Shipping industry seeks additional sources of capital as banks pull back on lending
A pullback in bank lending will increasingly steer global shipping companies to tap the capital markets for funding, according to Kroll Bond Rating Agency.
In a recent report, Kroll noted that a cash crunch, along with an oversupply of vessels for hire, is already driving consolidation in the shipping industry. This should make the combined fleet operators more attractive to investors, providing easier access to private debt capital.
“The industry has historically relied on funding from traditional shipping banks; however, many of these lenders have scaled back their funding by off-loading both non-performing and performing loans,” the report stated. “The funding gap in the shipping industry is substantial, and it is widening over time.”
As banks have pulled out of the market, Kroll stated, firms have turned to funding from the Norwegian high-yield bond market, export credit agencies and Chinese leasing companies. But more funding sources will be necessary, in particular as shipping firms are being required to modify and modernize their with more energy-efficient and cleaner-fuel vessels under binding rules enacted by the International Maritime Organization.
Those new requirements will ban the use of vessels in 2020 that lack “scrubbers” to clean the emissions of high-sulfur content fuel in older ships.
Kroll did not speculate on the additional use of securitization as source of funding, which is a common route for another shipping-industry segment: the management of leases for the use of dry-goods and freezer shipping containers transported on vessels. Over the past two years, some $9.2 billion of bonds backed by fleets of shipping containers have been issued in the U.S.
But container demand has remained steady amid global trade war threats and the oversupply of oil tankers that has challenged shipping vessel firm revenues. (Demand for shipping containers grew slightly in 2018, according to global shipping industry association BIMCO - the Baltic and International Maritime Council) - which reported a five-year high for container freight rates between Asia and U.S. West Coast trade routes, an an 8% surge with inbound-loaded container imports on the U.S. East Coast.)
Kroll's report traces the shipping industry’s current financing crunch to the past availability of cheap funding from banks; this kept the cost of acquiring ships low, which in turn drove down hire rates and fleet usage, thus reducing revenues.
But now, the "reduction in liquidity has created a need for alternative sources of financing in the shipping industry,” the report stated. “This funding mismatch is only heightened by steadily rising interest rates and increasing volatility in global trade markets,” including the rise of multinational tariffs in the Trump administration era.
Kroll explained that banks view shipping as a risky endeavor to underwrite. Demand for vessels ebbs and flows in response to macroeconomic activity, and capital costs are concentrated with large procurement needed to add ships when demand rises. Financial returns on ship investments are also spread out over the life of a vessel, or as much as 40 years, the report notes.
Shipping firms are also heavily dependent on their customer relationships to establish creditworthiness. “The strength of these relationships is often the difference between finding utilization or not, especially when the market is contracting,” according to Kroll. This was seen most recently in the energy sector and offshore drilling.
But shipping firms have usually maintained high levels of liquidity through available credit lines to weather downturns, the report said. For instance, the $2.38 billion equity deal in October combining two London offshore drilling industry firms – Ensco and Rowan Cos. plc – that was touted for the resulting $3.9 billion combined liquidity.
The need to attract investors and alternative private capital has been a factor in industry consolidation this year.
Executives for Diamond S Shipping of Greenwich, Conn., stated it was access to capital markets that drove its $1.65 billion acquisition of the tanker fleet from Capital Product Partners announced in November. (The combined fleet will be 68 ships, and will result in the third-largest publicly traded product fleet shipper in the world.)
“These mergers and acquisitions are mostly funded by cash or with equity deals, not with additional debt, which should also bolster credit quality,” Kroll’s report stated. “In addition, current orders for new vessels are also at a relatively low level, which should result in higher utilization and higher rates for existing vessels, so long as the global economy and trade remains healthy.”