The shipping industry is experiencing a significant period of change in 2024. This has been driven by global events over the last couple of years, supply chain disruptions and generally changing dynamics. Amidst these changes, in the ship finance sector, Chinese and Japanese leasing companies have emerged as key players not to be ignored. As a ship finance lawyer, I've witnessed their increasing prominence and it's a trend that shows no signs of slowing down.
THE RISE OF CHINESE LESSORS
Seizing opportunities
When traditional Western banks, primarily European institutions, began withdrawing from the shipping market over the past decade, Chinese and Japanese lessors recognized an opportunity. They stepped in and have maintained a strong presence ever since. Whilst they have always been involved in the shipping industry, mainly in the newbuild market, their focus has shifted toward the second-hand market. They have transformed the ship finance sector by aggressively offering sale and leaseback structures (SLBs) for vessels and/or fleets and this has offered an attractive alternative to traditional bank finance.
Unlocking capital
Shipowners face a perpetual challenge: how to finance vessel acquisitions and fleet expansion without tying up all their capital. Leasing provides a solution. By opting for SLBs, shipowners can release cash and access capital for newbuilds or acquisitions while retaining operational control over their vessels. This flexibility has made leasing an essential and attractive financing option in an ever-changing industry.
Competitive Pricing and Options
The sheer number of lessors in the market has led to competitive pricing and diverse structures. Shipowners now have multiple leasing options to choose from, often selecting among several leasing houses when refinancing their fleets. This abundance of choice empowers shipowners to tailor financing arrangements to their specific needs. In fact, we have seen that many of our own shipowning clients now have as many as 4 or 5 leasing options from different leasing companies when considering refinancing their fleets.
CONSIDERATIONS FOR SHIPOWNERS
While leasing offers significant advantages, shipowners must weigh the pros and cons as summarised below:
Pros
- Alternative Capital Source: Leasing provides an alternative to traditional bank loans, especially during economic uncertainties when traditional bank loans may be limited. This allows shipowners to access funds without solely relying on bank loans.
- Working Capital Preservation: By freeing up capital through SLBs, shipowners can allocate resources strategically enabling investment in other areas of the business.
- Flexibility: Lease terms can be customized in terms of duration and payment structures and can offer both finance leases or operating leases, allowing shipowners to adapt to changing market conditions.
- Off-Balance Sheet Treatment: Operating leases don't typically appear on a balance sheet which improves financial ratios and creditworthiness. Finance leases, while appearing on the balance sheet, still offer operational control without full ownership.
- Older Tonnage: Some lessors are willing to finance older and less efficient tonnage which traditional western lenders tend to shun and therefore is attractive to some shipowners.
- Deal Closing Time: SLB deals now take significantly less time than they used to as their processes are much more streamlined; most can now be closed within 3-4 months.
- Repair and Maintenance: Not only do the lessors provide financing options, they can also carry out repairs and maintenance of the vessels being financed, sometimes installing scrubbers and other energy efficient equipment at local yards to address ongoing environmental regulations.
Cons
- Limited Control for Lessees: As the lessor retains ownership, lessees can sometimes find themselves with limited control over the vessel. This lack of control can hinder operational decisions and strategic planning.
- "Hell or High Water" Clauses: The documents will normally include a "hell or high water" clause, preventing lessees from terminating the lease early (regardless of circumstances) and ensuring continuous hire payments. If terminated, lessees must compensate the lessor, which can be unfeasible for some lessees.
- Market Dynamics and Economic Downturns: SLB rates are influenced by market conditions, including vessel values and charter rates so any economic downturn(s) can significantly affect leasing rates and overall profitability of shipowners. Lessees may face higher costs during challenging economic periods.
- Complex documents: Due to the inherent risks associated with ships and shipping operations, SLB arrangements involve intricate legal documents. Challenges can arise in areas such as liability, insurance, and compliance with maritime regulations. Seeking advice from specialised ship finance lawyers is crucial.
- Asset Disposal Restrictions: SLB arrangements restrict the lessee's ability to freely dispose of the asset. Timely asset sales can become difficult, potentially affecting the lessee's financial flexibility and return on investment.
- Inflexibility in Changing Market Conditions: Unlike traditional bank loans, SLB terms are often fixed and less negotiable, allowing little room for deviation in changing market conditions. During changing market conditions, lessees may struggle to adapt the terms to their advantage.
- Compliance Challenges with Lessor's Internal Policies: Most SLB deals involve adherence to the lessor's internal policies, especially if they are state-owned entities. Decision-making authority lies with senior executives, which can lead to delays and complexities for lessees.
THE FUTURE OF SHIP FINANCE
Whilst we cannot deny the significant role played by Chinese and Japanese lessors over the last few years, we have seen a resurgence of Greek banks returning to the market with competitive pricing and improved credit ratings – a development that will no doubt delight major Greek shipowners who have long term relationships with such banks. The four major Greek lenders, Piraeus Bank, Alpha Bank, Eurobank and National Bank of Greece have seen their lending increase to pre-2010 levels with each portfolio now boasting on average up to €4bn according to recent Petrofin Research. We have ourselves witnessed this return to the market. It will be interesting to see how this grows considering how effective the leasing structure has become.
Chinese and Japanese leasing companies have indeed reshaped the ship finance landscape by capitalising on market dynamics and expanding their global influence by leasing to major players in the industry and thus instilling trust and confidence in their services. Despite any future industry shifts or economic changes, ship leasing is no longer an alternative; it has firmly established itself as a key financing option for shipowners and the interplay between traditional lenders and innovative lessors will define the industry's future. Shipowners must navigate this evolving landscape wisely.
Sources: Lloyds List, Tradewinds, Bimco, Seatrade Maritime, Petrofin Research
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.