OFAC revokes so-called U-turn authorization for Cuba-related financial transactions
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.
The way ships are financed has changed considerably in the past ten years, and the market has continued to evolve throughout 2017. In the years following the global financial crisis new ship finance structures have been developed and new sources of finance have become available to the industry.
Despite the many changes the ship finance industry has undergone over the past ten years, Norton Rose Fulbright’s recent The way ahead Transport survey indicates that the majority of respondents from the shipping industry do not expect funding to become any more accessible in the medium term – just 27 percent believe the availability of funding will increase over the next five years. Despite this, bank debt is expected to remain the industry’s primary source of funding, according to 23 percent, followed by private equity, shareholders, and capital markets and bonds, selected by 15 percent, 14 percent and 13 percent respectively.
Conventional ship financing deals with traditional banks have now become few and far between. Loan volume for syndicated marine lending was estimated by Dealogic to be around $50bn in 2016, a significant decrease from the loan volume of $120bn seen in 2007. This downward trend has continued with syndicated marine lending (shipping and offshore) totalling c.$3.8bn (based on 26 transactions) for Q1 2017 a significant decrease from c.$10.2bn (based on 41 transactions) for Q1 2016 and reflecting the lowest number of deals since records began. A number of the ship finance banks that historically dominated the market, particularly the European banks, have been announcing their intention to exit shipping by actively marketing and selling their shipping portfolios or allowing existing loans to amortise and not taking on new business. Although this has been triggered by the financial crisis, there are other factors affecting the desire of the banks to shrink their shipping portfolios. These factors include the increasing regulation and scrutiny faced by the European banks, particularly as a result of the Basel regulations and following the substantial losses made by these banks in the shipping industry over the course of the last few years.
As a result, portfolio sales have become an increasingly prominent feature of the market. A number of these sales have been announced publicly, including sales by RBS, as well as a number of German banks, including Commerzbank, NordLB and HSH. The combined portfolio of HSH, Commerzbank and RBS was US$77.2bn in 2012 and fell to US$27.8bn in 2016, providing an illustration of the scale of the market for those interested in acquiring shipping loan portfolios.
RBS, formerly a key lender in the Greek shipping industry, has sold a number of its shipping loans and has stated publicly its intention to dispose of the majority of its remaining shipping loans by the end of this year. Most recently, Japanese investor Orix Corporation together with Berenberg Bank purchased a performing shipping loan portfolio of around US$460m from RBS. This followed an earlier purchase by these entities of a separate portfolio from RBS of around US$300m in late 2016. Market commentators estimate that the overall volume of industry debt acquired by Berenberg Bank over the past year is more than US$1bn.
It was recently announced that HSH is close to a sale of the viable sections of its shipping business, with reports that private equity groups Apollo, Cerberus and J.C. Flowers were bidding for the business. This sale would support the objective of the German state owners of HSH to privatise HSH by the end of February 2018.
NordLB is another bank that has been actively selling major parts of its shipping portfolio. As of August 2017 it was reported to have sold EUR14.5bn of its portfolio.
While a number of banks have exited the shipping market, there are many banks continuing to lend selectively to shipowners. These loans will typically be to strong existing customers as well as to large shipping conglomerates. While a number of these banks remain active in the market, they are nonetheless actively trying to downsize their portfolios.
Although rare, there are examples of some banks looking to develop selectively and conservatively strong shipping portfolios by bringing on new small to medium-sized shipowners, particularly in key shipping markets such as Cyprus and Greece. Such banks may choose to finance ships which are in a liquid market, such as mega boxships, offshore vessels and Very Large Crude Carriers (VLCCs), so that the ships can be easily sold in an enforcement scenario, rather than lending to niche markets. Bank of Cyprus and Hellenic Bank are two such banks.
Following the substantial reduction in the availability of financing from traditional banks, shipowners are increasingly having to turn to alternative financing sources. This is particularly the case for small to medium-sized shipowners, as traditional lenders are generally focusing on larger shipping clients due to regulatory and risk management requirements. As a result of this, shipowners are now becoming increasingly interested in considering structures such as high-yield bonds, convertible debt, capital and operating leases, as well as preferred equity structures.
The last few years have seen some of the larger players within the shipping market turning to the capital markets in order to meet their funding requirements. Many of these transactions have involved the US and Norwegian capital markets, with the Norwegian bond market being seen as particularly favourable for shipping assets. The London markets are also actively looking to attract their first shipping listings since 2006/2007.
Export credit agencies (ECAs) have been common participants in the ship finance industry in recent years, either via direct lending through bilateral transactions or co-financings, or through guarantees and insurance policies.
Chinese banks and leasing companies are becoming increasingly active within the shipping industry. This activity is likely to increase as a result of China’s Belt & Road Initiative, through which China is seeking to create a modern-day silk road, aimed at supporting the Chinese shipbuilding industry.
Private equity entered the shipping industry following the global financial crisis and has prompted a great deal of discussion around its long term role in shipping. Many private equity funds initially entered into joint ventures with shipowners. Recently, however, we have seen that a number of these funds are more interested in buying loans from traditional banks, at a large discounts, in order to see immediate profits.
Along with these more traditional private equity players, a number of new alternative financing outfits have recently entered the market. These new entrants are targeting small / medium-sized shipowners and are directly lending to these companies through primary or, more typically, mezzanine financing. Alternative finance tends to come with a higher price tag, so it is often not as attractive to shipowners as traditional bank debt. However, alternative capital providers may be long-term players within the shipping industry particularly if traditional commercial lenders are not be able to re-enter the industry in the medium term due to the increasingly stringent regulatory environment. Alternative structured capital providers are typically interested in creative investment structures which will often involve leasing structures and preferred equity as well as more traditional debt structures.
As we approach 2018, we can expect to see further developments in the ship finance market. As asset values gradually rise, banking regulation becomes ever more stringent and new participants enter the market every sub-sector of the ship finance market, across banks, funds and individual investors, will continue to feel the impact of these changes, and no doubt be encouraged to evolve further.
On 5 September 2019, Professor John McMillan AO’s Final Report (Report) on the operation of the Narcotic Drugs Act 1967 (ND Act) was tabled in Parliament. Section 26A of the ND Act required the Minster to cause a review of the operation of the ND Act to be undertaken.