Leasing as a form of ship financing is here to stay, and it’s up to the traditional banks lending to the sector to educate funding newcomers so that the overtonnaging mistakes of the past are not repeated.

That was the viewpoint of three banking experts speaking at the recent Marine Money Hong Kong 2021 Greater Bay Area Virtual Forum.

Stephanie Leow, executive director of shipping finance, global credit markets, at Standard Chartered Bank, described leasing as “definitely part of the financial ecosystem today”. Standard Chartered provides financing to some lessors as they shoulder some of the residual risk that the bank is less willing to take on.

Gwenael Delattre, director and head of shipping and offshore for Asia Pacific at Société Générale, said his bank had questioned some years ago whether to compete or partner with leasing houses. “But it became pretty clear pretty quickly that we could not compete with them because they are willing to put this extra leverage which banks are not willing to do.” He added that Chinese leasing companies are willing to take some risks that traditional banks are not able or willing to take, especially when it comes to financing technology-related risks. “It’s important that someone takes the extra step to help the industry and for that I think that Chinese leasing companies are partners rather than competitors and will remain like that for many years,” he said.

James Tong, head of global shipping and logistics for APAC and Japan and head of diversified industrials China at Citi, expected more leasing companies to enter the market, particularly to fund the new fleet of green ships that will be required in the future to meet zero carbon goals. Here, he stressed the need for traditional banks with a long history in financing shipping to share knowledge with the “new kids in town” so that they support the right clients and so that the market is not flooded with unnecessary assets.

Tong said he was pleased to see new money coming into the shipping market – “I think the more the merrier, in a sense to give options” – but added that he hoped that owners recognise that the market is at an inflection point of environmental concern.

I think the more the merrier, in a sense to give options

Green problems

The current lack of investment in shipping assets is largely being driven by a lack of workable and proven zero carbon technology – and this barrier is good, in Tong’s view. His worry is that when this barrier is removed what he termed as ‘hot money’ may flow into the market without the necessary knowledge which will fuel speculation and lead to a crash. If this happens, the traditional banks that have been lending for a long time will suffer which may lead to their retreat from shipping, taking their expertise with them. “The riskier financier could come in, ruin the market and then go.”

He added that newcomers to the ship financing scene should be considering investments in green technology and software and not focus solely on hard assets. “Then we will continue to build value in the sector, otherwise the next cycle or crash will be coming,” Tong warned.

All three banking experts said that they would be keen to do more in the sustainable financing space. “Everyone wants to finance the sexy kind of assets that can have a very positive environmental benefit to the world,” said Delattre. But there would need to be new checks and balances to cover different credit risk when it comes to financing new technology.

“The last thing we want to do is to become that hot money that got burnt five to six years ago,” Leow said. “We don’t want to be the ones that throw money without looking at who is behind it, and whether they have the specific experience to do what is necessary if the market goes in a down cycle.”

We don’t want to be the ones that throw money without looking at who is behind it

Capital available

Asked whether Standard Chartered Bank would finance a particular type of asset because it has a green tag, Leow said that at this stage the technology is not there to guarantee that green label. “No shipowner can say for sure that their vessel will be carbon neutral, for example,” she said. Instead, she said that banks have a different role to play, enabling shipping companies to meet their ambitions in developing their own carbon neutral plans. Delattre added that most of the bank’s clients are already aware of what they need to do and when it comes to technological uncertainty, banks need to trust the judgement of its clients.

Leow noted that, in general, there is still a lot of capital in the market. “There is a lack of good investment space and shipping is still attractive.” That said, attitudes have changed: “The shipowners that have remained have learned and are taking a cautious approach.” Leow pointed to a 2021 orderbook which while up, is equivalent to just 8% of the global fleet.

In terms of the structure of the ship banking sector, Delattre said that while some European banks have returned to servicing their domestic market in Europe and exited Asia, overall the financing sector has stabilised and there is still “a lot” of liquidity. He also noted a flight to quality, so even though some companies are retreating from the shipping market Société Générale observes that the top tier corporates are very well banked which is driving prices and terms.

In closing, Citi’s Tong said that ship financing needs to be responsible financing – and that has not always been the case in the past. He stressed the need for a knowledge base for smarter funding to meet the changing needs of the industry. “Covid should either break us further, or unite us better,” he said. “It is not about lowering the financing cost; it is about responsible financing and a responsible shipping industry.”
Source: The Baltic Briefing