Attractive finance terms help tide low-demand storm-
Ship finance is admirably encapsulated by Lord Justice Roskill in his judgment in the “PANGLOBAL FRIENDSHIP”, [1978] 1 Lloyd’s Rep 368 at 371:
“The method for obtaining finance for ships… may be summarised in these words. The bank advances to one or more owning companies a large sum of money. It of course requires security. It will take on a mortgage on the ship for that security. It may take other mortgages on other ships for the same security. If the ship, as often happens, is about to be time chartered, then the bank will take an assignment of the time charter in order that the bank as assignee can benefit from the time charter in order to reduce the mortgage debt. In addition it will… take an assignment of insurance policies and P and I Club cover in order that in the event of total or partial loss of the ship the bank as the lender may be suitably secured… The effect of this is to ensure that the lending bank is completely secured against the insolvency of the borrower who intends that the bank shall obtain complete priority over the claims of other creditors against the borrower.”
Essentially, a bank or lender advances money to a shipowner to assist him to buy a new ship; buy a second-hand ship; convert, repair, or alter a ship; or refinance the existing indebtedness secured on a ship.
Trends in the ASEAN region
Maritime activity in the Singapore basin, which includes all ports in Singapore, Johor, Bintan, and Batam, is expected to grow to two or three times its current size by 2025. The shifts in global trade to the East will be supported by the growing ASEAN and China maritime trade, the ASEAN and South Asia maritime trade, as well as the intra-ASEAN maritime trade. Maritime trade in the ASEAN region will also be driven by the rising trade between China and India, the projected annual economic growth rates of 5–6 per cent for ASEAN countries over the next five years, and cargo demand shifting to liquids due to demand from China.
Moreover, Asia is becoming a yachting haven for the young and rich, with an increase in the sales of luxury boats. Hong Kong was the largest market for super yachts in Asia in 2012. With rapid growth in sales reported in Thailand, China, Indonesia, and Singapore. Yachts are considered ships under Singapore law.
Global trends
Globally, the shipping market is facing a crisis. The shipping industry is currently struggling with overcapacity and volatile rates. Freight rates on the key Asia–Europe route have fallen by as much as 70 per cent in recent years; they have continued to decline due to low demand. In most markets, ships are operating below cost. Large shipping lines are using new “ultra-large” ships in order to keep their operating costs low (due to factors such as increased fuel efficiency).
In response to the situation, the world’s three largest container shipping lines – Maersk Line, the Mediterranean Shipping Company, and CMA CGM – have set up an operational alliance for the Asia–Europe, trans-pacific, and transatlantic routes. New buildings have declined since their peak in 2007, with Japan, South Korea, and China leading in the percentages of ships built. Even the value of second-hand ships is also depressed.
Through New York Maritime, local bankers, lawyers and other professionals have launched a strategy to develop innovative financing solutions to have lessors treated as the owners of the vessel, if the court consider the bareboat charter to be a true lease. These ideas have been adopted by the Marshall Islands: it has amended its Maritime Act to allow equipment lessors that provide lease financing of vessels to enjoy the same security in collateral as a mortgagee under a preferred mortgage.
On July 29, 2013, Maersk Line launched the first of its Triple E ships, the most environment-friendly ships to date.
Opportunities and challenges
With the low cost of new buildings and depressed asset valuations of second-hand ships, shipowners can now pick up a vessel at a good price. Shipowners should assess when and how to expand, upgrade, or renew their fleet. As few vessels are purchased with liquid funds, shipowners would have to assess whether the profit is worth the interest and choose or tailor their financing structure to guarantee success.
A major challenge for shipowners now is to ensure constant cash flow and have liquid funds so that they are in a position to consider expanding, upgrading or renewing their fleet.They will also be seeking to minimise costs.
Finally, with regard to the newly-purchased vessels, shipowners will have to engage lawyers to ensure that these ships are permitted to sail in ASEAN waters.
Forming alliances is an option to enlarge or update fleets without having to purchase or build more vessels, which will better equip shipowners to face challenges such as changes in demand, while delivering more stable, frequent, and flexible services. However, fleet may require refinancing and repair, alteration, or conversion financing, especially to retrofit vessels to cut greenhouse gas emissions and improve fuel efficiency to meet International Maritime Organization and European Union laws.
Shipowners leasing their vessels should take note of the new Marshall Islands law and developments in New York, should their lessor meet with United States Chapter 11 proceedings.
The internet has made it easier for shipowners to select the lender that best suits their purposes. (Lenders include international commercial banks, specialist shipping banks, domestic banks, and government-owned or government-backed banks.) Communication is also faster and easier with email and telephone numbers published on websites. Fierce competition has resulted in increased offerings of creative financing packages.
Asian lenders are expected to offer a wide range of packaged shipbuilding and financing deals.
Private equity investors are also a new source of lending whereas banks are looking to cut their risks in shipping finance. Shipping companies may issue bonds or launch initial public offerings. Other sources include tax-based partnerships, tax lease finance, and equity funds.
There is also a great opportunity for lawyers to assist in the negotiation of ship finance facilities where a Norwegian bank may lend to an ASEAN-country-incorporated borrower with a Liberian-flag ship as security, a Greek guarantor, and a loan agreement governed by English law. Lawyers will be expected to advise their client on the laws of the different countries and assist in navigating the lengthy documents and opinions involved. English lawyers would draw up the loan and security agreements.
Shipbuilding yards also have to keep abreast of developments in technology and the law. Yards in ASEAN countries, such as the new ones in Vietnam and the Philippines, will compete with their European and Japanese counterparts. They may collaborate so that they can rely on one another’s experience, strengths, and expertise.
The ship finance market will be affected by national and international laws, government subsidies, and support for the shipbuilding industry or shipowners.
Navigating the highs and lows
As John F. Kennedy once said, “When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger, and the other represents opportunity.”There is, therefore, a silver lining of opportunity within the dark clouds of crisis.
As shipping is cyclical, freight rates will recover, demand for new buildings will increase, more yards will open, and good times for the shipping industry will be here again. Meanwhile, the ASEAN shipping market looks set to grow. With increased maritime activity in the region resulting in a greater demand for repairs at the very least, and with rapid growth in sales of luxury boats, shipping finance transactions should increase.
Gerald Yee is head of the admiralty and shipping practice group at Colin Ng and Partners. His portfolio of contentious shipping work includes admiralty enforcement, litigation of cargo claims, oil and gas disputes for well-known oil majors, contracts of affreightment, marine insurance and P&I matters. He has handled many cases before the Singapore courts up to the Singapore Court of Appeal and has experience in handling and conducting arbitration proceedings in London and Singapore in institutional and non-institutional arbitrations, as well as instructed local counsel in the conduct of proceedings in China, Malaysia, Indonesia, Vietnam, and Thailand.
Jasmin Yek is an associate in the Construction, Engineering and Infrastructure Projects Practice Group, having started practice in the litigation department of a medium-sized law firm. Her main area of practice is civil and commercial litigation. Jasmin has also assisted in matters involving arbitration and matrimonial proceedings.
