Coming to America

Leverage is an important ingredient in the stew of ship finance. In a bubbling cauldron of big-ticket assets, thin operating margins and meager long-term returns, debt financing is the spice that makes the meal tasty for risk seeking equity. While commercial banks have historically been a reliable source of competitively priced secured capital, The Bank for International Settlements’ (BIS) revised rules for the calculation of risk by commercial banks, and the adequacy of capital that must be allocated to fund that risk, appear set to tighten the market.

The BIS regulations aren’t the only factor at work; ship finance liquidity is also being reduced by an inability of Japanese and Korean banks to lend, reduced tax advantages, non-existent export credits, limited longterm employment and erratic newbuilding prices. Oh, and did we forget to mention that over time many shipping assets classes fail to earn their cost of capital? As a result, the question that we are asked more and more frequently is this – where will ship finance leverage come from in the future? We draw our answer from an aphorism uttered by JP Morgan: “money changes direction like a school of fish.”

This is only an excerpt of Coming to America

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