The International Handbook of Shipping Finance (eBook)

Manolis G. Kavussanos is Professor at Athens University of Economics and Business (AUEB), Greece, Director of the MSc program in International Shipping, Finance and Management and of the Laboratory for Finance since inception, member of the steering committees of the MSc program in Accounting and Finance (A&F) and has been the Director of the MSc and PhD programs in A&F at AUEB for five years. Ilias D. Visvikis is Professor of Shipping Finance and Risk Management, and Director of Executive Education and Professional Development at World Maritime University (WMU) founded by the International Maritime Organization (IMO), and also co-Coordinator of the Postgraduate Diploma in Executive Maritime Management jointly delivered by WMU and DNV GL.

About the Editors 5
Book Chapter Reviewers 7
Preface 8
Contents 15
About the Contributors 20
List ofAbbreviations 28
List of Figures 34
List of Tables 38
1: Shipping Markets and Their Economic Drivers 40
1.1 An Introduction to Shipping 40
1.1.1 The Maritime Value Chain 40
1.1.1.1 Ship Owner 41
1.1.1.2 Shipyards 41
1.1.1.3 Charterers 42
1.1.1.4 Cargo Owners 42
1.1.1.5 Freight Forwarders 42
1.1.1.6 Ship Managers 42
1.1.1.7 Brokers 43
1.1.2 The Shipping Segments 43
1.1.3 The Various Shipping Markets 43
1.1.3.1 The Newbuilding Market 44
1.1.3.2 The S& P Market
1.1.3.3 The Demolition Market 45
1.1.3.4 The Charter Market 45
1.1.3.5 The Freight Spot Market 46
1.1.3.6 Forward Freight Agreements 46
1.1.4 Cost Structures in Shipping 47
1.2 The Drivers of Shipping Markets 48
1.2.1 Demand for Transport Capacity 49
1.2.2 The Supply of Transport Capacity 51
1.3 Shipping Market Performance 52
1.4 The Bulk Shipping Market 54
1.4.1 The Structure of the Bulk Shipping Market 54
1.4.2 The Drivers of the Bulk Shipping Market 54
1.4.3 Bulk Shipping Market Development 56
1.4.3.1 The Demand Side 56
1.4.3.2 The Supply Side 56
1.4.3.3 Earnings 57
1.4.3.4 Prices 58
1.5 The Tanker Shipping Market 59
1.5.1 Structure of the Tanker Shipping Market 59
1.5.2 Drivers of the Tanker Shipping Market 60
1.5.3 Tanker Shipping Market Development 61
1.5.3.1 The Demand Side 61
1.5.3.2 The Supply Side 61
1.5.3.3 Earnings 63
1.5.3.4 Prices 64
1.6 The Container Shipping Market 65
1.6.1 Structure of the Container Shipping Market 65
1.6.2 The Drivers of the Container Shipping Market 65
1.6.3 Container Shipping Market Development 67
1.6.3.1 The Demand Side 67
1.6.3.2 The Supply Side 67
1.6.3.3 Earnings 69
1.6.3.4 Prices 70
1.7 The Offshore Market 70
1.7.1 Structure of the Offshore Market 70
1.7.2 Drivers of the Offshore Market 71
1.7.3 Offshore Market Development 72
1.7.3.1 The Demand Side 72
1.7.3.2 The Supply Side 73
1.7.3.3 Earnings 75
1.7.3.4 Prices 76
1.8 Summary 76
Bibliography 77
2: Asset Risk Assessment, Analysis and Forecasting in Asset Backed Finance 79
2.1 Introduction 79
2.2 Global Demand and China: Cyclicality, Super Cycles, Sector Cycles and Counter-Cyclicality 81
2.2.1 Global Economic Development and China as the Key Driver of Shipping Sectors 81
2.2.2 Cyclicality and Variables Affecting Cyclicality: A Political Variable in a Commercial Industry 82
2.3 The Shipping Sector Market Outlook 91
2.3.1 The Container Shipping Sector 91
2.3.2 The Dry–Bulk Shipping Sector 97
