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2016 | Book

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The International Handbook of Shipping Finance

Theory and Practice

Editors: Manolis G. Kavussanos, Ilias D. Visvikis

Publisher: Palgrave Macmillan UK

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

About this book

The International Handbook of Shipping Finance is a one-stop resource, offering comprehensive reference to theory and practice in the area of shipping finance. In the multibillion dollar international shipping industry, it is important to understand the various issues involved in the finance of the sector. This involves the identification and evaluation of the alternative sources of capital available for financing the ships, including the appraisal and budgeting of shipping investment projects; legal and insurance aspects of ship finance; the financial analysis and modelling of investment projects; mergers and acquisitions; and the commercial and market risk management issues involved.

Edited by two leading academics in this area, and with contributions from 25 prominent market practitioners and academics over 16 chapters, this Handbook covers shipping finance and banking, maritime financial management and investments. As such, it includes: shipping markets; asset backed finance; shipbuilding finance; debt finance; public and private equity and debt markets; structured finance; legal aspects and key clauses of ship mortgages; marine insurance; mechanisms for handling defaulted loans; investment appraisal and capital budgeting; financial analysis and investment modelling; business risk management and freight derivatives; and mergers and acquisitions. Thus, the Handbook offers a rigorous understanding of the different aspects of modern shipping finance and maritime financial management and investments, the various characteristics of the available products, the capital needs and requirements, and a clear view on the different financial management strategies through a series of practical examples and applications. Technical where appropriate, but grounded in market reality, this is a “must-have” reference for anyone involved in shipping finance, from bank practitioners and commodity trading houses, to shipbrokers, lawyers and insurance houses as well as to university students studying shipping finance.

Table of Contents

Preface by Editors

Manolis Kavussanos, Professor, Director, MSc in International Shipping, Finance and Management, Athens University of Economics and Business, Greece

Ilias Visvikis, Professor, Director Executive Education and Professional Development, World Maritime University, Sweden

Chapter 1: Shipping Markets and their Economic Drivers

Jan-Henrik Huebner, Head of Shipping Advisory, DNV GL, Germany

Chapter 2: Asset Risk Assessment, Analysis and Forecasting in Asset Backed Finance

Henriette Brent Petersen, Head of Shipping & Offshore Research, DVB Bank SE, The Netherlands

Chapter 3: Overview of Ship Finance

Fotis Giannakoulis, Research Vice President, Morgan Stanley, USA

Chapter 4: Shipbuilding Finance

Charles Cushing, C.R. Cushing & Co. Inc., USA

Chapter 5: Debt Financing in Shipping

George Paleokrassas, Partner, Watson, Farley & Williams, Greece

Chapter 6: Public Debt Markets for Shipping

Basil Karatzas, Founder & CEO, Karatzas Marine Advisors & Co., USA

Chapter 7: Public and Private Equity Markets

Jeffrey Pribor, Global Head, Maritime Investment Banking, Jefferies LLC, USA

Cecilie Lind, Associate Investment Banking, Jefferies LLC, USA

Chapter 8: Structured Finance in Shipping

Contributor: Ioannis Alexopoulos, Director, Shipping Financier, Eurofin Group, Greece

Nikos Stratis, Managing Director of Augustea Group, UK

Chapter 9: Key Clauses of a Shipping Loan Agreement

Kyriakos Spoullos, Solicitor, Norton Rose Fulbright, Greece

Chapter 10: Legal Aspects of Ship Mortgages

Simon Norton, Lecturer, Cardiff Business School, UK

Claudio Chistè, Investec Bank Plc., UK

Chapter 11: Reasons and Mechanics of Handling Defaulted Shipping Loans and Methods of Recovery

Dimitris Anagnostopoulos, Board Member & Director, Aegean Baltic Bank, Greece

Philippos Tsamanis, VP - Head of Shipping, Aegean Baltic Bank, Greece

Chapter 12: Marine Insurance

Marc Huybrechts, Professor, University of Antwerp, Belgium

Theodora Nikaki, Associate Professor, Swansea University, UK

Chapter 13: Maritime Investment Appraisal and Budgeting

Wolfgang Drobetz, Professor, University of Hamburg, Germany

Stefan Albertijn, CEO, HAMANT Beratungs-und Investitions GmbH, Germany

Max Johns, Managing Director, German Shipowners’ Association, Germany

Chapter 14: Financial Analysis and Modelling of Ship Investments

Lars Patterson, Shipping Investment Analyst, Pacomarine Limited, UK

Chapter 15: Maritime Business Risk Management

Manolis Kavussanos, Professor, Director, MSc in International Shipping, Finance and Management, Athens University of Economics and Business, Greece

