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Financing for Older Ships’ Retrofits and Upgrades, a Rarity

A scarcity in obtaining finance for environmentally-friendly retrofits and upgrades is hindering shipping’s decarbonization process. In its latest weekly report, Intermodal said that “IMO 2020, Ballast Water Treatment regulations, Green Recycling, GHG emissions, EEXI, CII, ETS, Fit for 55, Carbon price/levy, the Poseidon Principles are just a handful pieces of evidence that the environmental regulations are not only knocking on the door, but are already inside the shipping house and with the intention to stay for good. Ship operators and managers, charterers, ship financiers must take good consideration of all the above before making any operational and investment decision; including placing an order for a new-building vessel, which has become the most complex decision to make, given all the new regulations and technologies coming up”.

According to the shipbroker’s Deputy CEO, Mr. George Laios, “in this radically changing environment, ship financiers need to assist the industry to bear the burden of the enormous cost of the new regulations/technologies and in general the setting up of the new greener landscape. So far, and while claiming that they will incentivize international shipping’s decarbonization, the focus in the immediate future is to finance solely modern/ecofriendly vessels, while older vessels’ access to financing which would need it the most for their environmentally upgrade is constrained by leading banks and left to alternative financing. This bifurcation in lending constitutes an obstacle for ships that don’t already have green credentials to take significant investment steps towards the energy transition requirements”.

Source: Intermodal

“Obviously, banks are afraid of being left with portfolios of assets that in 3-4 years’ time have a minimum value (being non green assets). On top of this, there is the concern that a two-tier assets market might develop when the new regulations kick in. The one tier being this of the greener ships and the second one being the tier with the older, non-eco ones that may be employed at a discount. This places another risk factor for the banks. The risk of their financing projects not being profitable anymore. In this context, older ships seem to be left with the operational choice of reducing engine power and thus lower speeds as a primary measure to be “emissions compliant”. While the choice split on the speed level between the shipowner and the charterer will largely depend on the prevailing freight market structure i.e. voyages or timecharters that older vessels will be opted to be deployed under, the sure thing is that they will all try to take advantage of it and negotiate the fixing rates”, Mr. Laios said.

“Will this be the case? Will we have another scrubber – non scrubber dilemma going forward? Will the new regulations, emissions mitigation costs via carbon prices / potential fuel levies, limited financing options (or expensive options through alternative financing) and lesser charter rates increase scrapping considerations in 2-3 years time, given that approx. 23% of the combined bulk tankers and containers fleet is above 15 years of age? Does the market have the luxury of losing even a fraction of this via scrapping considering the freight market upcycle across most shipping sectors leads to increased deadweight requirements? Let’s just have a look at what’s happening nowadays due to elevated port congestion, which has tied up a significant share of the dry bulk and containers fleet creating market inefficiencies that have exercised strong upward pressures on freight rates with container rates at record high levels and dry bulk freight rates at the highest in 13 years”, Intermodal’s Deputy CEO noted.

He concluded that “therefore, a further fleet supply squeeze creates good chances that younger vessels will benefit from a charter premium compared to their older peers. However, this that does not mean that older vessels will become obsolete. This is something that the banks need to realise and start supporting their clients when it comes to ‘’older’’ vessels’ financings. It goes without saying that the whole shipping value chain needs to adjust to the new greener environment regime. The banks need to support this new and highly expensive venture of their clients not just by not financing older vessels, but also providing real, monetary incentives that will have tangible and meaningful effect to their daily operating costs”.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

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