Erlend Sommerfelt Hauge, co-founder of ship finance platform, Oceanis, has some capital advice for readers.
Over the past 18 months banks have made serious efforts to return to the shipping industry.
As Splash reported last month, the Petrofin Index for Global Ship Finance, which assesses the level of bank finance available to the industry, showed its first uptick in 11 years.
Dubbed the ‘traditional lenders’ of the ship finance scene, the slow return of these highly regarded and regulated institutions is welcome news for larger owners who are typically their beneficiaries. But for many small-to-medium-sized owners, their reappearance brings limited change as banks continue to favour larger loans of $15m or more. So, what makes banks less able to provide smaller loans and where can shipowners look for finance on this scale?
To explain this, we must explore the economics of producing a shipping loan, seen through the lens of a bank.
The necessary work to issue every new potential loan, regardless of size – such as sourcing, background checks and performing analysis – is largely fixed and does not vary greatly with the size of the loan, unlike income which scales to a much greater extent. Due to the increasing level of regulations banks are required to adhere to, this process has become extremely expensive over the past decade and is not that different for a one-vessel loan application when compared to that of a 10-vessel loan. This should imply that the economics of a shipping loan improve with the size of the loan: a larger loan is more profitable to issue than a smaller loan, dollar-for-dollar.
Secondly, the level of extraordinary profitability seen in multiple shipping segments during the past 18 months has allowed shipowners to repay their debts well ahead of schedule. Consequently, the lenders’ loan books would shrink dramatically unless the financial institutions do everything in their power to replace these repaid amounts with new loans.
The most time-efficient way to get to a large book is to acquire an existing one. The second most time-efficient way, and more commonly utilised method, is to focus on larger scale projects when arranging new loans. Comparable to the economics of the loan, time efficiency also applies to larger loans when time is the scarce resource for other reasons than the cost it represents.
While many banks have quirks that don’t match with all owners, there is available capital in the market for the smaller owners. Alternative lenders remain active, having felt the pressure from the re-entrance of the banks, and are as hungry for deals as ever. Decreased regulatory requirements and more flexibility on structuring transactions have reduced the minimum loan amount they can provide, while recent increases in base rates have slashed the pricing difference between banks and the alternative sources of capital, to the great benefit of smaller shipowners.