Ilias Visvikis, Professor, Director Executive Education and Professional Development, World Maritime University, Sweden

Chapter 16: Mergers and Acquisitions in Shipping

George Alexandridis, Associate Professor, ICMA Centre, University of Reading, UK

Manish Singh, Manish Singh, Group Director - Strategy and M&A, V.Group Limited, UK

Frontmatter

1. Shipping Markets and Their Economic Drivers

Abstract

Before diving into the drivers of shipping markets and looking at their performance, a short introduction will be given into the maritime value chain, the various shipping segments and the types of shipping markets. An overview of the cost structures will also help to provide an understanding of the conduct of shipping markets.

Jan-Henrik Hübner

2. Asset Risk Assessment, Analysis and Forecasting in Asset Backed Finance

Abstract

In asset backed financing structures, security for repayment of the loan is primarily based on the asset as collateral. The structuring of the financing is therefore heavily dependent on the assessment of the current and future value and liquidity of the asset. This differs from corporate backed funding, where security primarily depends on the credit worthiness of the corporate and, thereby, on the corporate credit evaluation. In asset backed financing, the evaluation and risk assessment of the asset necessarily becomes critical for each financing transaction as well as from a portfolio risk perspective. The value and the liquidity of the asset today and in the future is the central element of the credit evaluation process.

Henriette Brent-Petersen

3. Overview of Shipping Finance

Abstract

The international shipping industry is both large and highly important to the global economy as it carries over 90 % of global trade. According to UNCTAD, there are over 45,000 ships in the world. The International Chamber of Shipping (ICS) estimates the number of seafarers at around 1.2 million. According to ISH Global Insight, liner shipping alone contributes over USD430 billion to world GDP and 13.5 million jobs. The shipping industry is inherently capital intensive and requires significant amounts of capital to be invested every year in newbuilding vessels, with the cost of building a ship often exceeding USD200 million. During the last ten years, orders of newbuilding vessels have averaged more than USD130 billion per annum, reaching USD266 billion in the peak of 2007. Furthermore, ships are liquid assets that change hands with high frequency and, as a result, the financing requirement is likely to be even higher as shipowners seek to fund second-hand acquisitions. According to Clarksons, over 1,000 vessels have changed hands on average every year in the last decade and the aggregate annual transaction value between 2004 and 2014 has exceeded USD25 billion, reaching a peak of USD47 billion in 2007.

Fotis Giannakoulis

4. Shipbuilding Finance

Abstract

Unquestionably, the acquisition of a vessel is a major undertaking. It is a project that involves the expenditure of a vast amount of money, manpower and other resources. Frequently, such an acquisition program calls for acquiring not just one vessel but several at the same time. This makes the project even more financially significant. Because of the amount of money involved, the long-term major commitment of the buyer and the risks involved, a vessel acquisition program requires a formal and disciplined approach to the project. This includes strategic planning, the development of a mission statement, the use of professional advice, the identification of risks, the development of a schedule and budget, and strict adherence to them—in short, disciplined project management.

Charles R. Cushing

5. Debt Financing in Shipping

Abstract

When a lender advances money to a shipowner, he or she needs to ensure that it is adequately protected and secured against the insolvency of the borrower, its failure to perform its obligations on a timely basis and the loss, or attachment by other creditors, of the ship. The owner, whose fundamental objective is to increase the return on his or her investment, is, by contrast, seeking to limit the lender’s interference with its business and to maintain the greatest flexibility in the conduct of its business and the operation of its ship.

George Paleokrassas

6. Public Debt Markets for Shipping

Abstract

For shipowners, borrowing monies from shipping banks has been the most prominent way of financial leverage in the shipping industry. The capital markets have also been a source of borrowing for larger, more sophisticated shipowners for several decades now, and it is expected that access to these markets will become ever more crucial in the future. The present chapter provides an introductory discussion to the public debt markets in shipping, its primary differences, advantages and disadvantages against shipping loans, and the main considerations that shipowners will have to face in order to navigate successfully the public debt markets.

