An End to Easy Money?

Investment bankers, private equity investors and shipowners swarmed the halls of the Hotel Pierre at Marine Money Week in June looking for deals they could cut to finance new ship orders. It wasn’t like the good old days when there was an abundance of bank loans, so investors and lenders were looking at all kinds of new instruments that could secure their investments against the kind of loan losses that wrecked the balance sheets of European ship finance banks over the last few years.

But as one private investor told me, “I look for value investments in industries that are at the bottom of their cycles, and shipping is one of the most cyclical industries.”

Although most of the talk involved dry and liquid bulk shipping, which has had a bad five years, the new ways investors are finding to fund new shipbuilding apply equally to container shipping, which has had five up-and-down years. Bankers enumerated a host of new financial instruments they’re cooking up to fund the new orders.  

“We will look for more traditional solutions when the market recovers,” said Oliver Faak, managing director and global head of shipping at Germany’s Norddeutsche Landesbank. “In the meantime, we are trying alternative solutions.”

Even without the traditional solutions now, there was a sense that the tide is turning and that there is money to be had if banks can get the security they need. And Chinese state-owned banks have been extending loans to Chinese lines to build new ships so the country’s shipyards can stay at full employment.

Many shipping lines and ship owners are trying to order new ships for two reasons: the need to build new eco-ships that can save fuel and cut costs, which applies to all shipping sectors; and the need to meet new environmental regulations on shipping, especially in the case of tankers. The needs are so acute that some of the relatively young bulk and tanker fleets may be scrapped, because they’re largely losing money when they’re at sea anyway.

But one banker struck a cautionary note, warning that new ship loans are only possible because of quantitative easing in the U.S., Europe and China. “The big picture is that we have been living in an easy-money environment since 2008, which is distorting asset values,” said Peter Stokes, senior adviser and head of shipping at Lazard. “What will the end of QE do to ship loans?”

The very possibility that China may tighten credit sent tremors rippling around the world in late June.

But easy money already has brought too much capacity. “Overcapacity is persisting and I don’t see anything more than an anemic recovery over the next few years unless people come to grips with overcapacity,” Stokes said. “It would be better for shipping lines to have too little capacity than too much, because at least they would be able to fill their ships.”

Contact Peter T. Leach at pleach@joc.com and follow him at twitter.com/petertleach.

 
 
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