Tankers at the Top and Offshore on the Up
Banks and Debt Funds are cooling their appetites on Dry and Tanker transactions due to asset values unjustified by current earnings
Container financing has stabilised due to renewed financier confidence in forward earnings
Offshore financing continues to strengthen with European Banks returning to the sector
The outlook for shipping finance remains positive, with a great number of lenders from Banks to Funds and Leasing Houses engaging in ever-greater competition to deploy capital. In the Offshore markets, the changes are especially clear with new and returning lenders regularly joining. Tanker financing appears to have reached its peak, with covenants starting to tighten. In Dry Bulk, low earnings make many financings difficult while Container vessel transactions have returned to normal levels after falling in Q1.
Erlend Sommerfelt Hauge, Managing Partner at oceanis, says:
“Average margins are continuing to fall when adjusting for leverage as banks continue to compete in maintaining their portfolio levels. The increased spread earned by retail banks on their deposits, as overnight earnings have grown much faster than savings account rates, has given these banks the ability to move more aggressively which will greatly benefit shipowners especially should base rates decrease.”
“Should any shipowners aim to diversify their financing counterparts or explore options for an acquisition or refinancing, now remains a good time to do so.”
Perhaps the first quarter was not the bottom of the Dry Bulk market after all. Declining earnings across segments, while asset values have remained surprisingly constant, make investment in Dry Bulk vessels today more an exercise in faith than trust in the markets.
Unfortunately for owners seeking to acquire or refinance, banks and funds are almost exclusively held to today’s market projections which has limited financing volumes considerably. Exceeding 50% LTV with an older spot-trading vessel is very difficult indeed without resorting to higher-cost debt funds, as banks have retreated to the 40% level.
Younger vessels enjoy more respite due to the potential for lengthened repayment profiles with breakevens set just below historic median earnings, but these repayments may prove difficult to maintain should current market projections be realised. More positively, loan margins are continuing to be compressed by high competition as lenders struggle to maintain their portfolio volumes in the face of high repayments from Container and Tanker owners.
For shipowners with a high level of conviction that better earnings will return, some high-cost options are available which can provide up to 75% leverage, even for older vessels. However, it should be noted that the repayments required exceed not only current market projections but even historic median earnings. The interest cost for this high-risk capital is also high, with margins in the region of 8%. In short, to avoid default there must be a clear view that earnings will be strong and that those strong earnings will come soon. We hope that this will be the case!
This quarter could be well described as a ‘pause for breath’ amongst financiers who, after spending the first half of the year taking opportunities to rebalance portfolios back into the sector, decided to reconsider these moves.
Loan amounts and margins, both much improved over the nine months to June, have seen no great change since then. Indeed, some lenders are now becoming more cautious and adding additional liquidity covenants or dividend restrictions as their confidence declines slightly.
In many ways, this gives the same feeling as container markets in early 2022; the party is still going strong, but some are thinking to book a taxi home. From experience in obtaining finance for container vessels in late 2022, we would highly recommend entering the market while the music is still playing.
And this music is certainly playing! Banks, funds and leasing houses remain exceptionally keen to fund for the time being. Loan amounts on offer remain high, though as asset values have increased more quickly over the past six months the LTVs available have contracted slightly. Margins continue to fall, with banks partially offsetting base rate rises and reacting to more intense competition for new loans.
Container financing has seen little change over the past quarter, mainly due to the consistency in earnings; financiers remain comfortable with charters even from second-tier operators for newbuilds, while mature vessels are being pushed towards top-tier counterparties to avoid the risk of renegotiation.
It has been interesting to see how different banks have dealt with issues such as LTV covenants over the past 6-12 months; while some chose not to place such covenants in their loan documentation during the post-covid boom, others are now imposing restrictions on dividends or requiring early repayments for vessels which are performing under well-paying charters. This has very clearly highlighted the need for a strong relationship between shipowner and financier so that these issues can be communicated ahead of time, and most importantly the need to consider how each individual covenant might affect cashflows given various potential scenarios for earnings and asset values during any financing.
Relatively little transaction volume is seen due to the majority of financings and sales having been closed during 2021 and 2022, but newbuilds and acquisitions still require financing. For these vessels, we are seeing the same charter-based repayment profiles as have been prevalent over the past two years with slowly decreasing margins as charter rates are now more conservative and asset values have retreated from their Icarus-like highs. For a non-recourse newbuild facility with a second-tier charterer, European lenders can offer terms with up to 70% LTV at drawdown and a margin in the very low 3% region.
Lenders are continuing to return to offshore financing, with this quarter seeing the first non-recourse terms shared via the oceanis platform from one European Bank which is new to the sector. At the same time, several other banks and funds are maintaining their presence in an increasingly competitive market. We still observe that financing for offshore assets is highly reliant on firm employment with strong counterparties. Most financiers within the segment are looking to finance strong offshore owners with a proven track record of operating vessels successfully.
For the right counterparty we are now seeing moderate LTV request receiving margins around 4-5% and higher leverage requests receiving margins in the region of 5-6%. Increasing competition between lenders looks set to further reduce these margins in the years to come.
With OSV markets continuing to firm up, we believe financing for offshore vessels will follow as we expect the oil and gas companies to offer longer term employment to secure their need for tonnage as rates continue to increase.
However, opportunities still exist for offshore owners looking to keep their vessels out of long-term employment due to expectations of higher rates in the years to come. This is perhaps best shown by the terms indicated for a pair of vessels under construction without a fixed charter which attracted 85% financing at a margin of around 8%. This pricing, comparable to that seen for similar leverage in cargo vessel financings, is a sure sign of the increased confidence of lenders in the renewed strength of the offshore market.
The future here looks bright.
For a full copy of the report, go to: https://api-prod.oceanis.io/reports/pdf/Oceanis-Q3-Market-Report.pdf