Abstract
An important characteristic and key feature of the shipping industry is that it is highly cyclical; this cyclicality is particularly apparent in the traditional, less specialized and highly fragmented dry bulk and tanker shipping sectors. Freight rates follow a volatile pattern, due to changes in the industry’s underlying demand and supply forces. As can be observed in Fig. 7.1, volatility of freight rates has a direct effect on shipping assets whose value follows a cyclical pattern similar to that of freight rates. Another important characteristic and key feature of the shipping industry is that it is highly capital intensive. The acquisition, ownership, and management of shipping assets require the commitment of very large amounts of capital. The establishment of a meaningful presence (critical mass) in shipping will typically involve the formation of a fleet of at least 7–10 vessels, and depending on the specific shipping sector, this will require a significant investment amount; e.g., the acquisition of a 5-year old Capesize vessel would require in September 2016 the commitment of about $24 million. As a result of the industry’s cyclical and capital-intensive nature, it is fundamental for the industry’s participants and capital providers to determine if the timing is appropriate for investments in shipping. Furthermore, and in order to ensure the viability of shipping investments, it is equally important to develop an understanding on the different financial sources of capital that are available in the industry and the techniques and strategies that can be employed to manage business risks. This chapter aims to expose the reader to the different sources of shipping finance, analyze each of them, and provide an overview of the present challenges in the sector. A deeper understanding of these ship-financing sources and conditions will assist toward employing these and developing the best possible capital structure for a shipping project and a company as a whole.
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Notes
- 1.
Tradewinds, Bank competition to ‘make shipping like airline industry’, June 2, 2016, http://www.tradewindsnews.com/weekly/761761/bank-competition-to-make-shipping-like-airline-industry
- 2.
Infographic, Top 10 Shipowning Nations by Value’ data sourced, Vessels Value, February, 2016, http://worldmaritimenews.com/archives/182683/infographic-top-10-shipowning-nations-by-value/
- 3.
During 2007, a large number of mortgages in the US went into default, creating thus a severe recession in the US and the world economy as a whole.
- 4.
Requisition Compensation is paid to the shipowner in the event of requisition (appropriation) of his shipping asset.
- 5.
Under Personal Guarantee, the shipowner is required to pay back the loan personally in the event of a default.
- 6.
Retention Accountis a bank account where part of the vessel’s earnings is retained for the purposes of the debt service.
- 7.
The OECD guidelines for government-supported export credits for ships are under OECD’s “Sector Understanding on Export Credits for Ships (SSU).”
- 8.
Marine Money International, Magazine, Issue—January 2016, DEBT, pp. 32 and 38.
- 9.
An “off-balance sheet” item typically refers to an asset or liability or other financing activity that it does not have to be reported on the balance sheet of the company. An “on-balance sheet” item refers to the opposite case, as an asset or liability needs to be reported in the company’s balance sheet.
- 10.
The Intercreditor Agreement is an agreement entered into between creditors who have the same debtor and outlines the ranking of their respective liens as well as the responsibilities, rights and liabilities of each creditor.
- 11.
The second-priority mortgage is subordinated to the first-priority mortgage that is registered on a vessel by a shipping banks when it extends a shipping loan against that vessel.
- 12.
Typically, the option is exercised when the common equity stock market price is higher than its predefined strike (exercise) price.
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Kavussanos, M.G., Visvikis, I.D., Alexopoulos, I. (2017). Managing Financial Resources in Shipping. In: Visvikis, I., Panayides, P. (eds) Shipping Operations Management. WMU Studies in Maritime Affairs, vol 4. Springer, Cham. https://doi.org/10.1007/978-3-319-62365-8_7
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