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Live From Sea Asia 2017
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Tay Kim Joo, director, debt capital markets, DNB Bank

Owners seek secondhand refinancing but lenders show little interest

With less new ships being ordered amid the severe oversupplied shipping market and vessel assets changing hands in light of restructurings, owners are starting to seek refinancing for secondhand tonnages, but bankers have expressed little or no interests in entering into deals for such passed down assets.

At the Sea Asia 2017 conference session on ship finance, cfo of Neptune Orient Lines (NOL) Serge Corbel highlighted that the industry would now be more concerned with the refinancing of secondhand vessels and the vessels acquired from the demise of some shipowners.

“For container shipping, there is currently not much stress on finding financing for new tonnage, but rather the concern is the refinancing of secondhand tonnages. The landscape has also moved into something new – where companies are looking to banks for corporate financing rather than specifically ship financing,” Corbel told delegates at the conference.

Tay Kim Joo, director, debt capital markets, DNB Bank, confirmed Corbel’s concerns as he shared the reality that banks, if given a choice, prefer new ships.

“Banks in general have internal policies on what age the asset must be and that it should be debt free, though it also depends on the asset type. But to put it straight, until today all banks prefer new ships,” Tay said.

Indeed, the number and size of financing deals for new ships have declined, according to some numbers shared by Tay. During the first quarter of 2017, there were 22 ship financing transactions compared to 56 in the year-ago period. The average transaction size of the deals has also gotten smaller to around $180m from around $256m over the same comparative period. “The 22 transactions in the first quarter is also the lowest ever in the past 10 years. This tells us that the market is very, very slow or close to dead,” Tay said.

Zhou Ling, general manager, shipping leasing department, CMB Financial Leasing, said plainly that “we prefer modern tonnage and secondhand vessels are a no-no for us.”

CMB Financial Leasing’s business model has increasingly expanded its portfolio of international players, after it was first carved out by the Chinese government to support Chinese shipbuilding activities.

The shift to welcoming international players came due to changes in the market dynamics where there is now a lack of sufficient fundings after the withdrawal of major European banks from the ship financing scene.

“The leasing model is certainly here to plug the gap. But going forward if the shipping market recovers to the extent that owners are able to again rely on traditional shipping banks, then the leasing model may become less attractive as we know the leasing model is more expensive than the traditional debt solution,” Zhou said.

“But for the time being we do see a need for leasing solutions. The owners who come to us typically look for more flexibility, higher leverage and longer loan tenure,” she said.

Just two years ago, 100% of CMB Financial Leasing’s transactions were all done for Chinese domestic owners. Today, that equation has changed to 60% international and 40% domestic. New deals over the past 12 months seen at CMB Financial Leasing saw around 90% of international players.

BW LPG, another shipowner on the Sea Asia panel session, has not yet tapped into the leasing model of financing as the shipowner has still been able to secure support from traditional bank loans, according to the company’s cfo Elaine Ong. “It [financial leasing] is one area we are considering but it comes at a price so we need to look at it closely,” Ong said.

Ong said the company has maintained a fairly good cash balance to brace itself for a rather hard fall in 2016 when rates declined. “We have not resorted to alternative forms of financing and continue to try to steer our balance sheet to keep it at a healthy level,” she said.

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