The financial crisis of 2008 and the slow-down of the world economy have led banks to limit their high-risk investments. During the same period, as it is well known, the containership and the dry-bulk markets have suffered and have come against an industrial crisis which has resulted in a heavy drop of their market values and a high decrease of their daily earnings. As a result, shipowners who had purchased their vessels during the big boom of 2005-2008, at historically high prices, were not able to repay the very high capital expenses, while they also defaulted on main loan covenants since in most cases the outstanding loans were much higher than the vessels’ current market value. The fact that shipping is traditionally a high-risk industry along with the deep crisis of the shipping markets created a negative mixture for many banks who decided to exit the shipping industry or minimize their shipping portfolios. As a result, we have recently seen a shift to new geographical regions that they were not such strong the previous years as well as a shift to new financial markets, offering solutions alternative to the traditional banking finance.
Banking finance goes East
During the years, European banks have been the leaders in shipping finance. Though, recently they are the banks who have been affected the most. The Euro crisis and the stricter risk management policies that the ECB requires has put pressure on the European banks to divest. Another key reason is the collapse of the KG funds in Germany, who has driven German banks to focus only on good performing existing clients and domestic shipowners, while they have decreased their support to foreigners. Furthermore, the disappearance of the newbuilding activity in Western countries (except specialized ships) has also contributed to this lower financing activity of the European financial institutions. Further to these developments, the European banks have lost almost 20% of the global share of the shipping portfolios. While they controlled more than 80% of the global shipping portfolios in 2010, their current share (as of end 2015) is about 63%.
USA banks have also increased their portfolios by about 60% (from $9.50 billion to about $15.50 billion), however, their market share has remained at very low levels of less than 5%. Historically, USA has not been a shipowning country while they have also been pioneers in alternative financing schemes instead of investing in traditional banking finance.
The 20% decrease in the European banks’ market share has been taken by the Eastern banks (Asian, Australian), especially the Chinese, who have almost doubled the shipping portfolios (from $66.40 billion to $128.30 billion) and increased their market share by about 18% since 2010. The boost of the Far Eastern banks is mainly attributed to China’s overall governmental policy to support its shipping and shipbuilding sectors. When the shipping crisis appeared after 2008, the Chinese shipbuilding industry was affected by a big number of cancellations and was threatened with collapse. In order for the bankruptcies to be avoided the Chinese banks increased their financial support to both the current shipowners, via refinancing plans in order not to cancel their orders and the new Owners in order to invest in newbuildings. A common structure that we meet in Chinese finance, especially with foreign shipowners, is the leasing scheme by which the Chinese banks lend their money to local leasing houses which purchase the ships and then lease/bareboat-out to foreigners.
Table 1: Bank Portfolios (in billion USD) and Market Share per Region
Table 1 summarizes the bank portfolios for the period from 2010 to 2015 showing a clear geographical shift of the banking finance from European countries to the Far East. If we see in detail the profile of the shipping portfolios of the European banks, it is obvious that traditional lenders such as Germans, British and Greeks are the ones who have decided a major cut off their shipping portfolios. Dutch banks seem to be the only European banks which have shown an increase though this is not sufficient to keep the European shipping portfolios steady. Table 2 describes the shipping portfolios of the European countries from 2010 to 2015.
Table 2: Bank Portfolios of European banks (in billion USD)
Which are the top banks who lend the shipping industry?
The following table summarizes the shipping portfolios of the 20 top banks. Three Far Eastern Banks keep a position within the top 5, which shows the rising importance of the Far Eastern banks to finance the shipping industry. Otherwise, the traditional European banks still maintain leading positions. We should also notice that the portfolios of the 20 top banks cover $298.30 billion (as of end 2015) while the 40 top banks had a total portfolio of $397.84 billion (as of end 2015) which is almost the same with the relevant figure of 2014 ($397.90 billion).
