Shipping Debt: When is “Expensive” Not Expensive?

Anyone who’s been active in the Greek ship finance scene over the last few decades will have vivid memories of negotiating, either for or against a financier, about the Holy Grail of most shipping groups: 10 basis-points-off the proposed interest margin (and, while you’re at it, same about the upfront fee, please). Other clauses, of a more technical nature, and with the potential to cause the borrower multiple amounts of pain compared to interest margin, seemed to be of lesser interest, or possibly even vanish from the radar of borrowers, provided that the (perceived) cost of capital was considered competitive enough.

Through the cycles of finance and shipping markets, this intense focus on lower pricing never quite stopped: for every percentage point added to the interest margin, as a result of a banking crisis or a new regulation, some basis points were subsequently removed, as a result of client pressure, each month down the road. Hence, even today, and despite all the talk about the tougher regulatory framework, the top-tier shipping groups are getting financed at close to their historical average cost (although the picture gets certainly more complicated as we move down the perceived quality ladder).

Although a lot of discussion can take place about the future trends of debt-capital pricing, there is one trend, witnessed by the writer, that seems to be at odds with the picture described above. Funds (typically offering their capital at materially higher cost than what top-banks are willing to part with their dollars) seem to be lending to privately-held, high-quality, shipping groups at an increasing rate.
To be fair, rarely is this fund money placed at a very senior level on those high-quality balance sheets. 

Given the creative minds of both the financiers and the “financees,” this more expensive - but also more flexible - capital takes its place on more junior levels of the shipping groups’ capital structures. But the key question still remains: why such a group, having deep-pocketed principals and easy access to cheap debt-capital, would enter into this sort of arrangement?

The answer may lie on the other side of the balance-sheet and be linked to another trend of the financial world: disintermediation. Although banks and public capital markets continue to have a central role in capital flows around the world, increasingly the ‘smart’ investment capital is provided from capital-holders to capital-seekers privately through funds (such as the ones that are also lending to shipping). 

These transactions may offer capital-holders more interesting opportunities, likely to outperform public markets, but also require larger tickets, greater sophistication and active monitoring of funds invested. As such, highly-liquid investors (as most principals behind top-quality shipping groups are) need a trusted and sophisticated partner to guide them through and help them achieve this Alpha in their investments. 

In owners’ quest to create a solid relationship with such a financially-savvy partner, a two-way street is created, with shipping groups using ‘expensive’ forms of capital provided by funds, while at the same time the groups’ principals use the capital ‘saved’ to target even higher returns on it, through partnering with the same funds. By the same token, funds that are in-principle comfortable with shipping risk, can place capital in high-quality entities, thus minimizing the counterparty risk (which, in the shipping industry, is perceived to be higher than in many other sectors).

This way of capital-structure/asset-management is a far-cry from the traditional one, historically adopted by Greek shipping groups, but it is also an additional indication that the Greek shipping community is well versed at the concept of efficiency, whether this regards the operation of a ship or the allocation of its capital and that “expensive” capital may not be as expensive as it initially looks… 

Dimitri G. Vassilacos is a Partner at Ship Finance Solutions, a boutique financial consulting firm specializing in the shipping sector. Prior to that he had assumed a variety of positions during a 20-year-long career in the banking sector including Head of Greek Shipping at Citibank and Manager of the Shipping Division at National Bank of Greece.