Alternative Fuels, Newbuilds and Retrofits are Key to Marine Industry Growth

Tim Stickney

The global marine vessel market is projected to grow from $170.75 billion in 2021 to $188.57 billion in 2028 at a CAGR of 1.43%, according to research from Fortune Business Insights.

From transportation vessels to workboats to marine construction ships, companies want to grow their business, stay current with new technologies, gain a competitive edge and be good stewards of our environment.

Current marine market trends include adoption of alternative fuels, acquiring new construction vessels, retrofitting existing fleet, and determining ideal solutions for procuring these vessels. A general theme for 2023 is “research your options and plan ahead.”

Alternative fuel vessels
The International Maritime Organization’s (IMO) initial greenhouse gas (GHG) strategy strives to reduce the total GHG emissions by at least 50% by 2050 compared to 2008, and to reduce the carbon intensity of international shipping by at least 40% by 2030 relative to 2008.

Alternative fuel is the path to achieving these goals. Pasha, Crowley Maritime Corporation and Maersk are three marine industry leaders adding alternative fuel vessels to their fleet.

Pasha Hawaii recently added a 774-foot Liquefied Natural Gas (LNG) fueled containership – the first LNG containership to fuel on the U.S. West Coast, and the first to serve Hawaii. LNG-fueled containerships are significantly cleaner and better for the environment than traditional cargo ships. Pasha is adding a second LNG-fueled containership, currently under construction, which will achieve energy efficiencies through a state-of-the-art engine, an optimized hull form and an underwater propulsion system with a high-efficiency rudder and propeller.

Crowley Maritime Corporation is currently having a 416-foot LNG-powered bunker barge constructed in Wisconsin, which will be on a long-term time charter with Royal Dutch Shell. When finished, it is expected to become the largest Jones Act Compliant vessel of its kind. It will also allow for delivery of LNG to various LNG containment systems as more of these vessels come into service. The vessel is expected to serve LNG fueled ships on and around East Coast Ports.

Compared to ships running on traditional fuels, LNG-powered cargo ships achieve a 99.9% reduction in diesel particulate matter and sulfur oxide emissions, 90% less nitrogen oxides and a 25% reduction in carbon dioxide.

Maersk recently ordered six additional methanol-fueled, 17,000 TEU container ships as part of its decarbonization strategy. According to the company website, Maersk set a net-zero emissions target for 2040. The company also announced it will only order vessels that can be operated on green fuels.

Due to the cost of new construction and supply chain issues, many companies choose to retrofit existing vessels with alternative-fueling capabilities. Retrofitting is not a quick process either, and companies need to be aware of the timeline and plan ahead.

New construction options
As they focus on meeting GHG goals while also growing their business and remaining competitive, some marine industry companies decide to order newly constructed vessels. Prior to entering into purchase agreements, companies need to be aware of the current shipbuilding landscape.

We’re seeing high pricing, and longer than “typical” build times, due to the same factors our economy has faced since the beginning of the pandemic. For example, main engine and crankshaft suppliers are unable to meet demands because of supply chain and labor challenges still plaguing our marketplace.

Companies who consider financing their newbuild vessels may face challenges in securing loans for this type of purchase. Since new-build construction comes with increased risk (e.g., lengthy timeline to build, seaworthiness of the finished product, inflationary risks causing build costs to go over budget, etc.), some lenders won’t finance new builds.

Again, companies should plan in advance, be aware of their options and understand the challenges they’re likely to face along the way.

Financing considerations
Modern marine technology is a large investment, so many companies choose to finance – allowing them to reap the benefits of state-of-the-art vessels with minimal impact to capital budgets. When financing the acquisition of new vessels, marine companies should consider return on investment (ROI), the financing structure and the lending team’s capabilities.

Here are financing considerations – in both type and structure – to contemplate:

  • Current asset values are higher than they were 12-18 months ago, due to both inflationary and supply issues as new builds have taken longer to complete and enter the marketplace. Many lenders will be particularly focused on advance rates on vessel financings, to ensure they aren’t over-advancing on vessels should values decrease in the next 12-24 months.  
  • Most lenders on large financings, particularly on either multi-vessel or single vessel syndicated facilities prefer a loan structure with an advance rate lent against the Orderly Liquidation Value(s) (“OLV”) up to 85% of OLV. Loan structures allow the vessel owner/operators to capture the often-healthy depreciation benefits of owning large marine vessels, helping them offset taxable income.
  • Longer terms with mission-appropriate amortization: All project costs can be bundled into one plan, including sales tax, labor and freight.  
  • Flexible payment options can be designed to complement seasonal cash flow requirements.
  • Lenders who structure true leases of vessels can offer owner/operators fixed price early buyout options for future purchase cost certainty.

Working with lenders who are very active in the marine space is critical. Owner/operators want to select finance partners with care, as many institutions have come into the marine space during the past 24 months due to various economic factors. Active lenders in the syndicated loan market have industry relationships, and are attune to pricing, terms and structures that can “clear the market” successfully.

For instance, some lenders are unwilling to work around long wait times and risk associated with new construction, and/or wary of oil and gas deal exposure. Plan ahead, so you are not rushed to find a lender willing to work with you during that timeframe and under those risks. Know the type of vessels the lender will, or will not.

Maritime companies are often faced with finding balance between making capital investments in the business and maintaining budgets, and there are multiple options when it comes to vessel financing. Choosing a lending provider who takes the time to understand the specific needs of the business and is experienced in financing marine investments is an important part of the equation.

This document is designed to provide general information only and is not comprehensive nor is it legal, accounting or tax advice. KeyBank does not make any warranties regarding the results obtained from the use of this information. Credit products are subject to credit approval, terms, conditions, and availability and subject to change. Key Equipment Finance is a division of KeyBank.

Marine News Magazine, page 27,  Nov 2022

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