Alternative Schemes of Shipping Finance
Since the banking system is suffering, Shipowners recently explore alternative means of financing in order either to refinance the existing bank loans or to invest in new ships. Some of the new schemes that we recently see are the following:
- — Equity funds: This is the most famous alternative source of shipping finance that we have seen the in the post-2008 world. It is estimated that between 2008 and 2015 more than 16 billion USD have been injected in shipping from various private equity funds. Most of these funds are USA based and they usually form Joint Ventures with major shipowners in order either to refinance current ships or make new investments. Oaktree Capital Management is a major US fund with high investments in shipping during the past years with Joint Ventures with shipowners like Navig8 and the Greek Starbulk. In a deal, which took place in 2013, the Oaktree fund invested in 14 chemical tankers which were in the portfolio of a major German bank (Commerzbank). As a result, $383 million were removed from the shipping portfolio of Commerzbank. Another fund, Apollo Global Management invested about $500 million in container vessels through a JV with Rickmers Group. Equity funds intent to invest in today’s historically low prices and therefore to make a profit from future value appreciation. Since the shipping markets have kept their downside movement during 2014-2016, the private equity funds have faced losses and some of them have already decreased their shipping portfolios recently being afraid that we have not yet seen the bottom line.
- — Public Offerings: Shipping companies offer their equity shares to the public in order to raise finance both in Stock Exchanges and Over the Counter. The most active stock exchanges are the New York (NYSE), the Nasdaq and the Stock Exchanges of London, Oslo, Hong Kong and Singapore. The process of taking the company public is time-consuming and requires much cooperation with several parties like lawyers, accountants, financial advisors and other parties as well as a due diligence to be completed in order to ensure that the candidate company fulfills and follows strict financial and regulatory requirements. Finance through public markets is usually raised from the biggest companies in our industry and money have been raised by companies like Navios, Euronav, Costamare, Diana Shipping, Teekay, GasLog, Navigator and others.
- — Sale and Lease Back: This is a modern instrument which can be used for refinancing purposes. With this, the shipowner sells a vessel to a leasing house or fund who subsequently charterers the vessel back on bareboat. The shipowner loses the title on the ship but keeps her full control on same. Top Ships (ex. Top Tankers) entered into a significant Sale and Lease Back transaction in 2006 for 13 vessels of its fleet from which they sourced $550 million. In 2010 NewLead Holdings sold 4 of their bulker ships and leased them back in a refinance deal which relieved the company’s balance sheet from a debt of about $87 million. This deal was awarded as the deal of the year 2010 by the Marine Money Magazine.
Since the Chinese economy is slowing down recently and also the orders for new ships are much less, it is highly expected that the financing from Far Eastern banks may also be affected and slowed down. In the west, it is expected that major traditional ships like Commerzbank, RBS and HSH may exit shipping and new banks enter shipping, however, given the bad economic environment in Europe, the banking finance is expected to remain weak and banks to deleverage their portfolios. In view of this, the non-banking finance like private equity funds, IPOs and Sale and Lease-Back or pure Leasing are the finance alternatives for Shipowners and their presence is expected to be increased.
In any case, in order for shipping finance to be improved and the lending opportunities to be raised, we need to see a market recovery which in the dry bulk and containership markets is not expected soon. Also, some recovery of the world economy and the strengthening of banks’ balance sheet and relevant capital ratios can help financial institutions take further risks and increase their involvement in the risky industry of shipping.
Shipping finance is another sector of our industry which recently changes, with a view to more alternative solutions. In line with these changing trends, OpenSea also brings a new way of getting most competitive freight rates for Shipowners. During hard times, it is not just enough to cut your operating costs, but it is even more important to explore new opportunities and develop new clients. One of our users said: “I don’t want to invite my colleagues, because this is my competitive advantage.” In the meantime, we keep on growing with new ships and cargoes being placed in our marketplace every day and with dozens of firm offers being sent between our users every week. This strong market support on our business model confirms its high efficiency.