Corporate & Institutional Banking Ship Finance: Navigating the Choppy Seas Rajbir Talwar, Director Shipping Americas September 2018 Annual Cargo Conference, ASBA
Ship Finance History Is this the most interesting topic, you wonder? Safe Harbor - A ship in harbor is safe, but that is not what ships are built for J A Shedd
The Story of Shipping is the Story of Modern Finance (1600 1700s) The Story of Risk & Reward Ad-Venture Capital Limited Partnerships partnership per voyage Diversification 100s of ships 100s of investors Financial Centers & Capitalism Pricing Risk innovative idea of actually repaying debt would lower cost of debt Cost of Capital low interest rates in the 1600s Financed more trade with debt High dividend leveraged up by high borrowing Limited Liability Financial wizardry options, futures, short selling Regulation
Industry Characteristics Drive Financing Structures The Prevailing Winds that drive & shape this industry Commoditized Information Symmetry Mobility
The Perfect Competition - Or at least close enough Commoditized Information Symmetry Mobility
and Supply Demand being (relatively) in-elastic One Less Ship One More Ship
Let s Pause To Take A Compass Bearing Ship Finance: Needs to deal with Volatility Volatility 120% 100% 80% 60% 30% 25% 20% 15% Ship Finance: Needs to deal with Volatility Commodity Competition Inelastic - Demand & Supply Fixed Costs / Construction Lead times 40% 10% 20% 5% 0% ClarkSea Index VLCC Capesize Boxship FTSE-100 S&P 500 Earnings Earnings Earnings Brent Crude 0% Coefficient of Variation (LHS) Source: Clarksons Research Avg. Absolute Change (RHS)
Compass heading Volatility creates Cyclicality Ship & Freight Prices Drop, Over Ordering Over Tonnage Freight Rates Drop, Vessels Lose Value Ship Finance Classical Shipping Cycle Excess Capacity of Ship Building Demand of New Building Ships Drop Yards Re-Open or New Yards Created Demolition Increases Demand for Building New Ships Increases Fleet Shrinks Freight Rates Recover
So You Are Saying Nothing Has Changed in the Last 400 years!! Boom and Bust and Boom again
Financing a Volatile and Cyclical Industry
Cash Flow is Volatile So the Focus should be on the Balance Sheet Balance Sheet Focus High Operating Leverage should not mix with high Financial Leverage 400 years ago we learned Cash is King to deal with Volatility and Cyclicality
Research University of London Liquidity Ratios and Gearing Ratio Key to Predicting Default Average for Working capital / Total Assets Retained Earnings Gearing Non Defaulted 4% 26% 53% Vs. Vs. Vs. Vs. Defaulted -9% 7% 70% Source: Article in Transportation Research Part E Logistics and Transportation Review Oct 2008. DOI: 10.1016/j.tre.2007.10.005 Source: RePEc C.th. Grammenos et al. Transportation Research Part E 44
Potential Return & Risk Ship Finance The Long & Short of the Capital Stack Build Equity The Capital Stack High Common Equity Discipline about buying Assets Don t love that debt just because it s cheap Equity Preferred Equity Subordinated Debt Debt Low Senior Debt
Valuing that Built Up Equity Valuation Cashflow Based Asset Based DCF Net Asset Value P/Earnings EV/Ebitda Dividend Yield
Power of Mark-to-Market Liquidity of the Assets is Key How Liquid is the Fleet Handysize Panamax Bulk Handymax Aframax Suezmax Capesize LPG VLCC Chem. Tanker Cont <3k TEU Ro Ro Products Cruise MPP Offshore Reefer Pass. Ferr. Cont 3k+ TEU LNG Gen. Cargo PCC Share of Sales by Sector Other, 27% Container, 10% Tanker, 25% Bulk, 35% 0 2 4 6 8 Source: Clarkson Research Services NAV Market value of Assets Less Market Value of Liability = Value to Equity
Trends in Ship Finance
Transparency & Consolidation Regulation Sustainability Alternative Finance Larger Better capitalized Transparent Trends towards consolidation
Sustainability is key Founding Father of RSRS & SSI Responsible Ship Recycling Standards Sustainable Shipping Initiative 18
Leading Shipping Bank Marine Finance Ranking Syndicated Marine Finance Loans Volume by Bookrunner 9M 2017 Rank Bookrunner Volume ($m) Deals % Share 9M 2016 1 Citi 3,184 5 18.1 2 2 1,609 13 9.1 5 3 DNB Markets 1,207 14 6.9 1 4 BAML 1,204 6 6.8 9 5 Nordea 973 10 5.5 3 6 ING 970 6 5.5 4 7 KFW 834 1 4.7 26 8 Sumitomo Mitsui Financial Group 805 5 4.6 12 9 Wells Fargo Securities 754 4 4.3 17 10 BNP Paribas 673 5 3.8 11 A better bank contributing to a better world Total 31,200 114 100 Source: Marine Finance Ranking, Marine Money January 2018
Contact Details Thank you Rajbir Talwar Director Shipping Americas ABN AMRO Holdings USA LLC 100 Park Avenue, 17th Floor NYC, NY 10017 USA rajbir.talwar@abnamro.com