The crisis in the container shipping sector is not new. After a boom in exports between 2004 and 2007, the industry placed some of the biggest ship orders in its history, resulting in massive oversupply when the downturn hit and export volumes collapsed. As a consequence, shipping firms have recorded losses for several years in a row, and are struggling to get financing from banks who are concerned with Basel III requirements and reduced lending limits.

Gust Biesbroeck, head of transportation at ABN Amro, says: “What we have seen over the past three years is that some of the European banks are stepping back from ship finance for a number of reasons, among which are the pressures of the Basel III regulations, but also lack of access to US dollars for European banks. For some banks there have also been credit risks, because the shipping market in general was weak in 2012 so some clients have had trouble meeting their financial obligations. It has not been an easy year for ship finance.”

But if the years between 2009 and 2012 were bad, 2013 looks like it is going to be even worse. Export volumes are not picking up, banking regulations are getting tighter and tighter, and shipping firms are draining the cash reserves they had accumulated during the boom.

Goh Mei Lin, a partner at law firm Watson, Farley and Williams (WFW) in Singapore, explains: “Many shipping companies are in a worse cash position now than they were two or three years ago. At the early stages of the downturn when things started going wrong, some shipping companies still had significant cash reserves, which enabled them to weather the storm for a period of time notwithstanding the difficulties they faced in raising new money because of the tight banking market. However since then, a lot of those cash reserves have been utilised and the banking and shipping markets have become even worse.”

She expects to see further restructurings and more companies filing for bankruptcy or court protection when they are unable to continue to meet the demands of their creditors in 2013.]

Merger wave

Goh explains that banks don’t just rely on the fact that the ships have good charters, but also on the individual track record of the people behind the company in order to decide whether or not to extend financing. “If a company is a start-up but the key persons behind the company are well known to the banks and are recognised as having a sound track record as owner or operator it’s easier to raise financing. But it still doesn’t change the fact it is difficult for many banks to lend outside of their existing or core client group.”

Shipping finance is becoming based more on reliable income streams than on the value of the ships, making it difficult for companies to get funding if they do not have a charter in place. But in the current crisis, charter rates are very low, making ship owners reluctant to commit to them for a long period of time. “Rather than being stuck with these rates, they want the flexibility to be able to benefit from an increase in rates. Again, there is a conflict between the needs and requirements of the companies and the needs and requirements of the banks,” Goh adds.

For ABN Amro’s Biesbroeck, it is the mid-sized firms that are under pressure, because they initially attracted a lot of capital from banks. “They are very often family-owned shipping companies who have had longstanding relationships with banks, but they won’t be able to get the same amounts anymore,” he says.

Therefore, the crisis has led to a lot of alliances, whether horizontal or vertical. “We see a trend between cargo owners, commodity traders and ship owners to team up more; there’s more vertical integration in the value chain in order to attract different sources of capital, as more transparency and more stability of sources of cashflow are necessary to attract these funds,” Biesbroeck adds.

The container shipping industry has experienced a wave of mergers in recent years, the latest being that of Hamburg-based Hapag-Lloyd and Hamburg Sued, respectively the world’s sixth and twelfth-largest container lines. According to Bloomberg, the two firms are in merger talks to form the world’s fourth-largest carrier, lowering costs and improving access to funding at a time when smaller players are in jeopardy.

And judging from the experience of Denmark-based Maersk, the world’s number one shipping firm, economies of scale do help when funding becomes scarce. Jan Kjærvik, head of group finance and risk management at the firm, tells GTR: “In general the financing climate for shipping companies has deteriorated over the last years, but we are a large conglomerate with a lot of activities outside shipping, which helps in finding finance. There have been a lot of financing activities on behalf of the group in 2012.”

Maersk has access to capital markets and bond issues, an increasingly popular alternative to fund the sector, but one reserved to a small elite. Kjærvik says the bond market constitutes more than 20% of the firm’s total drawn debt, along with export credit agencies (ECA), ship financing, but also bank financing (under 40%) and project financing.

“We have issued the equivalent of over US$2bn in eurobonds, as well as Norwegian and Swedish krone bonds, but we have also continued to raise project financing for our terminals and utilised ECA, multinationals and ship-mortgage institutions for terminal and shipping investments. We have a very diversified portfolio of funding sources,” he adds.

In April 2012, the company reportedly closed a US$100mn K-sure-backed financing deal with Japan’s Bank of Tokyo Mitsubishi UFJ (BTMU) and Sumitomo Mitsui Banking Corporation (SMBC), for the purchase of three Korean-built container ships.


Even those who do not fulfil the criteria for bond financing have been forced to diversify their sources of funding. Luckily, a variety of new financiers have entered the market, attempting to fill the gap left by European banks such as Commerzbank – previously the world’s second-biggest lender to the sector. Asia in particular has stepped up its participation in the industry. ECAs, development banks and commercial banks all increased funding to the sector in recent years.

“There is more optimism in Asia than in Europe, and if you look at the domestic banks in Singapore, India, Thailand, Japan and some banks in Korea, they are to a certain extent able to fill the liquidity gap left by the western banks. However, some of these banks will only fund projects involving a domestic borrower. For example, the Korea Development Bank and Korea Finance Corporation are very much in business and can fill a big chunk of the gap but only where the borrower or sponsor is a Korean party; and there’s a similar situation for Indian banks, which focus on financing to Indian parties,” WFW’s Goh points out.

China Eximbank told Reuters at the end of January that it planned to increase lending for the buying or leasing of ships by around US$3bn this year, in a move to support badly-hit Chinese shipyards. But again, ECAs only lend or guarantee funding for transactions involving their own country, making them a useful but incomplete alternative.

US banks have also stepped in to some extent, but there it seems that private equity funds have been even more active. “It would be exaggerating to say that all the American banks are coming into shipping, but some of the banks that have shipping knowledge in-house have definitely been more active over the past 12 months. Capital has also come from other sources. One of the most apparent ones has been private equity, especially from the United States,” says Biesbroeck.

However, investment funds on their own do not have the resources to handle entire shipping deals, and they still need commercial banks to be involved. Moreover, the returns that private investors hope to gain are not exactly in line with what the shipping sector can currently provide.

Andrew Nimmo, another partner at WFW, explains: “On the one hand a private player will be looking to secure a return in the teens, but owners had become accustomed to securing debt at thin margins above Libor. The margins have risen since the financial crisis, but there is still a gap to be bridged there which at present is only really being filled by those investment funds and investors who have the specialist shipping sector knowledge to get involved with stakes in the forward vessel prices and are confident in their predictions for the residual value outlook for the vessels they are taking on.”

Besides, investors looking to get involved in shipping must be willing to wait to see any returns, as the market in general still needs to recover from several years of crisis. “Whilst the potential returns on the capital appreciation of the ships when the market improves are very attractive, the possibility that some of these ships may generate or continue to generate negative cashflows for the next 12 to 18 months is of real concern. We have a number of cases at the moment where the vessels’ earnings are not even sufficient to cover operating expenses, let alone debt service,” adds Goh.

Finally, liquidity-flushed Middle Eastern banks could also play a growing role in financing shipping deals in the future, but there the problem lies in “a lack of familiarity with the industry, or in some cases, a hesitancy to re-enter the sector on volatility grounds or due to having been burned previously”, says Nimmo.

Despite the abundance of new players in the shipping finance sector, liquidity is hard to come by, and shipping firms will need to be resourceful in order to stay afloat in 2013. Diversification will be the key to survival, and parties will have to manage their expectations and show creativity while fundraising in less-than-ideal market conditions.