Significant Trends
in Ship Finance:
Risks & Opportunities
in the Decade Ahead
DATE: SEPTEMBER, 2020
AUTHOR: MATT McCLEERY - MANAGING DIRECTOR OF BLUE
SEA CAPITAL, INC. AND PRESIDENT OF MARINE MONEY.
For Questions or Inquiries about this report, please contact: [email protected]
Executive Summary
Secular changes in ship finance are dramatically reshaping this traditional industry. In
this paper, we will present our view of past, present and future conditions for ship
finance and investment and conclude by highlighting some key trends.
The three main drivers of the secular change in the ship finance marketplace are:
1. From 2010-2019 traditional, largely European, commercial banks significantly
reduced their exposure to shipping as a result of the following:
• (1) Increasing banking regulations and capital allocation
• (2) Significant loan losses and
• (3) A preference for larger borrowers
2. Institutional investor appetite for shipping equities has decreased due to:
• Lack of liquidity
• Micro market capitalization of shipping companies
• Poor historical financial performance and
• ESG-related issues, in certain cases
3. Private equity investment in shipping companies has decreased for a
variety of reasons, including:
• Absence of gains to be achieved from “asset plays” due to lack of cheap
capital
• The high cost of private equity often exceeding the modest midcycle
returns generated by shipping assets and
• The challenge in finding successful and timely exits
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Trends and Opportunities in Ship Finance & Investment
With interest rates likely to remain low, commercial banks unlikely to increase their
exposure to shipping and trends in investor preferences unlikely to change, we have
identified the following opportunities for investors, borrowers, lenders and other
transaction support professionals to consider.
• Shipping Markets Will Be Strong in the Medium Term
Ongoing changes in emissions regulations and higher cost of capital will continue to
limit the size of the orderbook for new vessels and create favorable supply/demand
fundamentals for shipowners. Therefore, we expect to have generally strong shipping
markets if demand returns to pre-COVID levels and growth rates.
• Shipping Company Balance Sheets will De-Leverage
We believe shipping companies will gravitate toward greater retention of free cash
flow and will reduce the leverage on their balance sheets. As a consequence, the
risks and returns from shipping assets will moderate in the future which may change
the profile of appropriate investors.
• More Attractive Terms for Available to Lenders
While increased equity on balance sheets will reduce the risk to lenders, we do not
anticipate that there will be a commensurate reduction in the cost, terms and
conditions of debt. Therefore, we believe conservative lending to shipping companies
will become more attractive to lenders relative to other hard assets such as aviation
and real estate.
• Less “Asset Play” in Shipping
The reduced availability of inexpensive debt financing may limit the opportunity for
“asset play” in shipping going forward.
• Direct Lending Will Continue to Grow
We anticipate that a declining volume of discounted shipping loans and loan portfolios
sold by exiting European banks will make the market for direct lending more
competitive. Nevertheless, we anticipate that the direct lending will account for a
growing percentage of the shipping industry’s capex requirements, resulting in higher
funding costs to the industry.
• Emergence of Preferred Equity and Profit Sharing
To allow for higher potential returns without increasing the fixed daily breakeven costs
on vessels, we anticipate that “debt with profit sharing” and “preferred equity”
structures will become more popular as they feature relatively low fixed coupons,
flexible amortization and the sharing of vessel earnings and asset appreciation.
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Direct Lenders
• Leasing is the New Equity
With capital markets an unreliable source of reasonably priced equity and commercial
banks reducing advance rates, we believe vessel leasing will continue to play a larger
role in higher leveraged ship finance. Vessel leasing will come in the form of operating
and financial leases and be provided by Chinese and Japanese lessors, public vessel
leasing companies and institutional investors who provide the equity component of a
leveraged lease and borrow money from traditional commercial banks.
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• “Green” Financing Activity Will Increase as Shipping Transitions to Lower
Carbon
Over time we expect impact investors to participate in the shipping industry’s task of
complying with the IMO-mandated directive of reducing carbon emissions. However,
until “cleaner” shipping projects are able to generate satisfactory economic returns,
we anticipate that government-supported and government-subsidized programs will
play an extremely important role in bridging the gap.
• Outlook for New Equity Issuance
As a result of persistently low valuations relative to the net asset values for many
companies, we anticipate the market will bifurcate into a cohort of companies that will
issue equity irrespective of valuation in order to strengthen balance sheets and grow
and a cohort of companies that continue to buy back their own shares.
• Consolidation Will Slowly Continue Over Time
Although it will evolve slowly, we anticipate that consolidation will continue due to
institutional investors preference for larger companies with greater share liquidity and
the desire of large investors to exit shipping investments. The pace of consolidation
will be impacted by relative valuations among peer companies and social issues
among management.
• IMO 2030 and IMO 2050 and ESG Will be a Game Changer
The ability and willingness to embrace decarbonization initiatives will further bifurcate
the market for owners, charterers and financiers by creating opportunities for
shipowners who are able to partner with, and suit the needs of, large charterers.
• Larger Shipbrokers Will Gain Market Advantage
Stronger, well-financed shipbrokers will increase their market dominance by
aggregating proprietary data, investing in technology and adding value to existing
client relationships by capturing a larger share of research and capital raising
activities.
• Shipping’s Tax Efficiency Will Become More Valuable
The shipping industry’s favorable tax treatment will become more valuable as U.S.
and European tax rates increase, interest rates remain low and shipping balance
sheets are de- risked to produce reliable returns over time.
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Matt McCleery, President, Marine Money
Managing Director, Blue Sea Capital, Inc.
For Questions or Inquiries about this report, please contact:
[email protected]
