Guide to Shipping Finance/LGT4021, PolyU

Overview of different type of shipping finance and shipping market
Summary recap of 500+ pages study guide
What the exam coming out gonna surprise you…

bank financing advantage

advantage

tax deductibility of interest
relatively low cost of funding
flexibility

disadvantage

only advance limited amounts
restricted to 5–7 years and an advance rate of 70–80%
mortgage against the ship and restrictive covenants

5Cs

character,cash flow,condition,capital,collateral

characteristics of shipping

• high volatility and cyclicality of the shipping market,
• huge call for capital resources,
• reliance on external demand
• technical and complexity of the operation
• potential loss arising from environmental, safety, oil pollution or other navigation accidents

Financing market

half the world’s capital is held as investments traded in the securities markets.
equity: prospectus
capital: credit-worthiness
• money markets (short-term debt)
• capital market (long-term debt (bonds and debentures)
• stock markets (public offering of shares and equity) market

Type of shipping finance

private funds

• own funds
• private investment

bank finance

• Mortgage-backed loan
• Corporate bank loan
• Shipping credit for financing new ships (new-buildings)
shipyard finance, address pre-delivery guarantee and credit term are occasionally subsidized
• Mezzanine finance
• Private placement of debt and equity
invest directly in shipping finances

capital markets

considering factors of public offering

– equity market
– shipping market
– corporate structure and culture
– company performance
– pricing

disadvantage

– external factors
– to disclose material information
– cost of management
– shipping too small
– legal requirement
– shareholder control diluted

bond issue

Pros:

significant market capitalization
longer term of financing (15 years or longer)
not prepaid matured for principal
coupon payment fixed, low volatility

Cons:

demanding coupon requirement
bondholders’ tolerance

special purpose vehicle (SPV)

• ship funds
• special purpose company or SPAC,
• limited partnership, such as Norwegian KSs or German KG,
• finance lease,
• operating lease,
reduce finance costs by transferring ownership of the ship
• securitization

the sources of capital structure broadly include:

• retained earnings,
• debt,
• equity
• hybrid securities that a firm uses to finance its:
• assets and investments (in longer-term nature),
• operations (in shorter-term and working capital nature), and
• future growth and long-term development

main determinants

• overall risk,
• returns, and
• cost of capital

theoretical background of capital structure:

• the Modigliani-Miller Theorem (or The MM Theorem)
• the Trade-off Theory of Capital Structure
• the Pecking Order Theory
• the Signaling Theory
• the Market Timing Theory

historical development of shipping finance

  1. Ship finance in the pre-steam era
  2. The evolution of the shipping corporation
  3. Charter-backed finance in the 1950s and 1960s
  4. The one-ship company
  5. Asset-backed finance in the 1970s
  6. Financing asset play in the 1980s
  7. Developments of corporate finance in the 1990s
  8. Shipbuilding credit

shipping finance and shipping economics

shipping has distinctive characteristics
• predictable earnings
• well-defined corporate structures
• high levels of disclosure
• well-defined ownership
• consistent growth and high yields

costs

• operating costs (half is crew costs)
• voyage (bunker price)
• cargo-handling
• capital
old or new ships? depression & flexibility, capital/operating cost?
spot/time charter

productivity

• rapid cargo handling
• generate cargo flexibility
• high speed

trading cashflow

• age
• size
• technical flexibility
• cargo management

cashflow

• voyage cash flow analysis
• annual cash flow analysis (long-term planning)
• discounted cash flow analysis (compare project with the time of payment)

four shipping market

• freight
-voyage charter
-time-charter
-bareboat
-contract of affreightment
funding, loans, funding & bridging finance
• sale & purchase
• newbuilding
• demolition market

sea transport system

• bulk shipping (high-volume, price-sensitive cargo)
• specialized shipping (higher value “bulk” cargo like cars, refrigerated cargo, forest product, chemical)
• liner shipping (container, small parcels)

shipping market cycle

-long
-short (coordinate supply &demand)
  1. trough
  2. recovery
  3. market peak
  4. collapse
-seasonal

ship registration

national, international, open registers (flag of convenience)
dual registration
• one-ship company & Mareva injunction
• maritime lien
• merger and acquisition in the shipping industry
• ship investment strategy and criteria
chapter
The above is the recap of the shipping finance. Leave your email below if u need the details for LGT4021 examination, including what would possibly come out for “fill in the blank”, “MC questions” and calculation part
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