Ship financing industry braces for its own crunch

Ship financing industry braces for its own crunch The faltering of heritage U.S. investment banks could do more than just induce global economic jitters.
   In the shipping world, it may make the financing of ships more difficult. Even as the price of containerships is dropping — 10 percent to 15 percent in the last two months, Alvin Cheng, chief executive officer of Singapore-based Pacific Shipping Trust, told Lloyd’s List Monday — buyers are hard to find in an environment of cautious decision-making and restricted lending.
   “We see that a lot less is available to ship owners when they want finance,” Cheng told Lloyd’s List. “Some owners may not be able to refinance vessels.'
   PST owns 11 vessels, which it leases to shipping lines on long-term bareboat charters. Cheng indicated that the trust might scale back plans to add more vessels until the market picks back up.
   The main problem for the shipping world is that tough times for banks means those banks will be more choosy about their lending.
   Analysts say that Western banks will need to recover higher margins in their future lending activities to make up for losses incurred as a result of the mortgage and credit fiasco. That means ship owners hoping to secure financing for new assets could find those deals much more expensive.
   Tobias K'nig, CEO of K'nig & Cie. GmbH & Co. KG, a Germany ship financing house, recently said in an interview with ship financing Web site Maritime Competence Germany that the fallout from the credit crisis has placed a deep strain on ship owners.
   “The credit crisis has pushed up the cost of borrowing money across all industries and shipping is not immune,” K'nig said. “It is simply a function of supply and demand. The lack of trust between banks is a major issue.”
   The main problem is that the bulk of ship financing originates from the part of the globe most hard hit by the credit crisis.
   “Ship financing has been traditionally dominated by western banks, which are now suffering from an increased cost of liquidity and severe erosion of trust,” K'nig said. “Obviously, the larger lenders tend to have bigger problems. But on the other hand, the smaller ones are facing similar restrictions and often cannot cope with the deal size of a typical transaction. Apart from the banks, there are leasing firms, private equity firms, German KG houses and U.S. publicly listed companies, which are all suffering because of the reduced availability and increased cost of debt financing. Overall, the lending policies are more restrictive, covenants are stronger. In some cases, banks are trying to get out of deals which have been arranged before or simply refuse to provide additional debt facilities.
   “This crisis will show which of the shipping banks are really committed to shipping and will hold on to their customers in difficult times.”
   When asked how the KG model of financing ships would respond to today’s economic climate, he said it would survive.
   “The KG model has been reported dead a few times,” he said. “But the truth of the fact is that it has reinvented itself a few times. The typical KG investor is an entrepreneur and has a long-term strategy. For shipping, long-term money is the perfect match as shipping is a long-term investment, too.”
   K'nig added, however, that new ideas for the financing of ships could emerge.
   “There are certainly many sources of capital around the world that the shipping industry and ship financers have yet to tap into,” he said. “It is inevitable and desirable that new financing schemes emerge.
   But Hans-Werner Kummerow, owner and director of HWK-Verlag, told Maritime Competence Germany that radically new ideas are not necessary.
   “Ship financing schemes will react to changes in financial markets as they have always done throughout the centuries,” he said. “However there is little need to invent new schemes. A simple but close look at well-tested schemes of the past will do. Older ship-financing schemes will be rediscovered. And the leading role in ship financing will shift eastward to Arabic and Asian ship-financing models.”