Damien Laracy and Panos Pourgourides examine ship finance from a Hong Kong vantage point
Even the most disinterested of outside observers will have noticed that the last year has continued to see significant pressure on the global shipping market. Although some sectors have fared better than others, the economic slowdown in China, at best faltering growth in much of the rest of the world and, more recently, the collapse in the price of oil has led some to question whether there is any respite in sight. And while there are few signs of any meaningful increase in demand for the foreseeable future, investors are also having to contend with more new ships coming into the market, limited scrapping, a shortage of available capital and ever greater demands from existing financiers. Those financiers are themselves faced, like their owners, with a decline in resale values and depressed freight rates. Unprecedented levels of volatility in some sectors have made it more difficult than ever to predict what may follow, but some existing trends appear set to continue at the same time as others look increasingly likely to emerge:
Traditional commercial debt finance from banks and other institutional financiers remains in very short supply. What little activity there is tends to be focused on those few owners still able to attract the continued support of their existing lenders, though the dry bulk and container sectors in particular remain especially challenging and there is little sign of any improvement in this situation in the short to medium term. Indeed, it seems clear that those entities trading at a loss can only continue to do so for a limited time and while this may lead banks to look again at terminating their facilities and enforcing their security, the fact that “resale” values in some sectors are more realistically bench-marked against scrap values rather than any future trading potential makes the decision to enforce all the more unpalatable. More positively, some limited funding should remain available from export credit agencies keen to support their native shipbuilding sectors and private equity – much of it associated with Hong Kong as well as other global financial centres – continues to have an important role to play. Nevertheless, those hoping for a return to the days of readily available and cheap credit look certain to be disappointed.
Mergers and acquisitions
M&A activity in any industry is normally driven by a desire to create higher shareholder value by creating greater market opportunities and realising economies of scale. Shipping is no different. But the differences between the myriad sectors and sub-sectors in our industry, coupled with the fragmentation which results from the traditional one ship owning structure, even where such ships form part of a fleet, together with the capital intensive nature of the market, has tended to militate against M&A activity in the past. This situation may be set to change however. First, in part because of the natural tendency towards larger institutions with a greater market presence. Secondly, we may see more entities that have successfully weathered the storm being tempted to acquire other ships at the current low values – perhaps from distressed sellers – in the hope and expectation that market conditions will eventually improve. And third, it seems fair to assume that some of those same private equity investors mentioned above will look for an exit on their existing investments – perhaps to realise a profit or otherwise to lessen their exposure. To the extent that any such consolidation might help the industry recover more quickly when the wider market does eventually pick up, it is surely to be welcomed, even it may signal the demise of some previously well-known and highly regarded entities.
There was a good deal of publicity in December last year when figures released showed that the value of funds raised via new listings of public companies in Hong Kong far exceeded the value of funds raised in New York. Hong Kong is therefore once again the top global IPO market, a title it last held in 2011.
The congratulations need to be tempered however by suggestions that our Securities And Futures Commission will be reviewing the current listing regime. This could lead to tightening up of listing requirements, particularly on the newer Growth Enterprise Market (“GEM”) Board in Hong Kong .
History tells us that no matter the vagaries of the global economy, and despite the apparent disconnect we sometimes see between parts of the new build order book and wider supply and demand, the shipping sector has nevertheless proven itself able to adapt to the changing needs of a changing world, albeit sometimes with high profile casualties along the way. The current bear market environment may be more extreme than that witnessed in the previous downturn, but the fundamentals remain the same. As such, we can probably expect to see the industry continue to look for ways to reduce the current over capacity in some sectors – perhaps with increased scrapping, some of which may come at the behest of the regulators – or to reconfigure existing orders or, in time, hopefully to see further consolidation. That in turn may lead to a more coherent and controlled response to further, hopefully positive changes in the underlying market for an industry that, after all, continues to carry the very great majority of the world’s trade from one country to the next.
And when the storm is simply too stormy, Hong Kong continues to provide excellent legal facilities for arrest and expedient sale of distressed vessels. The depth of Admiralty and insolvency experience here, that can come to the aid of financiers, owners and investors, when required remains world class . And in these times when it appears fashionable to compare Hong Kong with Singapore, it should be remembered that our Admiralty Bailiff levies only a 1% commission for facilitating a Judicial Sale – half of what is levied in Singapore. That means more funds available for creditors, including a bank that may have adopted the common practice of “bidding the debt” via a special purpose company incorporated to acquire the newly “cleansed” (via the Judicial Sale mechanism) arrested vessel.
This article was co-authored by Damien Laracy (Laracy & Co/Hill Dickinson, Hong Kong) and Panos Pourgourides (Partner, Hill Dickinson, London)