The World’s One Stop Shop for Ship Finance

Anyone who has flown into Singapore over the last few years has upon descent had a glimpse at the fleet of merchant ships that sail and lie at any given moment in the straits around the island. Singapore’s reputation as the world’s busiest container port is deservedly earned; however, a fact often overlooked is that Singapore is also the best city in the world for the access to shipping debt.

Singapore set out in 2003 to become a global shipping and ship finance hub, and in 2010 has already achieved this to a very impressive extent. It is the only city in the world where within probably two days you can find someone to lend to you from 24 of the world’s top shipping banks, of course Singaporean but also Japanese, German, French, Norwegian, Dutch – and then some. In preparation of this article, we have personally gathered information from many of the key players in this market.

While it might be surprising to some, the three local banks – Development Bank of Singapore (“DBS”), United Overseas Bank (“UOB”) and Oversea-Chinese Banking Corporation (“OCBC”) have all made forays into ship financing and are actively building up expertise over the past few years. Shipping has not been traditionally an area of focus for these deposit-taking banks as like many of their counterparts in Asia, they have been more inclined towards the property sector. But the picture has gradually changed.
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The World Has Changed! Or Not!

Last year, we began our discussion of Dealogic’s 1Q 2009 Syndicated Shipping Loans Tables with the following sentence: “A quarter, particularly the first one, does not make a year, but according to the first quarter Dealogic tables [which were published in early April 2009], …the axis of the ship finance world has tipped eastward.”

However, we also should have recalled from our studies of Eastern religions that nothing is permanent and the world is forever changing. In a diminished first quarter of 2010 in volume terms, the Europeans have come back, but still the number one spot in both the Bookrunner and MLA table has gone to a Japanese bank, Mizuho, followed by perennial leaders DnB NOR and Nordea. Mizuho’s finish is an outstanding accomplishment having moved up from the middle of the pack to pass it’s main local competitors, SMBC and Mitsubishi UFJ. Despite a fair amount of movement in the standings, it is still early in the year and we are not ready to make a call with respect to the earth’s axis. We leave you to peruse the tables and make your own judgments with respect to how the banks finished.

While the leaders strut their stuff, we will turn to the numbers themselves, which are more interesting from our perspective. A quarter-to-quarter comparison shows a 48% decline in shipping volume this year, despite a slight increase in number of deals. We were concerned by the trend shown in Figure 1 but then looked at last quarter’s data. In fact, 4Q 2009 volume was somewhat comparable at $6.8 billion versus this quarter’s $6.1 billion, with 3 more deals done this period. In fact, we should overlay history on these numbers, which evidence the delayed impact of the credit crisis on shipping. Unlike other sectors, loan volumes in shipping remained high in the 4Q 2008 and 1Q 2009 and then collapsed in the 2Q 2009, later than most others. A comparison of the latter period to the current quarter may be more telling and in line with our comparisons to the 4th quarter.

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I Love It!

For many years we would ask our survey respondents to describe how they felt about their job and the overwhelming majority selected “I love it.”  Then last year in the midst of what for many of our friends was clearly a nightmare we dropped the question. It just did not seem right to ask.   In 2009, for the first time since we began the survey, the universe expected to slash jobs and the business environment for 90% of the respondents was either somewhat or extremely negative. Hard to love anything in that environment.

And we did not ask the question again this year, though perhaps we should have.  “On the job front in 2010, 97% shouted there would be NO job cuts and 47% even said they expected to hire staff”.

That is good news.  Job security tends to make people happier with their job.  But the real reason we should have asked the question is more nuanced. Expectations for the year ahead make ship financing very much a job, and one at which everyone expects to have to work very hard. So while some “I love it” responses may have returned, we suspect most would have chosen the middle path, “It’s OK.”

One respondent may have said it best when commenting on factors that will impact the business this year when he wrote, “[For 2010 it will be] time vs. work load vs. number of staff vs. lengthy restructuring processes,” that is the measure of the year. In other words, there is a lot of work ahead.

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Public or Private? That is a Question!

Our survey is distributed to a broad community of lending banks, but also to banks that make most their money providing capital markets services.  Thus it may not come as any surprise when we report that in 2010, public shipping companies enjoy a preferential edge among financiers over their private peers. Their information is far more transparent, audited and of course they deliver fees. In 2010, 65% of the respondents indicated that they would prefer to finance public companies.

But it hasn’t always been so and last year, 2009, it didn’t seem to matter as no one had easy access to debt.

When shipping turned to the public markets in a big way in 2005, we expanded our survey questions to plumb the finance universe’s perspective on the trend.  Understandably the jury was still out on the public option.  While 35% thought the new IPOs were good for shipping, almost 50% responded that it was too early to tell. That was in 2005.
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The 2010 Shipping Banker Survey

Introduction
In considering the past year, the image that comes to mind takes place in the Great War, with soldiers in a trench rising after an artillery barrage. The smoke is clearing, as the sun rises, and after the soldiers check themselves and find they have escaped injury, they are ready to fight another day.