Basil M. Karatzas

7. Public and Private Equity Markets

Abstract

The public and private equity markets constitute viable sources of ship financing alongside bank debt and other debt alternatives. Although a less traditional source of ship finance, the equity capital markets and private investors offer a plethora of opportunities as seen in Fig. 7.1, for both public and private shipping companies, albeit some solutions are more favored and applicable than others. As illustrated in Fig. 7.1, a private company may issue common stock in the public markets in a registered initial public offering (IPO), or they may choose to do an equity private placement. A public company may access additional capital in the public markets by pursuing a private investment in public equity (PIPE), a follow-on offering or through an equity-linked security such as convertible debt. Execution tactics are dictated by market conditions, investor appetite, structural considerations and trading dynamics. This chapter primarily focuses on the most relevant equity products available to private shipping companies with a particular emphasis on the benefits and drawbacks of being a public versus a private company, IPO structures and processes, as well as the role of private equity within the maritime sector.

Jeffrey Pribor, Cecilie Skajem Lind

8. Structured Finance in Shipping

Abstract

A key characteristic of the shipping industry is that it is highly capital intensive. The international shipowning community is at all times in need of significant amounts of capital in order to fund its fleet modernization and expansion strategy as well as to refinance its existing trading fleet. Traditionally, shipowners have satisfied their ship financing requirements through their own (or family and friends) equity resources as well as on bank debt finance, which represents the cheapest form of external capital when compared to other alternative sources. With China formally entering the World Trade Organization (WTO) in 2001, the international shipowning community was faced with an increased demand for its services, as it was called upon to assist fueling and facilitating the so-called BRICs’ (Brazil, Russia, India and China) tremendous growth.

Ioannis Alexopoulos, Nikos Stratis

9. Key Clauses of a Shipping Loan Agreement

Abstract

The aim of this chapter is to provide a general overview of certain key clauses commonly found in a shipping loan agreement. These are known as “commercial” terms and they purport to maintain throughout the loan period the business activities of the obligors under the loan agreement within a pre-agreed framework. This is frequently opposed by the obligors, who are seeking the least possible restrictions in running their business. This makes such provisions the subject of the toughest negotiation between the parties and therefore the most difficult to draft. The critical concern for the draftsperson, usually acting for the lender, is how to “tighten up” such clauses from a lender’s perspective and, at the same time, ensure that they are well-adapted to reflect the secured nature of the transaction and the shipping background. This becomes even more challenging if, during the negotiations, certain borrower’s comments are accepted by the lender. In that case, the draftsperson is required to amend such clauses, ensuring that the borrower’s point is met, without unreasonably prejudicing the lender’s position. Together with the financial terms of the relevant loan (e.g. the loan amount, the margin, the repayment profile, the interest periods, the last availability date), such clauses constitute the “heart” of most financing documents. We shall call such clauses “operative clauses” (a list and analysis of which can be found below).

Kyriakos Spoullos

10. Legal Aspects of Ship Mortgages

Abstract

In its basic form, a mortgage may be defined as a charge by way of lien over a vessel given to secure a loan. The lien is extinguished when the obligation has been discharged, and will usually “attach” to the asset, meaning that it can be seized and sold by the original lender, leaving the new owner with a separate claim against the vendor from whom it was bought. If the prior obligation is discharged, for example by full payment of the outstanding debt and any interest thereon, the lien will detach from the asset. However, if there is default in payment, then the creditor can initiate proceedings to seize and sell the asset to which the lien has attached. In such circumstance, the buyer in this later sale will obtain good title to the asset and will have no claim against the lienee who exercised the power to sell, unless the latter was acting in bad faith. The United Kingdom Merchant Shipping Act 1988, Schedule 1, Paragraph 21, provides as follows:

Simon D. Norton, Claudio Chiste

11. Mechanics of Handling Defaulted Shipping Loans and the Methods of Recovery

Abstract

Regulators worldwide try to ensure that banks and other financial institutions have sufficient capital to keep them strong to protect depositors, but also the rest of the economy, since the failure of a large bank could have negative repercussions on the financial stability of a country. Within today’s globalized economy, this could create an increased systemic risk. In modern times, capital adequacy rules that have existed since the eighteenth century have been codified by the Switzerland based Bank of International Settlements (BIS). Through the years, the Basel Committee has defined the necessary financial ratios relating to the capital of banks versus their assets. It has also set a risk weight on each class of bank’s assets (government bonds, unsecured loans, etc.), and defined the risk type of its capital (first tier, second tier).

