Shifting Funding Field

By Paul Scott Abbott

As a pandemic-stressed world advances fresh approaches to virtually all activities, the financing landscape for breakbulk ships continues to expand beyond time-honored bank models, looking to benefit from economic rebound, from rising demand and even from stricter environmental mandates.

While the playing field is undoubtedly shifting, several longtime industry players told Breakbulk they see opportunities as breakbulk vessel financing moves forward with its own new normal.

“The breakbulk sector may stand to benefit the most from the recovery, when one takes into consideration the new mindset that has prevailed with the Covid pandemic,” said Basil Karatzas, CEO of New York-based Karatzas Marine Advisors & Co. for the past 10 years.

Karatzas, who has more than two decades of experience in maritime financing, said lower interest rates should spark investing desire, while mounting worldwide emphasis on a cleaner environment is likely to be a stimulus for still more breakbulk cargo, including ecofriendly wind turbines, and thus a potential driver of investments.


Investor Pool Diversification

An increasingly broad array of financiers should facilitate better matching of investments with opportunities, according to George Cambanis, managing director of marine finance at New York-based alternative investment platform Yieldstreet.

“The financing environment for the maritime industry, as a whole, has in recent years shifted away from the traditional model of banks providing the majority of debt capital to owners and operators, by becoming instead more reliant upon a more diverse, decentralized pool of financiers, made up of alternative finance providers, such as Yieldstreet; leasing companies; private equity firms; purpose-built family offices and so on,” Cambanis said.

“This more fragmented setting has allowed for the maritime industry’s capital requirements to be met by a more balanced mix of institutions, creating a tiered and targeted approach in terms of matching investment appetites to respective projects, whether in terms of specific assets, types of counterparty and/or individual project structures,” said South African-born Cambanis, who in 2002 established Deloitte’s global shipping and ports business group.

Today’s proliferation of varied avenues for financing, Cambanis said, should benefit all sectors of the maritime industry, so long as interests are aligned between market participants.

Nonetheless, as some observers note, the largest chunk of capital supporting the breakbulk sector still comes from the combination of international commercial banks, export credit agencies in Asia and Chinese leasing companies. And it is true that these sources of funds primarily target the largest shipowners.


Leasing Model Evolves

Among current trends is an acceleration of the leasing model, including shipyards financing newbuildings through the lease of the vessels to operators, according to Yorck Niclas Prehm, head of research for Hamburg, Germany-headquartered shipbroker Toepfer Transport, which also has offices in Singapore and Shanghai.

In addition, more big private equity companies are becoming engaged as asset users, Prehm said, with some shipowners improving liquidity by chartering vessels to operators with a purchase option at the end of the lease term.

Hannes Hollaender, Toepfer’s managing partner and co-owner, who has been with the company 20 years, said many financing banks have disappeared from shipping after having lost money at a time of overabundance of vessels in the global fleet.

Now, Hollaender said, with diverse financing and equity available, shipyards are getting busy building again, but, rather than focusing upon multipurpose vessels to serve the breakbulk market, it seems most are preferring to churn out containerships and tankers, which, he said, are simpler and more profitable to build.

“Being in a niche market is always a difficult situation,” said Hollaender’s colleague, Prehm. “There is limited transparency in the market, and it is more difficult to find financing.”

Andrew Graham, chairman of London-based Infinity Maritime, said his company’s approach to financing the environmentally conscious vessels demanded by emissions-reduction initiatives such as the Poseidon Principles entails an asset digitization platform, providing fractionalized ownership and facilitating sustainable equity finance for a maritime ecosystem optimized to meet environmental, social and governance – or ESG – criteria.

Furthermore, Graham said, Infinity’s technology furnishes a secondary market, enabling investors to adjust their positions as market conditions evolve.

“Traditional sources of finance are less available to small and medium-size operators, and new capital needs to come into the industry to help accelerate the development of newer, more sustainable technologies,” Graham said.

“The global credit crunch combined with new banking regulations has caused the lack of finance available to small and medium operators,” Graham added. “However, the pandemic has resulted in greater demand for breakbulk cargo, as the global economy bounces back.”


ESG is ‘Blessing, Curse’

According to Karatzas, ESG requirements present both challenges and opportunities.

“In a sense, ESG is both a blessing and a curse,” Karatzas said. “Clearly it’s a blessing as it forces companies and operators to consider cleaner and more responsible practices, practices that are better for people as consumers and employees, better for society and better for the environment.

“On the other hand,” he said, “it’s a clear disruption for the way business has been done for a long time, and there is change afoot that companies have to face. As always with change, there is risk not only with making the change, but also making the right change or just the right degree of change.

“There may be companies that will see ESG as another business fad and they may ignore it because shipping has a long tradition and it worked in the past,” Karatzas said. “We would think that would be a dangerous approach.”

Governments, banks, non-governmental organizations and charterers have been taking steps to encourage shipowners and operators to adopt ESG tenets, sometimes offering preferential financing for just such aspirants, Karatzas said, noting that Covid-19 has also been a catalyst for companies and consumers to change and demand more accountability.

Indeed, a historical lack of accountability and transparency has likely hindered investments in vessels.

“Often,” Infinity’s Graham said, “maritime operators have thrived on an opaqueness of transparency, which acts against the interests of investors in the vessels. Better governance will alleviate this. There is a rising paradigm within the industry of transparency in operations and supply chain, which is being solved by emerging technology companies.”


Options Improving

Karatzas said he sees the marketplace turning the corner, with increasing financing options available and business conditions improving following the negative repercussions related to the Covid-19 pandemic.

“A year after the start of the crisis and now with light at the end of the tunnel, it seems that the options have improved materially,” Karatzas said. “With interest rates low and projected to stay as such for a while, with the recovery at hand, banks and financiers are getting more active with shipping finance, so much so that one again hears of stories of banks entering into bidding wars to finance shipowners.

“One would have thought,” he added with caution, “that, after the financial crisis of 2008, at least shipping banks would be more skeptical and more mindful of repeating the mistakes of the past.”

Noting the age-old rule of “cargo is king,” Karatzas said prudent banks – and other investors – would be well-advised to focus on opportunities where long-term traditional contracts or contracts of affreightment between shipowners and charterers are in place or at least circumstances in which a strong commercial brand provides assurance that vessels will be kept busy.

“Now,” Karatzas said, “with a recovering market, getting more cargoes and contracts allows for adding new pages to a company’s financial playbook.

“Still,” he added, “equity investors are hard to come by in the shipping industry, given the losses they have sustained in the last decade and the false estimates of a market recovery. Probably this is a blessing in disguise as it keeps the order book under control, while allowing for better returns for the existing fleets.”


‘Luck’ Plays Role

Nonetheless, the ship order book needs bolstering, according to Toepfer’s Hollaender, with a particular demand for vessels built to meet contemporary ESG standards to replace aging, less-ecofriendly ships that are reaching the end of their economic lifespans.

“We all in the market have made a major mistake: We have neglected to order new ships,” Hollaender said. “We’re experiencing a rising demand for multipurpose vessels, and that is the challenge we’re facing right now.”

As far as garnering financing for those newbuildings, Toepfer’s Prehm commented, “Sometimes it’s luck.”

His colleague, Hollaender, interjected that it takes a bit more than dumb luck. “Luck is a mathematical formula,” Hollaender said. “You must find the right shipyard, find the right broker and find the right partner for equity.”  

A professional journalist for more than 50 years, U.S.-based Paul Scott Abbott has focused on transportation topics since the late 1980s.

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