Leasing: The Art of Matching Cashflows and Residual Values

There was good news and bad news for vessel leasing in 2004.

The good news was that there were loads of yield hungry investors interested in putting up the equity portion of leveraged leases. The bad news for lease arrangers was that this made competition for deals keener than we have ever seen it, with some shipping companies simultaneously requesting bids from multiple providers in the KG market, K/S market and private sources such as First Ship Lease and Navigation Finance.

From a structural standpoint, the challenge was that the long-term cash flows available in the market place did not reflect the enormously high vessel prices – driven by the spot market. The result was that lease arrangers had a harder time finding “projects” where the cash flows from a strong credit charter could amortize enough debt based on the very high asset purchase prices.

But there were also some enormous positives. First off, there were loads of newbuildings delivering, many of which had already been sold into the leasing markets upon delivery, and this provided a baseline amount of business. Secondly, the high asset prices encouraged tanker companies in particular to sell older units and lease them back. This type of transaction allowed them to book a gain to earnings, which was further enhanced by the high P/E multiples at which the stocks have been trading, and lower the age profile of their owned fleet – a statistic appreciated by investors. In a rising freight market, owners also liked the idea of selling ships and taking them back on charter at a fixed rate in order to keep commercial and operational control of assets they know well.

This is only an excerpt of Leasing: The Art of Matching Cashflows and Residual Values

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