Dimitris Anagnostopoulos, Philippos Tsamanis

12. Marine Insurance

Abstract

Building, financing and operating a vessel is a multi-million investment, which, given the nature of the risks involved, requires thoughtful planning from all parties involved (shipbuilders, financiers, owners/buyers). It is therefore very important that all parties make inter alia insurance arrangements which will cover the respective risks they are exposed to. This chapter will focus on the insurance coverage taken out by the shipyard, the vessel’s financiers and the shipowners (as operators of the vessel). Due to spatial constraints, this chapter will only provide a concise discussion of the pertinent insurance policies and will not delve into a detailed analysis of their provisions.

Marc A. Huybrechts, Theodora Nikaki

13. Maritime Investment Appraisal and Budgeting

Abstract

Shipping has always been a volatile business, one that is tightly linked to the business cycle. However, the recent global financial and economic crisis that started in 2008 is unprecedented. Industry revenues followed booming world trade fairly closely up until mid-2008, with the ClarkSea index of freight rates reaching its peak at the end of 2007. As the global financial crisis deepened in 2008, the index dropped almost 85 % by April 2009. The market values of vessels followed freight rates down, with the Clarkson Second Hand Price Index falling roughly 40 % during the same period. Since then, freight rates and vessel prices have remained low and are still far below the pre-crisis levels.

Stefan Albertijn, Wolfgang Drobetz, Max Johns

14. Financial Analysis and the Modeling of Ship Investment

Abstract

Financial modeling of ship investments can quantify downside risk and upside potential before a decision to invest is made, and also be used as a tool to monitor risks and performance during the investment period. A good financial model is also an excellent tool for communicating opportunities or potential problems to management, lenders and investors. This allows for opportunities or potential problems to be identified early and plans for alternative actions to be prepared in advance. Meaningful financial analysis and modelling of ship investments can, therefore, contribute to better management of risks and hence better risk-adjusted returns.

Lars Patterson

15. Maritime Business Freight Risk Management

Abstract

Due to the volatile nature of the shipping industry in rates and prices, market practitioners attempt to minimize the impact of adverse price movements of freight rates, bunker fuel prices, interest rates and foreign exchange rates, among others, through the use of financial derivatives products.¹ This risk management process has enabled companies operating in the industry to stabilize cash flows (revenues and costs), have more effective budgets, secure their shipping loans, and protect their corporate firm values. This chapter presents an overview of the various derivatives products and markets available to hedge the most important source of risk in the industry—namely, the freight rate risk—and to provide the trade specifics, uses and changes in regulations of freight rate derivatives.²

Manolis G. Kavussanos, Ilias D. Visvikis

16. Mergers and Acquisitions in Shipping

Abstract

Mergers and acquisitions (M&A) have played a vital role in shaping various global industries, and the shipping industry has had a fairly active track record for a range of M&A transactions. In a sector affected by sharp and significant peaks and troughs in freight rates as well as asset values, the ability effectively to originate, cultivate and integrate acquisitions, mergers or strategic alliances offers a valuable competitive advantage. Over the past few years in particular, consolidation within the shipping industry has picked up significantly, especially among shipping services such as ship management companies, ship agencies and broking firms that are coming together to realize synergistic gains from their combined scale. In the ship-owning spectrum, although traditional, synergy-driven deals are not as frequent, structural shifts in market conditions are likely to result in M&A activity gathering more pace. The recent trend towards more capital intensive strategies, aiming to capture economies of scale and reduce costs and financial risks, as well as the constant evolution and growing diversity of the shipping finance market highlighted in this handbook, are likely to trigger further consolidation across an industry that has traditionally resisted it, calling for a contemporary, in-depth analysis of this rather under-explored area within the maritime spectrum.

George Alexandridis, Manish Singh

Backmatter

Title: The International Handbook of Shipping Finance
Editors: Manolis G. Kavussanos
Ilias D. Visvikis
Publisher: Palgrave Macmillan UK
Electronic ISBN: 978-1-137-46546-7
Print ISBN: 978-1-137-46545-0
DOI: https://doi.org/10.1057/978-1-137-46546-7