Hong Kong: Is Hong Kong Destined To Be The Major Ship Finance Centre In Asia?

Last Updated: 27 July 2018
Article by Dean A. Young
Most Read Contributor in Hong Kong, July 2018

Lessons Learned

It is well known that since the global financial crisis of 2008-09 and the ensuing recession, the shipping industry has suffered heavily from overcapacity of ships and insufficient demand for cargoes, leading to downward pressure on vessel values and earnings. The offshore sector continues to be hurt by the drop in oil prices, to the extent that many rig owners will struggle to find funds for re-commissioning or face the scrap yard, alongside hundreds of their support vessels. The KG system of financing ships in Germany has been annihilated, forcing their banks to reduce their lending budgets and take over defaulted ships. Some have had no choice but to sell off their loan portfolios or close down. European owners have gradually lowered their market share from 47%-45% of the global fleet.

Although Asian owners have suffered too, and headline bankruptcies like Sanko Steamship, STX, TMT and Hanjin Shipping are proof of this, the number of loan enforcements has been comparatively small. The majority of owners in Taiwan, Singapore, Japan, China and Hong Kong were able to call on their institutional and private shareholders to provide working capital, they delayed or paid small penalties to cancel their new building programmes, they did not seek public equity through IPOs and shipping funds (preferring to retain control of their assets), they sold off or scrapped their old tonnage, and they cut back expenditure to the bone. Never ones to seek market domination by mass ordering (having learned valuable lessons from the recession of 1985) their traditional method of replacing tonnage only when demand required and generally subject to a period charter party has proved that prudence or 'owning with banking characteristics' does work. Consequently, Asian owners have increased their market share from 38% to 40%, of which PRC owners now control 12%. The PRC leasing companies are competing to grow further and 20% is not an impossible target.

Current Thinking

Lenders are aware that the contraction in shipyard capacity has helped to re-balance the supply/demand ratio, the consolidation in containership owners has reduced speculative ordering, and that values and earnings have either bottomed out or are starting to recover in the dry bulk, container and oil sectors (albeit choppy at times). Despite this background, the appetite for ship lending this year remains cautious. Every bank is analysing whether to remain in shipping or to sell its portfolios and warehoused vessels into a rising market. Debates are raging in-house between risk, compliance, corporate, and commodity departments about the technical complexities of ship finance, fluctuating earnings, volatile values, the cyclical spikes and troughs. Added to these are the on-going risks of obsolescence for non-compliance with environmental legislation designed to reduce shipping's carbon footprint, low profitability and, perhaps most serious, the high risk weighting of ship mortgages and long terms loans for capital adequacy purposes.

Signs of Positiveness

To counter these perceived difficulties, there are signs that banks can see as a window of opportunity, especially in the Far East.

  1. Global seaborne trade is experiencing steady annual growth and is forecast to grow further by 3.6% year on year in 2018. New buildings and refinancings are expected to require US$80-100bn p.a. There is a huge market demand and Asian banks have the funds.
  2. The lending climate in 2018 is very different from the previous 5 years. There is less competition from European, UK and Scandinavian banks. The private equity funds have realised that charter hire rates are not nearly enough to reach their expected return on equity, so have turned their attention towards buying bad debt portfolios from banks rather becoming owners themselves. This presents an opportunity for ship lenders to increase their market share with the possibility of higher margins and fees.
  3. The leasing market has grown substantially in Asia, particularly in China. This can be seen as beneficial to Asia, especially Hong Kong and Shanghai, by providing a type of tier 2 support for vessel values. The reason for this is because their shareholders are either financial institutions or state-owned enterprises, which makes their forced exit from this sector for financial reasons unlikely.
  4. Similarly, the competition from PRC banks who are lending to these lessors can be seen as beneficial because of their balance sheet strength and their contribution to the development of sophisticated financial services and products. The combination of PRC lessors and banks presents an opportunity for Hong Kong to become a major ship finance centre in Asia.
  5. Under the 13th Five Year Plan (2016-2020), the PRC Government has expressed support for Hong Kong to become an international transportation centre, in tandem with a separate scheme to promote Shanghai as a world class maritime centre. Both schemes create opportunities for the two cities to complement each other and to generate more business, and not just from China's 'Belt and Road' initiative. Out of a total of 30 maritime cities, Shanghai now ranks 4th and Hong Kong 7th, and banks with branches in both cities may find synergies between their customer bases.
  6. The HK Trade Development Council has been raising the profile of the shipping sector for some time, but other business groups are now speaking from the same page. Recently, the HK Financial Services Development Council (FSDC) has suggested that tax incentives would encourage greater competition by Hong Kong companies in the region, and particularly compared with Singapore which continues to draw businesses and manpower away from Hong Kong. A precedent has already been set in 2017 in the aviation sector by an amendment ordinance that reduces the rate of profits tax for qualifying aircraft lessors and leasing managers. If a similar tax reduction is introduced for the ship leasing sector, Hong Kong could see sizeable offices being established in Hong Kong by PRC leasing companies. The more economic activity in Hong Kong, the easier Hong Kong can refute OECD claims that base erosion and profit shifting to low tax jurisdictions like Hong Kong is a harmful tax practice.
  7. In addition to tax incentives, the FSDC has proposed to the HK Government that more support for shipping banks and their financial products should be provided by establishing a sovereign-rated financial institution or export credit agency. Such organs could provide insurance or guarantees against default, or they can purchase and package shipping loans into securitized bonds which would free up more capital for banks to lend on new facilities.
  8. Hong Kong financial institutions are likely to be the first port of call for users of the Hong Kong Shipping Register, which maintains its status as a world class registry currently ranking the 4th largest in the world. They are ideally placed to act as leaders in syndications and club lending where the HK ship mortgage is the primary security, and can be reassured by opinion letters from law firms as to its enforceability given the history of court cases allowing holders of a mortgage to take back and sell ships if their owners cannot repay the debt. China has been supportive of PRC owners registering their ships in Hong Kong, not just because it is one of its special administrative regions but also due to its advantages over PRC ports of registry such as its USD based banking sector, there being no capital and exchange controls, its tried and tested legal system based on English law, and an efficient shipping register.

Further Steps

Hong Kong has a long tradition in providing shipping finance but the number of HK born and bred owners in its sphere of influence is reducing. There needs to be a boost of measures to keep its existing owners and managed fleets in the territory, beyond looking at the numbers of ships registered under HK flag. And new measures have to be introduced to attract new owners, leasing companies and managers to set up business in Hong Kong, which in turn will attract more business for the ship lending community. The 2018 Report from the Xinhua-Baltic International Shipping Centre shows that Singapore still is the world's No. 1 port city, but Hong Kong has taken over London's position at second spot for the first time. This shows that the groundswell is beginning and it would be a wasted opportunity to look back in 12 months time and see that none of the measures suggested to the HK Government have been introduced.

Originally published 24 July 2018.

Visit us at www.mayerbrownjsm.com

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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
Similar Articles
Relevancy Powered by MondaqAI
Mayer Brown JSM
 
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”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Mayer Brown JSM
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions