A large part of the shipping industry experiences difficulty in raising money from banks for the construction of new, ‘green’, and thus more expensive, ships. This means shipowners need to be creative in finding alternative sources of financing. This was one of the main topics at the Mare Forum Shipfinance.
At the nineteenth Mare Forum Shipfinance on 6 November in Rotterdam, the bankers present repeatedly assured us that they were prepared to grant shipping credit. This will certainly apply to certain shipping companies with a high credit rating. Yet, for a much larger part of the shipping industry, including Dutch shipowners who are mainly active in the multi-purpose spot market, this is not the case. Therefore, shipowners have to look for financing for their activities themselves.
The fact that the banks are withdrawing from the financing of shipping is now a recurring theme at the Mare Forum Shipfinance, a conference organised by the Rotterdam-based Greek Jannis Kostoulas. The conferences, this year seventeen in total, are organised worldwide in mainly large port cities with ever-changing themes. The theme of the autumn meeting in Rotterdam is always the financing of shipping and is intended as a dialogue between shipowners and financiers.
Shipping Funds
Without banks offering financing, more than ever, the shipping industry is looking for wealthy Dutch people willing to invest in the sector. Last year, Shipping Company Groningen launched a blockchain-driven Shipfund. Meanwhile, Rotterdam-based ship financier Nesec is working on a 250-million-euro fund with selected mortgage shipping loans fed by investments from life insurers.
Shipping Company Groningen launched a blockchain-driven Shipfund
Stricter Requirements
The problem with the banks is that since the crisis in 2008, when many had to be rescued by the government, they have had to comply with much stricter conditions for the financing of ships. In fact, many German banks have decided to almost completely sell their large shipping portfolios with large losses to private equity funds. As a result, shipowners such as the Frisian JR Shipping were suddenly confronted with new financiers of their ships who demanded the mortgages, as a result of which the investors in limited partnership (commanditaire vennootschap or CV in Dutch) constructions lost their investment.
Banks that are still active in shipping financing, such as the Dutch ING Bank, ABN Amro and NIBC, are obliged to demand significantly more collateral (in the form of long-term charter contracts or equity capital) when providing a ship mortgage. Perhaps the most problematic is the requirement to hold significantly more capital up to 45 per cent of the loan in equity.
Banks still active in shipping financing are obliged to demand significantly more collateral
Providing a loan for a ship’s mortgage becomes very unattractive for a bank with such requirements, because it is expensive. The principle that banks generally finance up to sixty per cent of the costs of new construction or the purchase of a ship is also coming under pressure as a result. This percentage then falls to fifty or less, which means that the shipowner has to contribute considerably more equity to the financing.
It Takes Two to Tango
Shipowners and bankers have to tango, was the credo of Annet Koster, director of the Dutch shipowners’ association KVNR at the Mare Forum. In the fight against climate change, shipping is under great pressure to become more sustainable. Within the IMO, it has been agreed that by 2050, shipping will have reduced its greenhouse gas emissions by fifty per cent. The Dutch shipowners united in the KVNR believe that even a seventy per cent reduction is possible. ‘This is difficult, but not impossible,’ says Koster. However, this will only be possible if new ships are built that can sail on hydrogen, ammonia, ethanol or methanol.
Dutch shipowners believe that a seventy per cent CO2 reduction is possible
In order to be able to build these new ships, credit is needed. This credit will also have to come from the banks that now refuse to provide this if no long-term security can be provided for the expected merits of the ship. Long-term securities in the form of long-term charter contracts of ten years, for example, in which the value of a ship can largely be written off.
The book value then automatically comes close to a good second-hand value or ultimately the demolition value. Until now, ships have had an average life span of 25 years, but economically, they can be “worthless” and go to the scrap yard much sooner.
Large Part Depends on Spot Market
However, the problem is that much of the shipping industry, especially in the tanker, bulk and multi-purpose sectors, has rates that are set in spot markets. Shippers offer their cargoes to which shipowners can place a bid. It is then a matter of supply and demand that finally decided the final rate. If there is a lot of shipping space on offer, the rates will go down and that has been the case over the past few decades.
