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NAME 457 Maritime Economics and Management Ship Finance

maritime economics and management: Ship Finance

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NAME 457 Maritime Economics and Management Ship Finance

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  1. NAME 457 Ship Economics and Management Part – 6: Ship Finance Conducted by: Cdre M Muzibur Rahman, (E), psc, PhD, BN Cdre Muzib, psc, PhD

  2. Ship Finance World wide need for Ship Financing: $250,000,000,000 per year Sources of finance: »Equity »Debt »Grants Cdre Muzib, psc, PhD

  3. What form of financing to use? FRICT approach • Flexibility • Risk • Income • Control • Timing • And Others Cdre Muzib, psc, PhD

  4. Factors to Consider in Financing • Unused tax depreciation • Excess debt • Potential business risk • Buyer’s market • Large earning power • Strong, predictable cash flow • Low stock price low expectation • Long term, fixed rate - Leasing - Equity - Equity - Shipyard Credit - Debt - Debt – Hybrid - Bonds Cdre Muzib, psc, PhD

  5. Debt Financing • Least expensive • Most restrictive • Commercial or government loans • Loans secured or collateralized • Mortgages • Possible pledge of: - earnings - insurance - corporate guarantees - pledge of shares - personal guarantees • Seldom 100% rather practically between 50% - 65% (D/E ratio 1:1 to 1.85:1) Cdre Muzib, psc, PhD

  6. Sources of Debt Financing • Commercial banks • Ship finance banks • Investment banks • Government banks • Commercial finance companies • Saving and loan associations • Pension funds • Insurance companies • Commercial credit companies • Account receivable factors • Manufacturers and vendors Cdre Muzib, psc, PhD

  7. Debt – Commercial Banks • Norwegian owners - • Chinese owners • Japanese owners • Greek owners Norwegian banks Hong Kong banks Japanese banks Non-Greek banks - - - Cdre Muzib, psc, PhD

  8. Lien vs Mortgage • Liens are mortgages are quite similar in that they are both security interest options that are used for the same purpose; that is to ensure that loans are repaid and obligations are met. • A lien is a claim on an asset such as property or machinery that is used as collateral for funds borrowed or for the payment of obligations, or performance of services to another party. • A mortgage is a contract between the lender and the borrower that allows a borrower to borrow money from a lender for the purchase of an asset. . • Mortgages are a type of lien as the mortgage document will provide the lender a claim over the borrower’s assets and allows the lender to detain the property till payments are made. • Liens are not mortgages because it is a form of a security interest that can be claimed on different types of properties/assets and can also be placed over the payment of funds owed for a service provided. Cdre Muzib, psc, PhD

  9. Debt - Bonds • Bond financing is a type of long-term borrowing that state and local governments frequently use to raise money, primarily for long-lived infrastructure assets. They obtain this money by selling bonds to investors. In exchange, they promise to repay this money, with interest, according to specified schedules. • It is – Issued by shipowner – Certificates of indebtedness – Specific purposes – Specific rates and period Cdre Muzib, psc, PhD

  10. Debt – Mezzanine Financing • Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. • It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies. • Mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock. • It is used when: – Bank is unwilling to loan sufficient money. – High yield corporate debt, i.e. Junk Bonds. – Closes gap. – Provides high return. – Compensates for high risk. Cdre Muzib, psc, PhD

  11. Debt – Ship Mortgages Purposes: • Public record of lien • Priority of the lien • Sequence of prior liens • Agreement between lender and owner: - Operation - Insurance - Maintenance - Trading areas Cdre Muzib, psc, PhD

  12. Debt – Factors Considered in Granting Loans • Age of business • Type of operation • Method of payment • Currency of loan and repayment • Collateral • Character of management • Credit history • National economic factors • Industry • Mortgage and loan terms Cdre Muzib, psc, PhD

  13. Debt - Rates Floating (variable) - usually tied to LIBOR (London Interbank Offered Rate) Fixed - Rare from commercial banks. “Swap” - It involves exchange of interest rates between two parties. Swaps are more costly - Lender and third party who have excess variable and funds arrange swap. Swaps allow customers to fix their interest rate. fixed rate “Cap”- upper limit on interest rate on a floating-rate note (FRN) or an adjustable-rate mortgage (ARM). - Cap places a limit on any interest rate rises and thus protects against rising. - Lender pays interest over an agreed level. “Floor” – an option completely opposite to “cap” since provides to the buyer minimum possible interest rate. “Collar” - Reduces extra costs for a “cap”. - A combination of a “cap” and “floor”. Thus Collars protect customers from interest rate fluctuations within a simple range. Cdre Muzib, psc, PhD

  14. Spread • Spread is the difference between the bid and the ask price of a security or asset. • It is also the difference between cost of funds to the lender and the borrower based on: - Credit worthiness of owner - Risk in shipping operation - Size of loan - Period of loan - Type and amount of security - General supply and demand for loans Cdre Muzib, psc, PhD

  15. Leases Operating Finance Most ship leases are leveraged leases. Owner Lessor ■ ■ Provides equity portion of funding ■ ■ Retains ownership ■ ■ Make lease payments ■ ■ Provides debt portion ■ ■ Holds mortgage ■ ■ Receives assignment of lease payments. ■ ■ Tax benefits ■ ■ Residual at end of lease (sometimes). Cdre Muzib, psc, PhD

  16. Sources of Equity Funds • Retained earnings • Cash Flow • Sale of Assets • Sale of stock - common - preferred • Limited partnerships Cdre Muzib, psc, PhD

  17. Sale of Stock • Public Offering - Strict government controls - Rigorous accounting - Expensive - Time consuming • Private Placement - Insurance Cos. (casualty and property) - Mutual funds - Finance cos. Cdre Muzib, psc, PhD

  18. Hybrid Financing Schemes • Convertible debt • Debt with warrants • DIFKO (Danish) • K/G System (German) • Blocked currency schemes • Barter deals Cdre Muzib, psc, PhD

  19. Grants • Loans • Loan guarantees • Subsidized interest rates • Cash grants (owner or builder) • Cash or credit to allied industries • Operating subsidies • Favorable tax treatment • Moratoria/deferment on debt repayment • Training funds • R & D • Scrapping subsidies Cdre Muzib, psc, PhD

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