Tighter lending policies will make it more expensive for shipping companies to raise the $300 billion of debt needed to fund outstanding orders for new ships. Some predict borrowers will be able to raise only half this amount. The subprime-induced credit squeeze will mean higher costs to finance new ships and cancellations of some orders as owners struggle to secure financing, a shipping conference in Hong Kong was told recently.
Graham Porter, managing director of Seaspan Advisory Services, said that, by his reckoning, new ships on order over the next three years totalled some $450 billion-$500 billion and that $300 billion of debt would be needed from ship financing banks.
Porter, who was chairing a panel discussion at the conference organised by Marine Money, thought there would be a shortfall of roughly half this amount.
Last year was a record for debt lending in the marine finance market with $95 billion raised. Panelists thought a similar amount could be raised in 2008. Established ship owners would have little difficulty in obtaining financing -although would have to pay more - but newcomers and speculators would find it difficult.
According to shipping bankers on the panel, financing of a container ship with a 65% debt component could have been arranged at a cost of Libor plus 60bp in the middle of last year, but now it would cost at least Libor plus 100bp, and by the end of the year it might be as high as Libor plus 120bp.
One of the panelists, Andrew Chiang, director of global shipping and logistics for Asia-Pacific at Citi, said the deal would be priced at around Libor plus 100bp-150bp on the assumption the loan would be syndicated.
Financing of a modern VLCC (very large crude carrier), which would have cost Libor plus 80bp last June, would price even higher at anywhere between Libor plus 130bp-180bp, according to the panel.
The boom in shipping in recent years has attracted new players both as owners and as financiers. While demand for new ships has increased dramatically, the increased competition from financiers had brought down financing margins.
But while the credit squeeze that has followed in the wake of the subprime crisis has made it more difficult for banks directly affected by the crisis, it has also created opportunities in the form of higher margins for traditional ship financing banks.
"We went through an abnormal period while the market was booming, now things are getting back to normal," said another panelist, Arnold Wu, who is head of the Asia shipping division at BNP Paribas.
"We are going back to basics. We are going back to the levels and deal structures that we saw in the mid-90s and early 2000s," agreed Charles Reineke, who is a senior vice-president of the global shipping finance group at SMBC. He added that since the subprime crisis, lending decisions faced higher levels of scrutiny. Shipping departments within the banks have to compete for finance and have to justify their lending in terms of return on capital.
Chiang said Citi focuses on the top end of the market and will continue to provide financial support to those owners.
"Pricing has obviously gone up - banks are being a lot more picky. A lot of alternative forms of financing for shipping have today dried up. So you have a scarcity of capital, a very large order book and very large demand.
The players in the market will be fighting for that capital," he said.
Reineke noted that one-and-a-half years ago he had been worried by the prospect of hedge funds, private equity and other alternative sources of funds entering the ship finance market. "They were talking huge numbers - but where has it all gone?"
Kjell Erik Mjos, senior vice-president and advisor with DnB NOR Bank, said those worst affected by tightening credit would be the smaller ship owners and speculators who had made a down payment and placed orders in the hope of selling the vessel before completion. Korean and Indian owners who had been supported by their local banks would also be hurt since this bank lending has virtually dried up. He noted that one Korean owner had cancelled eight new building contracts recently because he was unable to make the down payment.
"That's just the beginning," Mjos warned. "Banks can lean back and pick and choose which deals they want to participate in."
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