Shipping and shipbuilding are highly susceptible to the hog cycle
Especially up to and including 2008, there was a boom in the shipbuilding industry and in the years 2013 to 2015 (according to IHS Markit World Shipbuilding Statistics) there are still far too many new ships on the market that reduce freight rates in the shipping industry.
Shipping and shipbuilding are highly susceptible to the hog cycle. If one shipowner invests in new ships, the next will do so as well. Countries such as the Netherlands and Germany added a little extra to this with their limited partnership constructions, making it very attractive for private individuals to invest in the construction of a new ship. As a result, far too little has been earned for years now. Shipping companies like Flinter and Abis are now bankrupt. Let alone that there is money left over to experiment with the construction of sustainable ships that emit less greenhouse gases.
Far too little has been earned for years now
Shipping in the Dutch North
A sector in the shipping industry that is still particularly affected by this is that of short sea shipping, in which many shipping companies in the north of the Netherlands and Germany are active. German shipping companies used to even set up Dutch subsidiaries (Feederlines, Reider Shipping and Navigia) in order to be able to make use of the limited partnership scheme.
Yet, between 2012-2014, the bomb burst and many of the ships financed by limited partnership structures went bankrupt. Of course, these ships still had a value, but not the value of a newbuild. Many of these ships were sold at much lower second-hand values by order of the trustees. This required the limited partnerships to be abolished or restructured. A job that the Groningen shipowner Otto Torenbosch carried out at the now completely dismantled Reider Shipping in Winschoten, once founded as a subsidiary of the German shipowner Hermann Buss from Leer.
Between 2012-2014, the bomb burst and many of the ships financed by limited partnership structures went bankrupt
Torenbosch recently became CEO of the Dutch Shipping Company Groningen (SCG), a shipping company created at the end of 2016 from a merger of Navigia Shipmanagement, Feederlines and Thorco Shipping Holland. SCG now has a fleet of forty ships, thirty of which have been restructured. This means that after bankruptcy there are now new owners.
Some of the ships are (co-)owned by SCG itself. SCG is responsible for the technical management and has a charterer on board to take care of the cargo. Because the restructured vessels now have a significantly lower book value, for example four million euros instead of the original ten million, they are now profitable.
Accessible Shipfund
Now that freight rates are cautiously rising again, SCG also wants to be able to expand. Hence ShipFund.nl, an online investment platform that can be used to invest in SCG bonds. With an annual return of 4.25 per cent and a term of two years, SCG and its ShipBonds want to offer an alternative to the low savings interest rate. Therefore, it is possible to participate for as little as 250 euros.
SCG has already collected more than 800,000 euros and hopes to raise another 250,000 euros with the fourth tranche that opened on 15 October. SCG wants to use the proceeds of these bonds to buy second-hand vessels, especially in Germany, where they come on the market at attractive prices.
Nesec Shipping Debt Fund
Nesec is a ship financier founded in 1946 with the initial aim of stimulating the export of ships built in the Netherlands and providing subordinated loans to shipowners. Nesec thus financed part (five to fifteen per cent) of the equity of shipowners and did not yet do in ship mortgages (sixty per cent) which was left for the banks. However, now that banks largely avoid financing ships, Nesec wants to jump into this void by offering ship mortgages itself by setting up a 250-million-euro fund. The money for this should come from life insurance companies in particular. These 250 million euros could be used to finance some thirty to forty ships for short sea shipping.
The money for Shipping Debt Fund should come from life insurance companies in particular
The Nesec Shipping Debt Fund is also primarily intended to help Dutch short sea shipping companies finance new construction or the purchase of second-hand ships. Nesec focuses on short sea shipping, because this is typically something Dutch in which approximately seventy per cent of the Dutch shipowners (based on the number of physical offices) are active. Negotiations on the establishment of this fund are, however, still in full swing. The Dutch Ministry of Economic Affairs has already declared its willingness to provide a guarantee for the investments in this Nesec Shipping Debt Fund.
Picture: SCG’s gearless box singledecker Veendijk (by Eoin Gardiner).
This article will appear (in Dutch) in SWZ|Maritime’s November issue.
