The New Reality of Ship Finance
Ship finance is in the midst of a continual downward spiral. Eight years on from the onset of the financial crisis, banks continue to announce steady, if not increasing loan loss provisions against their shipping portfolios. Some are selling part or all of their distressed loan books to private equity and hedge funds, and for the majority of shipowners, new bank debt continues to become harder to source.
Despite investors pursuing an expansive search for yield, exposure to shipping is still considered too risky. The industry’s reputation for being cyclical and highly volatile is a significant deterrent, prohibiting debt investors and private debt providers alike from supporting it. Private equity had its foray into shipping not long after the financial crisis. It is now licking its wounds as the lack of any significant market resurgence has impacted their ability to realize meaningful returns.
So where does this leave our beloved yet beleaguered industry? It would seem that it is set to enter the realms of more traditional corporate and commercial finance. This means that large, publically listed companies will remain of interest to banks seeking to use their balance sheet to achieve cross-sell targets. Smaller players will continue to face challenges in getting access to financing. If able to do so, it will most likely be at significantly more conservative leverage levels, and with interest margins considerably higher than their larger, listed counterparts are probably paying.
In this environment, notable points of differentiation will define success from failure for the smaller, more traditional shipowner. This goes beyond the changes imposed by regulatory bodies and requires an innovative and disruptive solution to what has essentially become a commoditized service. It is a point of fact that applies equally to the liquid and dry bulk sectors, as to the container sector. Consider as examples an ‘Uber’ like solution for the shipping world; or the (re)introduction of high-speed shipping to disrupt the air freight and short-sea sectors.
The point is that in this post 2008 world of finance, the bigger players in shipping will continue to get bigger with support from the banks and the benefits of scale playing in their favor. However, as they continue to scale up, their ability to react quickly to change and market disruptions is challenged, both by distorted faith in size and power, as well as the inevitable resistance experienced when changing the course of a very large vessel.
This is where the opportunity lies for those that are nimble and innovative. Market disruptors are able to capture the attention of private equity and venture capitalists. With backing from such parties, bank finance can become more accessible, albeit at a higher price than the larger, listed counterparts are paying at this point. But, with the guiding influence of an experienced financial backer, a public listing is a likely future strategy. This in turn opens up a world of debt and equity financing possibilities that, until this point, had been a thing of pre-2008 folklore. This is the reality of most other industry sectors and likely the new reality when it comes to shipping and ship finance.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.