Hamburg-based ship finance platform, oceanis, predicts ship financing costs for 2023 in a new quarterly report
– Bank financing for Container vessels has all but dried up, with only vessels employed by top-tier Charterers able to obtain financing terms on a non-recourse basis
– Product Tankers are in vogue with Financiers; loans at over 100% of historic fair market value (FMV) are possible for pool-trading mature vessels
– Poor earnings in Dry Bulk have caused a serious decline in the leverage available to shipowners, but finance remains available from a wide variety of sources
– Strength in the Offshore sector is bringing international banks back after a decade of write-downs and restructuring
– Rising base rates make alternative debt providers more attractive, with margins dropping across sectors
2023 looks set to be a positive year for shipowners seeking finance. Shipping finance markets remain open and banks are seeking opportunities to grow their portfolios, resulting in a highly competitive market.
“One of the best times in recent memory to finance your fleet”
Strong earnings across sectors, coupled with a flood of cheap money from quantitative easing efforts, pulled more banks and more investors into shipping after the pandemic. The increased competition that resulted, caused leverage to rise and margins to shrink across all vessel types, and is now most clearly seen in Dry and Tanker financings as banks attempt to rebalance their portfolios away from Container vessels.
The increase in base interest rates – 0.5% in January 2022 to 4.3% today – has in some cases tripled the total interest cost to shipowners and led to large changes in loan affordability for those seeking finance. These rising base rates have played to the favour of higher-cost alternative lenders who are now much closer to banks in terms of total interest cost.
Erlend Sommerfelt Hauge, Co-Founder and Managing Director of oceanis said: “The improving credit of shipowners over the past three years, coupled with heavy repayments on Container financings, have generated immense competition between financiers. At the same time, rising base rates are making higher-leverage financings comparatively cheaper, creating more competition for banks.
“Now is one of the best times in recent memory to finance your fleet.”
oceanis’ new Q1 2023 Finance Report gives an overview of the main sectors – Containers, Tankers, Bulk Carriers and Offshore – including the best terms available for vessels in the market today.
The first report of its kind, it contains high levels of detail on the margins available to shipowners seeking high and low leverage financings for old and new vessels across the Dry, Wet and Container segments. These margins are generated through detailed analysis of the financing terms received by oceanis in 2022 which totalled over $2bn across a broad range of vessel types, loan amounts and leverage requests. Importantly, the indications shared are on the basis of pure asset financing with no corporate guarantees.
“Whether used by shipowners to benchmark their bank’s pricing, by investors to model expected returns or by financial institutions to gauge their market competitiveness, we hope that this report will be of use to a wide range of industry participants,” said Sommerfelt Hauge.
“This is just one step on our path to provide the industry with a more transparent and efficient ship finance marketplace.”
The Container market slowdown has made finance for this sector much more difficult. The most prominent banks are looking to reduce their Container portfolios and are now seeking to finance only those vessels employed by very strong charter counterparties and at today’s lower valuations.
Some interesting developments on existing loans have emerged, where loan-to-value (LTV) covenants imposed by several banks during the up-cycle are now resulting in ‘soft defaults’ across their portfolios.
Dependent on how stringent the banks will be, some shipowners may be required to refinance existing facilities to avoid coming up with the prepayments required to cure LTV breaches.
Meanwhile, other banks either waived LTV restrictions or are allowing LTV breaches with no penalties; this makes very clear the importance of knowing the bank’s policies in such situations, not just how they are stipulated in the term sheet but how they are put into practice in times of stress.
Tankers on trend
Product Tankers are attracting the greatest attention from the banks, with Crude Tankers following closely behind. An older fleet, a lack of yard capacity for newbuilds and the sudden shock of lengthening trade routes due to Western sanctions have built a narrative of a structural bull run, with financiers more comfortable with higher long-term breakevens than had previously been the case.
The decreasing cost of alternative finance from alternative funds for these vessels is also a trend worth watching, with very high leverage and low margins being available. For older vessels with long-term employment, in this sector the difference between banks and funds is as low as 0.75% in additional interest margin for considerably greater leverage and flexibility.
With spot employment, both banks and funds are being highly aggressive in terms of historic LTVs; pool-trading Product Tankers can see terms offering initial proceeds of more than 120% of their average valuation over the past decade from funds, and more than 100% of that same average valuation from banks.
Dry bulk below average earnings
The Dry Bulker party of 2021 is over for the time being, but there is hope for the coming months.
While banks are less keen to offer leverage of more than 50% given today’s high valuations and low earnings, margins are low and amortisation is slow with 20-years-to-zero common on vessels over 10 years old.
Several lessors, meanwhile, have started to offer non-recourse terms as Container vessel repayments from top-tier counterparties are forcing bankers to get creative in originating new facilities. These terms are in many cases more attractive than bank terms, with fund-style leverage and bank-like pricing as well as tenors of up to 10 years for larger modern eco vessels.
This presents opportunities to smaller shipowners. Banks are still available to lend and should the much-promised resurgence of Dry Bulk materialise, it could prove beneficial to build relationships which can help build a fleet in years to come.
Banks are tentatively moving back into the Offshore market, after showing little interest for eight years. Alternative lenders in particular are keen on this sector, but apply a cautious approach as they have yet to build the intimate knowledge they enjoy of other sectors.
Recent surges in vessel earnings and asset values, as well as diversification of demand away from only oil and gas to also include renewable energy, suggest the current uptick in available funding is ‘sustainable’ in more ways than one. ‘Green’ financiers which invest partially on the basis of vessel efficiency are especially keen on renewable activity and can offer market-beating terms thanks to strong backing from larger commercial banks and environmental development funds.
Overall, shipping finance markets remain open across most sectors. Banks are looking to grow their portfolios and with increasing numbers of alternative funds, increased competition plays to the favour of the shipowner. And on the heightened base rates which have caused so much market turbulence over the past year, there is some hope for the future.
“Base rates, while currently high, are projected to fall from the second half of 2023,” said Sommerfelt Hauge.
“While it seems likely that the ‘free money’ era has ended for now, financing costs can be expected to decrease in the medium term as central banks react to the decreasing inflation we are seeing today.”