Capitan

SHIPPING FINANCE

Lesson One - Introduction to Shipping Finance Perspective on the Shipping Industry In its broadest sense, shipping is a service industry characterised by heavy capital investment and, unlike most other activities, it usually carries a minor inventory (stock-in-trade) position. Revenues tend to be volatile and ships are dependent upon their continued operation to cover runningexpenses, repairs, debt service and to provide a satisfactory profit to the investor. Some speculators, however, have proved very adept at "playing the asset trading game" and have earned good profits, simply by selling vessels at a level higher than the acquisition price. However, it should be said that the risks involved in only trading vessels, rather than their operation, are considereddangerous and few Shipowners choose to rely on this activity as a sole occupation. Much comment has been made on the severe depression experienced in recent years and the effects on Shipowners and financiers alike. From the Lender's point of view, this has resulted in an excessive amount of time devoted to cost consuming workout situations, rather than devoting the time to the generation of profitableand well structured transactions. This has produced, in some cases, a reluctance by some institutions to pursue shipping based business, at least in the short term. The shipping market is multi-faceted, taking into account the many disciplines ranging from a simple tramping operation, through sophisticated joint-ventures and pooling systems, to complex financial arrangements. While shipping remainsby far the most efficient conveyance of goods, it will always occupy a significant part in world trade. Although referred in its overall sense, there are strong arguments that shipping is, in fact, composed of a collection of markets, all of which are affected by similar economic factors. Logically, therefore, we could extend this analogy and say that different markets exist for different typesof ships and often move countercyclically to one another. Shipping is an international business where ships are considered to be mobile assets, capable of being traded effectively anywhere in the world. Vessel purchases require the commitment of large sums of money for relatively long periods of time and Lenders are often expected to make quick decisions to match the opportunities in themarketplace and the entrepreneurial nature of the purchase. As a consequence of this, shipping finance requires specialist knowledge in articulating the risks attached to the proposition and a thorough knowledge of the industry. For the Lenders, the returns tend, on average, to be higher than those received for other types of lending, reflecting the higher risk profile of the industry. The world merchantfleet is currently estimated to consist of well in excess of 30,000 vessels of greater than 300 registered tons each. Whilst current figures are difficult to gauge, at the beginning of the 1980's the annual mortgage turnover was estimated to be approximately $10 billion relating to the purchase of new vessels. It can,

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therefore, be seen that the marketplace has a constant capital turnover. Whilst the greater proportion of the financing for new vessels, estimated to be around 70 per cent., is provided by way of OECD schemes at subsidised and often fixed rates of interest plus advantageous terms and conditions, collateral opportunities occur to provide guarantees and foreign exchange to the providers of this finance.

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In the second-hand market, it is estimated that there is a total borrowing against mortgages of around $120-180 billion at any one time. In the case of second-hand purchases, the vast proportion of financing is provided by commercial domestic and international banks. What is Shipping Finance? At this stage, the term shipping finance requires definition. Traditionally, this involves...