Australia: Trends in capital market financing for the international shipping industry

Introduction

Capital markets financings have gained traction with the shipping industry in recent years. The issuance of bonds and equity by shipping companies more than doubled in value between 2008 and 2014, as banks, traditionally the industry's main source of funding, became more and more selective in their lending following the global financial crisis and particularly in light of increased regulations under Basel III and the upcoming implementation of Basel IV. The continuing difficulties in obtaining bank financing for the shipping industry can be seen in situations such as the bankruptcy of Hanjin Shipping, South Korea's largest shipping group, which entered into receivership in September 2016 as it was unable to find new financing or restructure its existing debt.

Since 2014 however, increasingly tough trading conditions in the shipping industry have stemmed the flow of capital markets transactions. The oversupply of ships, depressed freight rates, unsustainable debt and negative macroeconomic environment have led to a slowdown in capital markets activity. Bond and equity financing (excluding leasing, M&A and restructuring) dropped from $23.2 billion in 2014 to $10.3 billion in 2015. In the first eight months of 2016, approximately $1.8 billion was raised through bond and equity financing. Given the dramatic reduction in the use of capital markets funding by the industry, where are the opportunities for shipowners now?

Recent developments in shipping capital markets

Financing orders for new ships is often one of the initial drivers for capital markets financing. Orders for newbuild ships made in the years following 2008 have resulted in a flood of surplus ships as demand failed to keep pace with capacity, eventually, leading the shipbuilding industry to suffer considerable losses, and a dramatic drop in new orders.

The glut of vessels poses an overcapacity problem exacerbated by global economic conditions. In particular, the slowdown in the Chinese economy has led to a decrease in demand for goods, in turn reducing demand for shipping. Many of the fleets which commissioned new ships are now underutilized, which has simultaneously raised unit costs and reduced revenues. Shipping companies with leased ships have also suffered from the abrupt fall in freight rates in the last few years as many of their charter rates were fixed at high rates during previous boom times.

This toxic mix has affected profitability and the negative results are evident in the capital markets as many listed shipping companies continually trade below net asset value and shipping bonds increasingly default. No major shipping company has successfully pursued an Initial Public Offering (IPO) for over a year. Capital markets proceeds raised by US-listed ship owners in the first half of 2016 amounted to $944 million, down 59 per cent from the same period in 2015 and down 80 per cent from the same period in 2014.

Regulators have responded to the industry's downturn. A review of recent US-SEC comment letters to shipping companies' filings reveals that the SEC now frequently challenges the use of 10-year historical average charter rates for impairment analysis. The shipping industry had commonly used moving 10-year historical average charter rates as a standard of comparison to capture the market's long-term cyclical highs and lows. However, SEC comment letters to shipping companies often note that because of the recent volatility of the market and the continued poor outlook, shorter term historical average rates may provide a better benchmark. Shifting to average rates over a shorter period of time results in decreasing the value of the ships, which in turn negatively impacts the companies' financial condition. Changes in disclosure practices for registered deals are often eventually adopted into Rule 144A and subsequently Regulation S deals. Increasing requirements for negative disclosure may have a discouraging effect on shipping companies concerned about releasing sensitive business information.

Alternative financing options

Despite the current gloomy market conditions, shipping companies are exploring a variety of alternative funding through different financing options as evidenced by our recent The way ahead transport survey.

Export credit agency (ECA) financing has become one of the most popular sources of alternative funding in recent years. Before 2008, ECAs accounted for approximately 10 per cent of shipping and offshore-related debt finance. Since then, their contribution has increased to over 33 per cent.

One example of how ECAs are supporting capital markets financings is a $200 million fixed rate bond offering by ICBC Financial Leasing. This transaction, which completed in February 2016, was a combination of a commercial facility, an ECA-backed facility and a bond offering. It was also a debut collaboration between a Chinese financial lessor and the Export-Import Bank of Korea, which guaranteed the bond as the ECA lender, to support the financing of high-end ships built in Korea for use by leading global operators. This deal demonstrated that even during downturns, the capital markets are still open for the right kinds of transactions. The stability provided by an ECA-backed bond with major banks as underwriters sparked sufficient interest to support a bond deal at favorable pricing terms.

Another recent trend is the use of debt and equity private placements to obtain financing. According to IHS Fairplay, in the first half of 2014 and 2015, private placements accounted for less than 1 per cent of proceeds raised in the capital markets by US-listed ship owners, whereas in the first half of 2016, private placements accounted for approximately 70 per cent of such proceeds. With public investors on Wall Street reluctant to invest in a volatile market, the shipping industry has turned to smaller and more targeted private placements, including private equity funds created by capital management companies focusing on the shipping industry. Debt capital markets transactions are also attractive to shipping companies since they provide longer maturities, fixed rates and higher flexibility in extending credit for riskier projects that banks do not finance.

The future

The shipping business is ultimately cyclical. Newbuilds have already dropped off and the surplus of ships will eventually diminish as older ships are retired and shipping demand picks up. A significant drop in oil prices in early 2016 increased oil tanker transport and helped keep freight costs manageable. However, dry bulk and container shipping markets remain in a slump which has not been fully mitigated.

The overall shipping market remains vulnerable due to the slowdown in global economic activity. Industry experts believe it will likely be a year or two before industry recovers and are generally not optimistic about the prospects of the IPO market in the near term. In the meantime, shipping companies will continue to seek financing through alternative capital markets options. Debt deals are possible for the right names and where the structure is robust, such as with the participation of a major ECA. The equity market will likely continue to be driven by private financing.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.