Sean Durkin, president of Northern Fund Management America, summed up the current situation: “The flow of funds has slowed down for shipping, the equity market is probably at its lowest point for shipping companies over the last 20 years, and new money coming in from financial sponsors is slow.”
The influx of private equity (PE) during the last few years, seen as an alternative financing source for owners after the retreat of European banks, is also coming to a point of fatigue due to the prolonged downturn of shipping. “People are tired of hearing market recovery next year when it never does,” said Philip Clausius, managing partner at Transport Capital.
“The financial structures that we think will work in today’s market are those with more downside protection and additional layer of protection for people coming from outside of the (shipping) industry, and this trend will play out in the next 12-24 months,” Clausius said at the Capital Link China Shipping Forum held in Shanghai this week.
Hsu Chih-chuen, chairman of Eddie Steamship Corp and Courage Marine, said in the event that PE is coming onboard, they would want to own senior equity interests while the shipowners themselves would have to own junior equity interests.
“Hence for example if a ship with a $100m value were to drop by 20%, the PE will still get all their money back while the owner will lose money,” Hsu said.
Clausius pointed out that the public markets “are firmly shut at this point” as public investors have come to realise that this is a very volatile industry. “Why should public investors buy into a new company when there are all those existing ones? So the public markets are shut until we see some degree of sustainability. I am not very optimistic on public markets until at least the first half of 2017,” he commented.
Fresh financing for new start-ups is also virtually non-existent in this current market as banks are not willing to engage with companies that have no track record. “There is capital available for shipping but it is a challenge for banks to find good quality, strong companies with good projects. Banks need to ensure that they do not have to face losses when they find themselves in a downcycle like offshore at the moment,” said Christos Tsakonas, regional head of Asia, corporate bank department of shipping, offshore & logistics at DNB Asia.
“We are watching the supply side of the industry very closely as it is important that we do not incentivise owners to deploy more new vessels,” Tsakonas said.
Aaron Sen, head of ship finance Asia Pacific and deputy global head of ship finance at Nord, agreed that “money is available but banks won’t be doing deals on a high leverage basis.” Sen added: “Furthermore regulations like Basel III are not incentivising banks to be very open to increase their lendings not only to shipping but to other industries as well.”
For banks like Credit Suisse which does not yet have a substantial ship financing portfolio, the current shipping downturn however has not prompted the Zurich-headquartered bank to totally shy away.
“The big question is how can we get the right business in an environment that we are not that familiar with,” said Mario Behe, global head of ship & offshore drilling finance at Credit Suisse. “We need to take small steps to avoid mistakes because mistakes in this industry are incredibly costly.”
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