2.4 The Asset: Importance of Asset Specifications 101
2.5 Mitigation of Risks 103
2.6 Conclusion 104
Notes 105
3: Overview of Shipping Finance 108
3.1 Introduction 108
3.2 Sources of Ship Financing 109
3.2.1 Financing from Banks 112
3.2.1.1 Mortgaged-Backed Bank Loans 113
3.2.1.2 Newbuilding Financing 117
3.2.1.3 Mezzanine Financing 118
3.2.1.4 Corporate Loans 119
3.2.2 Leasing Financing 119
3.2.3 Financing from Capital Markets 121
3.2.3.1 Corporate Bonds 122
3.2.3.2 Public Equity Offerings 123
3.2.3.3 High Payout Structures and Master Limited Partnerships 124
3.2.3.4 Special Purpose Acquisition Companies 128
3.2.3.5 Private Equity 129
3.3 Conclusion 130
Bibliography 131
4: Shipbuilding Finance 132
4.1 Introduction 132
4.1.1 Reasons for Vessel Acquisition 132
4.1.2 Alternatives to New Construction 133
4.1.3 Reasons for an Orderly Approach to Vessel Acquisition and Project Financing 133
4.1.4 What Can Go Wrong in Ship Acquisition Projects? 134
4.1.5 What Is Project Management? 134
4.1.6 Strategic Planning 135
4.1.7 Forecasting 135
4.1.8 Plans 137
4.1.9 Mission Statement 137
4.1.10 Vessel Design 138
4.1.11 Sources of Ship Finance 138
4.1.12 Ship Finance 140
4.1.13 Choosing a Source of Funds for Ship Construction 140
4.1.14 Debt Financing 141
4.1.15 Loans Syndication 142
4.1.16 Mezzanine Financing 143
4.1.17 Bonds 144
4.1.18 High Yield (“Junk”) Financing 144
4.1.19 Shipyard Credit 144
4.1.20 Leasing 145
4.1.21 Interest Rates 147
4.1.22 Ship Mortgages and Other Loan Security 148
4.1.23 Export Credit Agencies (ECA) 150
4.1.24 Hybrid Financing Schemes 151
4.1.25 Islamic Bank Finance 152
4.1.26 Government Grants 153
4.1.27 Equity Financing 155
4.1.28 Public Offerings 156
4.1.29 Private Placement 156
4.1.30 Venture Capital 157
4.1.31 Master Limited Partnership (MLP) 157
4.1.32 Financial Aspects of the Shipbuilding Contract 157
4.1.33 Progress Payments 159
4.1.34 Performance or Surety Bond 159
4.1.35 Refund Guarantees 160
4.2 Conclusion 160
Bibliography 161
5: Debt Financing in Shipping 162
5.1 Introduction 162
5.2 Types of Debt Financing 163
5.2.1 Standard Loan Facility 163
5.2.1.1 The Lender 163
5.2.1.2 Syndication 164
5.2.1.3 The Borrower 165
5.2.1.4 The Financed Ship: Newbuildings and Second-hand Vessels 165
5.2.1.5 Facility Amount 167
5.2.1.6 Conditions Precedent 167
5.2.1.7 Currency 168
5.2.1.8 Tenor and Repayment of Loan Facility 168
5.2.1.9 Interest 169
5.2.1.10 Representations and Warranties 170
5.2.1.11 Covenants 171
5.2.1.12 Governing Law and Jurisdiction 172
5.2.1.13 Events of Default 172
5.2.1.14 Fees 173
5.2.2 Leasing 173
5.2.3 Bonds 174
5.2.4 Mezzanine Financing 176
5.2.5 Export Credit Agencies 177
5.3 Security Package 178
5.3.1 The Ship Mortgage 179
5.3.2 The Assignment of Earnings, Charter Hire, Insurances and Requisition Compensation 180
5.3.3 The Charge or Pledge Over Accounts 181
5.3.4 The Shares Charge or Pledge 181
5.3.5 The Pre-delivery Security Assignment 181
5.4 Conclusion 181
Bibliography 182
6: Public Debt Markets for Shipping 183
6.1 Introduction 183
6.2 Basic Concepts of Bonds 183
6.3 Bond Issuing Example 185
6.4 Bond Pricing in the Secondary Market Example 185
6.5 Issuing of a Shipping Bond 186
6.6 Filing a Prospectus 186
6.7 Obtaining a Credit Rating 187
6.8 Selecting an Underwriter 188
6.9 Timing of Issuing Shipping Bonds 190
