many of China's yards, has emerged as China's most indebted local government.

This is bad news for large but even slightly shaky companies such as China Rongsheng which has been trying to reach out to local governments to help bail it out.

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