As the shipping industry continues to expand, which is now reaching some historical highs, the number of investors who make hefty gains continues to grow. Interestingly enough, however, the same is not true for many long-time financial providers who used to dominate this sector. While this will be discussed in more detail shortly, Brian Ladin, who is a long time shipping investor, summarizes it as the exit of European giants.
More precisely, the exit of some of the largest European banks that used to finance the shipping industry has been quite rapid and unprecedented over the past decade. With it, there are now many trends that are shaping the shipping sector as one that is highly unpredictable. To understand all of the current and forthcoming developments, however, let us look into the background of the abrupt change.
More European Banks Exit the Industry
Over the past ten years, some of the largest banks that the shipping industry has relied on for decades have decided to exit the field. Since the vast majority of them were based in Europe, the entire exit is being viewed as a shift from one continent to another. While there are many reasons behind this, one of the most important ones is the fact that most European providers used to offer extremely low-priced loans to shipping organizations. For instance, finding 70% or more of the project’s financing at a 2% margin was quite reasonable in the late 2000s. Nowadays, however, it is tough to get a margin that is below at least twice that number.
Besides, the onset of a significant financial downturn in 2008 did not help. It was the event that one could say “set the wheels in motion,” which eventually snowballed into a lot of unprofitable years for the European banks who dealt with ship financing. Finally, things like added regulations, the likes of which include Basel regulations, made these projects even harder to navigate successfully. Thus, to showcase just how big the drop has been, consider the following figures.
In 2007, right before the crisis came about, these institutions had north of $120 billion invested in the ship finance sector. Analyses from 2016, on the other hand, show that the overall figure has gone down to just $50 billion. In translation, it took less than ten years for over half of the original finance volume to disappear.
Getting Back to the Equilibrium
According to Brian Ladin, the changes that come with the exit of seasoned providers of ship finance have been just as staggering. For instance, another trend that must be taken into account is that financing is a lot harder to come by. As mentioned earlier, the rates that companies can now obtain new goods and hardware are nowhere near as favorable. It leads to tighter budgets and longer planning stages that now have to include an extended period dedicated to finding investors from multiple continents.
The Focus Shifts
Due to the European players exiting the sphere, many new financial institutions from other geographical locations have entered. While some originate from the U.S., the vast majority of them are coming from Asia. As per many experts who have been in the field for a prolonged time, it would not be surprising to see this lead to a relocation of some ship manufacturers and operators to regions that are closer to their financing allies. For instance, while docking and having a production force in Europe was understandable, it now constitutes a geographical obstacle considering that most financing offers will come from Asia.
U.S. Equity Funds
Besides Asia, Brian Ladin stresses the importance of the equity funds that are coming from the western nations, especially the U.S. During the timeframe mentioned above between 2007 and 2016, it is estimated that more than $16 billion of U.S. investors’ money has been put into the ship finance industry. The leading provider who has been creating such joint ventures is a California-based asset management firm called Oaktree Capital Management. Another dominant player is Apollo Global Management that currently has over $500 million invested in a wide range of container vessels.
Still, however, the odds of these organizations taking the majority market share from their Asian counterparts is quite low. After all, these types of enormous investments in the ship finance industry are still relatively young in the U.S. as the European banks used to dominate the sector for a long time. Nonetheless, anticipating more and more asset management firms and commercial banks from this side of the world to get involved would not be a far-reaching expectation. It would cause a beneficial spread of power between large players from the continents of Asia and America, which could lead to better rates.