Ship leasing is seen as being firmly anchored to wider
economic uncertainty and as such will see a patchy recovery until
global conditions improve. Grant Collinson reports
Seafaring has long been a convenient source of
financial metaphor; the global economy as tempestuous or calm, an
investment as plain sailing or in troubled water.
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In few industries is this more apt than in the
bellwether industry of shipping and leasing in this market has not
escaped the economic maelstrom engulfing the world since 2008.
“We’ve seen a lot of banks exit the market
that were previously very active,” said Alan Cunningham, partner
with DLA Piper and expert on shipping finance.
“We’ve seen some reduce their activity and
we’ve seen the credit terms on which banks are willing to offer
tighten.”
One bank previously heavily involved in the
ship leasing industry is Germany’s HSH Nordbank. However the bank
began winding down the sector since 2009 as a part of its
Restructuring Unit which includes sectors deemed no longer aligned
with the bank’s long term strategy.
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By GlobalDataA spokesman for HSH Nordbank would only
comment to say leasing is just one of several options for financing
ships and is subject to the same problems and advantages such as
provision of equity and diminishing residual values.
The bank said they work on a project by
project basis and leasing is not a general sales channel offered to
clients.
It is not just the banks which have felt the
squeeze in the sector either. John Barter, managing director of
broker Oak Leasing, told Leasing Life the market is
subdued and ship leasing business being written by his company has
dropped off significantly.
“The drop in business has been considerable,”
he said.
“We used to do all sorts of vessels and it has
just gone flat.”
Barter said Oak Leasing were working in the
small end of the market, doing deals for £15-16m, but said
companies across the board were reducing business.
“I haven’t heard of anyone doing stonking
deals. Companies are just not leasing,” he said.
“Most of the companies are selling off part of
their portfolios; they are not in the market.”
Cunningham suggests many banks that have
reduced shipping business have done so for the same reasons as they
have reduced lending elsewhere since 2008. Namely the availability
of capital and the terms on which capital is lent.
He said following the economic crisis banks
are looking at balance sheets and are trying to repair them by
disposing of what they consider non-core areas and areas taking up
large amounts of capital.
“So if you have $3bn worth of ship leases on
the balance sheet,” said Cunningham. “That could well be taking up
a lot of capital.”
Lenders becoming more cautious
Cunningham adds, while non-specialist banks
have tried to move away from shipping, even those who are still
writing business in the sector are becoming considerably more
cautious.
He said: “When you look at financing a ship
there are all sorts of things to look at, charter rates, freight
rates, which will determine what kind of income that vessel will
generate and therefore what kind of financing it can stand.”
Charter rates, the cost of hiring the vessel,
and freight rates, the cost of cargo delivery, have generally gone
down since the end of 2008 which has reduced shipping
profitability.
Barter agrees and said reduction in margins in
leasing deals has made the industry very tough.
An indication of the extent of rate changes is
the dramatic fall of the Baltic Dry Index, a measure of supply and
demand in shipping, at the end of 2008.
At an all-time high of 11,793 points in May
2008, the index fell to 663 points by December the same year. The
index has recorded around 1,300 points during summer 2011.
World seaborne trade has grown steadily in
terms of tonnage of freight since 1990, only dropping briefly in
2009, according to the British Chamber of Shipping, the industry’s
UK trade association.
However, Cunningham points out vessel capacity
has grown concurrently therefore a significant increase in leasing
need from ship operators has not materialised.
Obsolescence vs future plans
The production of new ships and the
obsolescence of others, said Cunningham, is another factor funders
have to consider for a ship lease. As new vessels with greater
capacity are designed and built older ships, which still carry
similar costs and charges but are unable to transport similar
levels of cargo, become obsolete.
Banks, said Cunningham, are increasingly aware
of this and it is not the only issue they now consider when judging
a lease deal including looking closely at changes in the
market.
He said: “They are looking at obsolescence all
the time. They are looking at changes in the markets.
“I think in relation to the terms on which
banks are willing to lend, a lot of them are trying to really see
into the future – they are saying ‘what’s this going to looking
like in four years time?’
“[They are asking] will this contract to
transport oil from Africa to China still be in place? How long is
there left in the Nigerian oil fields and things like that.
“That kind of conservatism and risk aversion
wasn’t so prevalent in the credit boom.”
While some leasing industries are experiencing
recovery and growth shipping has still to emerge, perhaps due to a
lag effect.
According to the United Nations Conference on
Trade and Development 2010 maritime report, even has the economic
crisis continued through 2009 vessels continued to be built,
recording a 22% increase in vessel numbers on 2008 due to orders
that had been placed prior to the economic crisis. 
While this may drag out the recovery for
general container cargo shipping, which makes up a significant
proportion of the world fleet, there are some areas where the trade
winds are already picking up.
Specialist areas like oil transportation and
off-shore constructions ships, are making money, said
Cunningham.
“Specialist growth areas are doing very well
and the rates that are available to the ship operators and owners
are good, they are high and it is profitable,” he said.
“A lot of that has to do with the fact the
industries they are involved in are very profitable because
commodity price is high or because they are growing industries,
like off-shore wind power.”
Patchy recovery
Cunningham believes any recovery in ship
leasing will not be universal but favour specific sectors such as
the shipping of commodities such minerals and natural resources in
emerging economies.
“A recovery will be patchy and biased towards
particular sectors, sectors which are profitable and where there is
not over-capacity and where obsolescence is not a significant
threat,” he said.
Barter is confident a recovery will happen
although he is reluctant to commit to a timescale because he sees
the industry as firmly anchored to wider economic uncertainty.
“It is only a matter of time before the Greeks
disengage from the Euro, the cost Italian bonds are up, there are
serious concerns about Portugal and Spain,” he said.
“[But] it will always come back. Always look on the bright side.
When? ‘How long is a piece string?’ It depends entirely on what
happens with the Euro.”
grant.collinson@vrlfinancialnews.com
