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10 Key Factors affecting finance across the maritime industry

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With stakeholders facing wildly varying terms for finance availability across shipping, Wikborg Rein’s Beatrice Russ highlights the common factors to keep in mind.

Finance is the lifeblood of any capital-intensive industry, especially one as diverse and fast moving as shipping. In recent years, many maritime stakeholders in the main markets, whether second hand sale and purchase, newbuilding or recycling, have seen repeated hurdles in the easy access to finance under beneficial terms. There are a number of factors that significantly impact this access:

Who is asking for financing?

The most important factor when securing funds will always be the identity of the shipping company, its track record and the market segment or segments in which it operates. Diversification is not always a plus in an industry where niche players are able to leverage agility and superior knowledge to their advantage. The growing commodification of finance contracts in general sometimes masks this point and might give the impression that there is little variation in the available terms. 

In this context, where an industry segment is in the current cycle will have an enormous impact on availability, structure and terms of finance driving. The majority of finance arrangements are still heavily influenced by the laws of supply and demand in any individual segment of the maritime industry.

The need for additional finance will be assessed against questions such as: is everyone currently clamouring for cruises? Did insufficient container vessels get built leading to an inability to take advantage of a rise in freight rates? and so on. 

What is happening in other industries?

Competition is not just internal to the industry. As shipping is a global industry, owners can access a variety of finance markets outside their own domestic sphere. However, this might not help in circumstances where financiers generally are able to achieve better returns for themselves in another industry, for example the property industry, leaving less availability for shipping. An emphasis on a more corporate based strategy relying less on the asset class or niche opportunities might help in this instance to unlock finance. 

What is the value of the asset?

The returns that a financier gets for their money will drive availability and pricing. Historic performance might be at least as important here as future predictions, because it is more tangible. The old loan to value rules have not proven themselves to be a useful tool in the last major downturn. They usually only come into play when it is already too late and values have started slipping. This leaves a financier with the potential headache of how to unlock sufficient value from their security. However, for anyone prepared to play the long game, they are still useful and loan to value nevertheless helps to provide a guideline and helps to give the pricing of a transaction an asset boost in the evaluation. 

What is the size of the potential borrower and its operation? 

Size matters in most industries and shipping is no exception here. The scale of an operation as well as the ability to upscale further remains one of the drivers of terms. Consolidation in some market segments tends to change the type of finance used and might also influence ease of availability across the sector.

What is the type of finance being requested?

Different types of financial instruments such as mortgage-backed vanilla loans, syndicated semi-corporate loans, finance leases or operational leases allow for a more diverse market. The strength and weaknesses of the various groups and sub-groups of finance will inform what types are available for what type of shipping company. 

The attraction of a sale leaseback financing might be dampened for participants requiring a great deal of flexibility due to restrictions in the ability to exit the loan transaction, arising out of the need by the lessor to "own" the asset for a certain length of time in order to make the deal worthwhile. However, this type of borrowing may be ideal for other shipping operators for whom the long-term nature, high loan to value ratio and (often) attractive pricing can be ideal. 

Equity investments require a greater sharing of both risk and profits and may come with strings attached regarding expectations on returns.

The often more transparent nature of a straight mortgage loan tends to make it accessible for any type of market participant, although access may be impacted by the risk appetite of lenders and ongoing market conditions. 

How big is the risk?

The question of ‘how safe is my asset?’ applies not just to owners but also lenders. Blue chip insurance for hull as well as protection and indemnity remain a key consideration in any finance transaction. Without the proof that appropriate insurance is in place at all times — even covering the eventuality that an owner might have invalidated their own insurance by their actions or otherwise — a transaction will not be financeable in the any market. No financier would be able to justify sharing in a risk as large as the loss of the underlying asset on which the loan relies.  

What is the reputational risk?

Company and sector reputation has become a major factor in any type of lending. The shipping industry in general and the offshore industry in particular are widely seen as environmental polluters. In an age of greater transparency and activism, financiers will shy away from investing in projects which have the potential to embarrass them. This does not only apply to environmental concerns but pressure also comes to bear in terms of anti-money laundering and sanctions provisions, which are gaining increased prominence. 

Who is in charge in the world?

Geopolitics are playing a major part in finance arrangements, sometimes hiding behind underlying commercial considerations. Sanctions are currently one of the main features changing the landscape of finance arrangements. The real fear of war breaking out between certain countries or the potential implications of the actions of certain politicians now mean that some transactions are no longer viable. 

Protectionism in general tends to be the enemy of a global industry, whose business is the transportation of goods and people or work carried out offshore in the territorial waters of a country.

How high is the risk of disruption of operations?

While the supply chain is impressively resilient, it is still susceptible to disruption by events such as piracy, inclement weather and accidents blocking major shipping lanes. While these incidents are near impossible to foresee, there are some — such as cyber-attacks — that are increasingly viewed as fixtures on the risk landscape, thereby changing the specific terms of what is expected of a shipping company to take account of in its operations. 

Companies that have proven their ability to manage these risks and remain agile for recovery are more likely to secure favourable finance options.

How about innovation? 

Innovation, particularly when it comes to environmentally friendly technology, has a great role to play in improving industry reputation — but also carries inherent risk. The need to reform old practices has been apparent for some time and change is happening, but at a slow pace. 

Unfortunately, unproven technologies are seen as a risk factor and a "green" premium for finance appears a pipe dream, given that financiers remain conservative as a whole. The biggest driver for acceptance of innovations are regulations which make these technologies desirable or even inevitable in the market with availability of finance playing a minor part.

Beatrice Russ is a partner at Wikborg Rein. The focus of Beatrice's practice is the finance and development of projects in the shipping, offshore, travel and aviation sectors taking projects from the planning and construction phase through to full operation.