6.10 Shipping Bonds and Interest Rate Cost 191
6.11 Considerations for the Cost of Shipping Bonds 192
6.12 Difference from Shipping Loans 193
6.13 Classification of Shipping Bonds Based on Collateral 196
6.14 Covenants and Special Conditions 199
6.15 Types of Shipping Bonds 200
6.15.1 Types of Bonds Based on Maturity 200
6.15.2 Origin of Issuer or Currency 200
6.15.3 Debt Repayment Schedule 201
6.15.4 Interest Rate Commitment 202
6.15.5 Option Characteristics 202
6.15.6 Seniority 203
6.16 Conclusion 203
Notes 204
7: Public and Private Equity Markets 205
7.1 Introduction 205
7.2 Public Equity 206
7.2.1 Public Equity Overview 206
7.2.2 Public Shipping Equity 211
7.2.3 Initial Public Offerings (IPOs) 213
7.2.4 Shipping Equity Valuation 218
7.3 Private Equity 220
7.3.1 Private Equity Overview 220
7.3.2 Private Equity in Shipping 221
7.3.3 Other 224
7.4 Conclusion 224
Notes 225
References 225
8: Structured Finance in Shipping 226
8.1 The Changing Landscape of the Ship Financing Market 226
8.2 ECAs 228
8.2.1 What Are ECAs? 228
8.2.2 ECAs’ Role in Ship Finance 229
8.2.3 ECA Ship Financing Structures 230
8.2.4 ECA Requirements and OECD Guidelines 232
8.2.5 Advantages and Disadvantages of ECA Ship Finance 233
8.3 Leasing Ship Finance 234
8.3.1 Ship Leasing 235
8.3.2 Types of Ship Leases 236
8.3.3 Ship Leases: Benefits and Drawbacks 238
8.3.4 Ship Lease Providers 240
8.4 Mezzanine Ship Finance 241
8.4.1 Forms of Mezzanine Finance in Shipping 241
8.4.2 Considerations in Mezzanine Finance 242
8.4.3 Applications of Mezzanine Finance 243
8.4.4 Advantages and Disadvantages of Mezzanine Finance 243
8.5 Conclusion 244
Notes 245
Bibliography 246
9: Key Clauses of a Shipping Loan Agreement 247
9.1 Introduction 247
9.2 Operative Clauses 248
9.3 Representations and Warranties 250
9.4 Conditions Precedent 251
9.5 Covenants 252
9.5.1 Minimum-Value Clause (MVC) Test 253
9.5.2 Financial Ratios (FR) Test 253
9.5.2.1 Balance Sheet Tests 254
9.5.2.2 Cash Flow Tests 255
9.6 Events of Default 258
9.7 Mandatory Prepayments 259
9.8 Assignment and Transfer 260
9.9 Conclusion 262
Bibliography 263
10: Legal Aspects of Ship Mortgages 264
10.1 Mortgages: A Definition 264
10.2 Limitations of Ship Mortgages as a Form of Security 267
10.3 Registration and the Priority of Mortgages 269
10.4 Powers of Mortgagees 271
10.4.1 Power of Sale 272
10.4.2 Power to Take Possession 276
10.4.3 Appointment of a Receiver 277
10.5 Rights of the Mortgagor 278
10.5.1 Right/Obligation to Insure the Vessel 278
10.5.2 Right to Sell the Vessel: Existence of Prior Encumbrances 280
10.5.3 Application for Sale by Court Order 280
10.5.4 Right to Redeem the Mortgage, and Foreclosure 281
10.6 Future Directions in Ship Mortgages as a Form of Financing: Securitization 282
10.7 Conclusion 283
Cases Cited 283
Bibliography 284
11: Mechanics of Handling Defaulted Shipping Loans and the Methods of Recovery 286
11.1 Introduction 286
11.2 The 1981–86 Shipping Crisis vs the Post-­2008 Period 287
11.3 The Mechanics of Handling Problematic Bank Loans 288
11.4 Early Detection of Signs 288
11.5 Once the Problem Is Detected 289
11.6 Preparation for Remedial Action 291
11.7 Determinants of the Bank’s Course of Action 293
11.8 Loan Recovery Through Auction of the Collateral Vessel 296
