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Demise of LIBOR creates uncertainty

Dagfinn Lunde on what owners ought to expect when it comes to paying interest on their loans.

What an amazing year 2021 is turning out for most in shipping (with apologies to tanker owners, still crying into their flat beer). No two shipping cycles are alike, something to bear in mind with today’s generally buoyant, yet still noticeably cautious, markets.

I well recall how in 2003 the bank I was working for predicted the biggest shipping upswing ever, and so it proved with China changing the world. Today’s markets though are so different with so many different strands at play, in a way I feel shipping has never appeared more messed up.

Still, this is meant to be a finance-focused column, so let’s look at the banks. The banking sector has largely sorted itself finally. It is very interesting to note however the massive range in interest charged by lenders at the moment.

It will become very difficult to plan your next interest payment

Several deals done by international banks for stock-listed companies come with margins from 2.5% to 2.7% above LIBOR, an incredibly low figure for this type of risk. A separate segment are Greek banks lending to local clientele at rates of between 2.7% to 4%. Then for just about all other banks the figure is between 4% to 6.5%. Then there’s private equity where decent financing is on offer for 6.5% to 10%, hugely down from the 17% or 18% margins charged eight or nine years ago. Private equity has finally worked out what to do via back levering deals.

Since we’re talking above LIBOR here it would be remiss of me if I didn’t touch upon this tricky subject – it is important, and few people are discussing it properly. After big scandals, where many banks were cheating, the authorities in the UK have decided to ditch the system. It’ll probably take a couple of years for it to be consigned to history.

$370trn is quoted today based on LIBOR, it is simply massive. What to do in its place? The Alternative Reference Rates Committee has come up with a secured overnight financing rate (SOFR), which is essentially what banks can borrow from the Fed against treasury bonds. It is good that it is just overnight but SOFR has a lot of negatives such as no forward curve whereas LIBOR has seven of them.

If a bank goes LIBOR from SOFR it will lose 30 basis points because LIBOR took into account also the risk on the banks. What will people do and how to deal with it in practice? In my mind, it will become very difficult to plan your next interest payment, it creates uncertainty for sure.

Enough LIBOR conjecture, back to the bigger picture of ship finance. Overall the banking market for ship finance is still contracting. And yet we are still seeing new lenders come in and others raise their game as shipping is suddenly sexy once again. Berenberg Bank, for instance, has been making big strides, working with German institutional investors where the bank comes in together for 10% to 20% on individual deals.

It is great to see investors have an interest in shipping again after so many years out in the cold. You can see it everywhere whether it be in the Norwegian bond market, the recent sale of Teekay LNG, or Michael Burry, the guy behind the Big Short, buying a big stake in Golden Ocean. And for my depressed tanker friends, the fact that John ‘Big Wolf’ Fredriksen has just piled into Euronav, well that ought to be a sign of hopeful times ahead.

This article first appeared in Maritime CEO magazine, published this week. Splash readers can access the full magazine for free by clicking here.

Dagfinn Lunde

Dagfinn Lunde, previously head of DnB New York (90-95), Head of INTERTANKO (95-00), and on the board of DVB responsible for the shipping and offshore division from 2000 until the end of 2013. He is now a board member of Maxi Shipping and co-founder of DagMar Navigation Ltd and SFG Ship Finance Global Ltd trading under the name
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