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Private equity investors to fill ship financing gap

Tuesday, 27 November 2012 | 00:00
One of the reasons behind the fall in newbuilding ordering activity this year has been the lack of financing, as banks around the world are limiting their exposure to shipping. As a result, industry players are actively and increasingly looking towards private equity investors to bridge this forming gap in capital requirements. Much of the ship finance lending activity in 2012, and likely continuing into 2013, will focus on restructurings and existing loan portfolios at the large shipping banks.
According to a recent report from Mcquilling Services, private equity groups make investments in shipping through a number of different structures, including among others direct investment, bridge financing, mezzanine financing, debtor-in-possession financing, sale-leaseback transaction, and joint ventures. The report noted that "these groups have been attracted to the shipping sector because of the global recession, banking crisis and a large vessel orderbook. These factors are driving depressed freight rates, vessel values and a spate of restructurings, defaults, renegotiations and bankruptcies, which create ripe targets for distressed investors. Asset owners and project managers might be looking to partner with private equity group to boost liquidity and meet the difference between the decreasing availability of debt financing and their total project costs".
Mcquilling Services added that "establishing a successful strategic partnership with a private equity fund will depend on the objectives of both parties and the contributions that each are able to provide. The biggest question that comes up between the two parties is control. As the private equity investor is likely putting up the largest portion of the investment, typically they will require a corresponding portion of control over management. Creative structures will address management control on a sliding scale through the use of goals and performance / return mandates".
It also mentioned that "private equity investors are generally interested in shipping because of their desire to invest in physical assets and realize an upside return upside on exit through asset sales. As such, additional issues likely to arise in the investment evaluation will relate to timing of an investor exit. If asset values rise to a high point where an attractive positive return could be attained, the private equity investor will need to know their ability to request that a vessel within the joint venture be sold" the US-based consulting services firm said in its weekly report. The bottom of a market is never easy to call unless you’re on the way back up. Patience is required from investors to ride out the remaining periods of depressed freight and asset value markets across a number of different sectors. It is important to establish a workable management and capital structure that will allow you to operate in persistent depressed market.
Wilbur Ross/Diamond S Shipping generated a strong management team with a capital structure that will support the company’s operations for a specific long term period of depressed markets. Established long-term contracts on the Diamond S product tanker fleet acquisition (2011) are said to be enough to carry the debt structure on their entire company even if their newbuilding Suezmaxes made no profit whatsoever. For his group (and most private equity investors), these investments are much like portfolio investments where the significant returns are only realized through the sale of assets in the upturn of an asset value market. As we enter the fourth year of low shipping markets, we believe private equity investors will want to see some light at the end of the tunnel giving hope to potential returns. Timing is one of the biggest topics of discussion for investors" the report concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide
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