Financing shortage looms over ship orders

PUBLISHED : Monday, 20 February, 2012, 12:00am
UPDATED : Monday, 20 February, 2012, 12:00am


Hong Kong and foreign shipowners are expected to need between US$126 billion and US$150 billion to finance all the ships that are on order and due to be delivered over the next three years.

But doubts over whether this volume of finance will be available through banks, private equity or other financing methods have already raised concerns that some orders could be cancelled.

This, in turn, would affect shipyards, particularly smaller facilities on the mainland, where up to half of the yards could fail by 2014, according to China State Shipbuilding president Tan Zuojun.

Concerns over the availability of finance were highlighted in a survey published on Friday by law firm Norton Rose. According to the survey, 42 per cent of shipping respondents said a shortage of cash was the greatest threat to their business.

Andrew Hampson, the managing director of private equity house Tufton Oceanic, estimated the total contract value of ships on order was US$271 billion, but only US$146 billion of this was financed.

Hampson estimated ships worth US$144 billion were due for delivery this year, followed by US$80 billion worth of ships next year.

Russell Beardmore, the head of shipping finance in northeast Asia for Standard Chartered, said some firms had estimated their funding needs and the consensus seemed to be US$140 billion to US$150 billion. 'When we do our own estimates, that looks reasonable,' he said.

The head of ship finance at one European bank said finance to cover the order book 'will fall short of what is needed'.

A ship finance conference organised by Marine Money this month will highlight problems shipowners face.

Export credit was one of six primary sources of funding identified by the shipping sector over the next two years, according to the Norton Rose survey. The others were bank debt, which has historically provided most ship finance; shareholder equity; bond issues; private equity investment; and internal cash reserves.

Brad Berman, a partner at New York law firm Holland & Knight, is expected to explain the benefits of private equity and as well as converting debt to equity during a Hong Kong Shipowners Association lunch meeting today.

But Beardmore said that while up to US$10 billion of private equity might be available for the sector, this was nowhere close to total needs.

'The returns required by private equity investors are significantly higher than for senior debt, so this source of finance is really a replacement for the owners' investment, not an alternative to bank financing,' he said.

Bank borrowing for shipowners has become tighter and more expensive, with shorter loan repayment periods. Shipowners, including Hong Kong and mainland owners, have already seen several European banks, which have traditionally been the major players in the sector, either pull out or reduce their involvement because of the euro-zone credit crisis and tougher capital requirements under the Basel II and III accords.

'Some banks, like Standard Chartered, are interested in increasing their shipping loan portfolios. However, when we look at the banks with the largest shipping portfolios, more of them seem to be trying to reduce their exposure - or even exit the sector altogether,' Beardmore said.

Ted Petropoulos, the head of Petrofin Research, estimated that US$105 billion in loan payments would be made by shipowners on existing ship loans over the next three years. But he questioned whether all this cash would be re-lent.

Beardmore said: 'I think that financing conditions are more difficult for shipping companies now than in 2008-09.What makes the position harder for shipping companies is that there are now fewer banks open for this business, and some significant players actively looking to leave it.'


This share of shipping players surveyed by Norton Rose said the main lesson since 2008 was to maintain cash reserves and secure funding lines