11.9 Situations a Bank May Face During a Vessel’s Arrest 298
11.10 Conclusion: The Other Side of the Coin 299
References 299
12: Marine Insurance 300
12.1 Overview 300
12.2 Builders’ Risk Insurance 301
12.3 Financiers’ Insurance 302
12.4 Owners’ Insurance 304
12.4.1 What “Risks” Will a Shipowner Want to Be Covered? 304
12.4.1.1 Property 305
12.4.1.2 Liability 305
12.4.1.3 Legal 305
12.4.1.4 Lost Time 306
12.4.1.5 Varia 306
12.4.1.6 Compulsory Insurance 307
12.4.2 Purchase of Insurance Cover: Where Could a Shipowner or a Prospective Shipowner Go to Buy the Insurance Cover that He or She Will Need for a Successful and Safe Operation of His or Her Vessel? 307
12.4.3 By Whom Could These Various Risks Be Insured? 307
12.4.4 The Cost of Insurance: A Shipowner also Has to Address the Question “What Will the Insurance Cost?” 309
12.4.5 Specific Aspects of Marine Insurance 310
12.5 Conclusion 312
Notes 312
References 315
Books 315
Book Chapters/Articles 315
13: Maritime Investment Appraisal and Budgeting 317
13.1 Introduction 317
13.2 Market Approach 319
13.3 Discounted Cash-Flow Approach 327
13.3.1 LTAV: Theory 327
13.3.2 LTAV: An Example 331
13.4 Comparing Value and Price 334
13.5 Financial Analysis of Shipping Companies 336
13.6 Conclusion 339
Notes 340
References 344
14: Financial Analysis and the Modeling of Ship Investment 346
14.1 Introduction 346
14.2 An Example of a Financial Model 347
14.3 Theory Behind the Ship Investment Criteria and Value Drivers 351
14.3.1 The Value of Flexibility (Optionality) 353
14.4 A Few Comments on Ship Investment Practice 355
14.4.1 Ship Purchase and Timing of Exit 355
14.4.2 Newbuilding versus Second-hand Purchase 355
14.4.3 Sale for Scrap 357
14.4.4 OPEX 358
14.4.5 Employment: “The Decision to Fix” 359
14.4.6 Financing 361
14.5 Ships as an Investment 363
14.5.1 Are Ships Priced in Efficient Markets? 363
14.5.2 Are Ship Prices, Charter Rates and Investment Returns Mean Reverting? 364
14.6 Conclusion 365
Note 365
References and Links 365
Market Data 365
OPEX Data 365
Software for Financial Modeling of Ship Investments 366
Bibliography 366
15: Maritime Business Freight Risk Management 367
15.1 Introduction 367
15.2 Freight Derivatives Market 368
15.3 Freight Rate Indices: The Underlying Assets of Freight Derivatives 370
15.4 Freight Derivatives Markets and Products 379
15.4.1 Forward Freight Agreements (FFAs) 379
15.4.2 Freight Futures Contracts 380
15.4.3 Cleared Forward Derivatives 381
15.4.4 Freight Options 386
15.5 The Baltic Forward Assessments 388
15.6 Trading Screens 390
15.7 Regulations in Derivatives Markets 392
15.8 Conclusion 395
Notes 395
Bibliography and References 397
16: Mergers and Acquisitions in Shipping 401
16.1 Introduction 401
16.2 The Shipping M& A Market
16.3 Motives for M& As in Shipping
16.4 M& A Process
16.4.1 M& A Strategy Formulation
16.4.2 Identification and Analysis of M& A Targets
16.4.3 Cultivation of M& A Targets
16.4.4 Due Diligence 414
16.4.5 Post-acquisition Integration Process 415
16.5 Shipping M& A Valuation
16.5.1 Cash Flow Valuation 417
16.5.2 Relative Valuation 420
16.5.3 Asset-Based Valuation 423
16.6 Financing of Shipping M& As
16.7 Value Creation in Shipping M& As
16.7.1 Measuring Value Creation 430
16.7.2 Do Shipping M& As Create Value?
16.8 Conclusion 437
Notes 438
References 441
Index 444