Page 118: of Maritime Reporter Magazine (June 1993)

SHIP'S FINANCE

If recent experience of the freight markets has taught us anything, it is that shipowners would get a bet- ter rate of return by putting their capital under the mattress than investing in new ships.

At the same time we know - be- cause everyone involved keeps tell- ing us so - that the world merchant fleet is in urgent need of replace- ment. Indeed, the spate of acci- dents involving old tankers and bulk carriers has confirmed this need.

Owners expect their tonnage to have a limited economic lifespan, and those serious about being in the business make arrangements and allowances to cover this. However, if owners cannot guarantee to re- cover new investment, let alone make any return on capital, how is this fleet replacement program to be effected? Who will fund it? What will it cost?

In a new report entitled "Finance for Ships," Drewry Shipping Con- sultants Ltd. takes a considered look at the current mismatch in the ship finance sector: between owners who would like to borrow but can't afford to repay loans out of operating in- come, and banks who have money to lend, but are increasingly skeptical about lending to the shipping indus- try.

Estimates of newbuilding demand to the end of the decade, together with potential secondhand activity, suggest that owners may be looking to raise between $240 and $320 bil- lion from lending institutions and other investors between now and the year 2000.

As many banks were stung in the previous market downturn in the 1980s, they are becoming more re- luctant to lend funds for shipping investment and, given that they only have limited reserves available, they can afford to choose only the more secure projects and creditworthy borrowers.

It is enlightening to realize that, on the basis of representative costs and income, a VLCC built in 1970 or 1971 quickly repaid the owner's in- vestment, but since then there has never been an occasion when capital has been fully recovered over the normal working life of a VLCC. A similar, though less dramatic pic- ture can be painted for smaller tank- ers and dry bulk carriers. This illus- trates the importance of tax advan- tages offered to shipowners. With- out tax advantages, investing in shipping would appear to hold no hope of making a profit as well as showing that flags of convenience

Source: Drewry Shipping Consultants Ltd. are, for many, a requirement rather than a luxury. Of course, sometimes it is better to pay the tax than invest in ships, and it appears that 1993 is one of those times.

On the other hand, for cash-rich companies and individuals looking for the possibility of a big return, the secondhand market offers many op- portunities to pick up tonnage at what may well in a few years time seem bargain basement prices. How- ever, the high-profile failure of a number of investment vehicles set up in the late 1980s to take advan-

Making Ends Meet:

Juggling With Finances Can Help

Shipowners Achieve Profitability

Total Interest Payments Under Different Loan Terms

Basis: VLCC newbuilding ordered 1981, at $67.7 million, repayments over 8.5 years ($ million)

OECD standard terms 20.64

Commercial rate (Libor + 1%), 80% loan 24.56

Commercial rate (Libor + 1%), 70% loan 22.95

Commercial rate (Libor + 2%), 70% loan 25.33

Commercial rate (Libor + 1 %), 70% loan, yen denominated 19.96

Commercial rate (Libor + 1 %), 70% loan, 3 year capital moratorium 29.18

Commercial rate (Libor + 1 %), 70% loan, 40% balloon 26.11 50% loan at Libor + 1 %, plus 20% subordinated loan at Libor + 3% with 100% balloon 29.74

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June, 1993

MARITIME

REPORTER

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