Well 2009 was “another day” and the bankers feeling, perhaps shell-shocked, found their footing and met the challenges of an economy which remained mired in recession, volatile shipping markets and, despite government intervention, still difficult credit markets. Bankers remained reticent to lend.  While some attribute it to illiquidity, other less generous souls blame the spread between essentially risk free funding and Treasuries as the primary motivation, as banks sought to rebuild their balance sheets. Nevertheless, shipping bankers did lend albeit smaller amounts as they met their commitments and even did new business. In times of crisis, it is easy to take comfort in standard formulas and so bankers focused their lending on large creditworthy entities, mainly public companies, with whom they already enjoyed a relationship. And while lending was in decline, those banks with capital markets groups were enjoying the fruits of their investment, as they joined the bulge bracket firms in bridging the capital shortfall through the public markets, while boosting fee income.

The year has past and we can write its history as well as gaze into the crystal ball. Fortuitously, it was time for our annual Bankers’ Survey, in which we take the bankers’ pulse to get a clearer picture of what is happening in ship finance today and what they think the future will bring.
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Lessons from the Past

Were there signals in the years of surveys that might have softened the landing if only we’d read them properly? Are there behavior patterns we can recognize now with the benefit of hindsight which might better prepare us for the next cycle?

Every year for the past decade Marine Money has surveyed the global banking community on performances, trends and future predictions.

A review of the past five years, five tumultuous cyclical years, provides interesting insight into the psychology of cycle behavior at both the corporate and more personal level. From 2005, just ahead of the boom years, optimism was expressed by the large majority of responders, even as they anticipated shrinking spreads driven by global banking competition. Coming off a 2004 year when 92% of respondents reported their institutions meeting budget, the optimism was well warranted. And, a whopping 42% of responders reported their institution was looking for returns over 17%.
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The Portfolios – Downsized a Bit

Introduction
Perhaps one of the most difficult, but at the same time most enjoyable challenges, we undertake each year is to try to pin down the various heads of the shipping departments to open their kimonos and impart data on the size of their portfolios, along with other related statistical data. Although we are certain a number is readily available, the hesitancy to share comes most likely from our simplistic approach. We ask simply for the size of the loan portfolio. Are we asking for the right number and, if so, how is it correctly measured?  Without definition and commonality, the question of whether each portfolio will be fairly portrayed on a comparative basis is a concern to respondents, as the end product could be viewed as a competitive “league table” of sorts.

In banking/credit parlance, the more commonly used term when discussing extended credit is exposure. This number differs in that it includes unfunded commitments, lines of credit, drawn or undrawn, letters of credit and guarantees and currency and interest rate swaps. In our number we do include unfunded commitments and lines of credit but ignore the rest.

In other respects, the data also has inherent flaws. Although we believe the sample is representative it is not all-inclusive. A number of banks have chosen not to participate largely for policy reasons. Others simply chose not to respond. While we understand the former, the latter is extremely disappointing. In particular, Asia, for the moment, is a distinct minority among this year’s participants, and, yet, we know from anecdotal evidence as well as the Dealogic tables, that it is this region’s banks that have experienced exponential growth, reflecting the area’s importance to the world economy. Quite unexpectedly, the Asian participants, Bank of China and ICBC, are two of China’s largest banks and their size gives pause. ICBC participated in our survey last year when its portfolio was a mere $2.2 billion. Just a year later, its portfolio more than doubled to $4.8 billion, an incredible accomplishment. Then there was Bank of China, who submitted its data for the first time and whose $12.8 billion portfolio put it in the top 10. Our challenge for next year is to build upon our efforts in Asia and convince that area’s banks to expand upon their transparency to include this data.
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And After the Market Closed

Navios Maritime Partners announced that it plans to offer another 4.5 million common units in a public offering, with a green shoe of a further 675 thousand units. Proceeds will be used for fleet expansion or general partnership purposes. This is Partners’ second offering of the year. The first raised $54 million back in February. The shares closed down $0.59 (3.04%) at $18.83 and fell a further $1.03 (5.5%) to $17.80 in after hours trading. At today’s closing price, gross proceeds would be approximately $85 million. We will cover this story as it evolves next week.

A Deal for the Times

While we do not normally cover commercial transactions, we thought the announcement by Eitzen Bulk Shipping (“Eitzen”) of a long-term COA was noteworthy as an example of an enabler of financing both through credit enhancement as well as contracted days. The COA is with ThyssenKrupp Slab International B.V., a joint venture between ThyssenKrupp and Vale for the transportation of ~50 million metric tons of steel slabs from Brazil to the U.S. and Europe over a period of 11 years. The total contracted revenue is expected to be approximately $727 million. The company attributes its selection after a lengthy two-year process to its ability to provide an innovative and complete logistical solution as well as its investment in a local office and port terminal facilities.
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Grindrod’s Strategic Expansion

A subsidiary of Grindrod Limited today acquired Fuelogic (Proprietary) Limited (“Fuelogic”), which is a bulk liquid fuel transporter operating in Southern Africa under long-term contracts. Fuelogic is a primary distributor of fuel from refineries and import facilities to terminals, depots and large customers. It is also a secondary distributor of fuel from terminals and depots to customers. In addition the company also distributes LPG. The purchase consideration is R160 million.
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