Warning on ship financing gap

PUBLISHED : Thursday, 29 September, 2011, 12:00am
UPDATED : Thursday, 29 September, 2011, 12:00am


Maritime experts have warned of a shortfall of up to US$200 billion in finance available to pay for merchant ships already on order and due to be delivered over the next three years.

The warning comes as the overall value of the ships on order falls, following a drop in ship values since the vessels were ordered.

The problems, which could have implications for Hong Kong and mainland shipowners, were outlined at a Marine Money ship finance conference in Singapore.

Damien Adams, a partner at maritime law firm Watson, Farley and Williams, said the shortfall in finance was estimated at between US$30 billion and US$200 billion.

By comparison, the 25 biggest ship finance banks have a total shipping loan book of around US$330 billion.

There is a wide gulf between the estimated shortfall figures because of uncertainty over how many ships have been ordered and will be delivered and the amount of cash that has been arranged by shipowners. Clarkson, the British shipbroking house, estimated there were 6,156 ships on order for delivery between now and 2016, totalling 405.4 million deadweight tonnes. This covers ships of all types, including containerships, tankers, dry cargo bulk carriers, ferries and offshore vessels.

Of this total, Clarkson estimated there were 626 tankers on order totalling 90.7 million dwt. Nicolas Duran, head of sale and purchase and new building departments at shipbroking house Fearnleys Asia (Singapore), estimated that these ships had a total contract value of US$41.5 billion. But ship values had fallen so much, he said, these ships had a resale value of about US$30.5 billion.

Duran said this decline in value posed a huge issue for the industry. This is because shipowners may only get finance to cover a proportion of the value of the ship rather than the contract price of the vessel. As a result, shipowners would have to increase the amount of equity they contributed to finance the ship. This cash would come from internal resources or from the sale of other assets, putting further financial pressure on shipowners just as revenues are also set to fall as a result of declining freight and charter rates.

These pressures also come as banks are imposing tougher restrictions on the amount of cash made available to shipowners.

Marine Money shipping analyst Rodricks Wong said that while some Chinese banks were studying the feasibility of offering dual-currency loans in yuan and US dollars, mainland financial institutions were facing dollar-focused liquidity issues.

'There is a reluctance to lend in US dollars and there has been a corresponding decline in the number of loans to both domestic and foreign owners,' he said.

Banks such as ICBC, Bank of China and China Construction Bank have been among the largest lenders to mainland and foreign owners, although the total size of their ship finance book is difficult to estimate.

Bankers said possible solutions to the ship finance shortfall included bonds issues, private equity and additional equity raising through possible secondary listings in Hong Kong, Singapore or elsewhere.