A question you may have never considered is: how do shipping companies stay afloat? Historically, the shipping industry had covered costs through bank loans, but after the economic recession of 2008, financial institutions have slowly begun to pull out. This reduction in bank lending, which hit an all-time low in 2014, is not likely to improve. Thus, the shipping industry has had to start looking to alternative methods of financing if they wish to remain competitive in the industry and continue acquiring vessels. Brian Ladin is the the founder of Delos Shipping, where he exercises his leadership skills and extensive experience investing in public and private businesses. Delos Shipping is a capital provider to the shipping industry, primarily focused on distressed assets, long term leases, and cyclical asset plays. Ladin has not only witnessed but been part of this financial shift in the industry and offers his insight into what he believes to be the two most viable sources of alternative financing for acquiring ships.
Financing through Export Credit Agencies
According to Brian Ladin of Delos Shipping, export credit agencies, otherwise known as ECAs, are one of the most stable financial alternatives for shipping companies. For those that don’t know, an ECA is a type of agency that offers to fund the international export-related activities, such as shipping, of a domestic company. ECAs are either private, or often, a quasi-government institution that acts as a mediator between the government and the exporting shipping company. An example of an ECA is the Export Import Bank of China, which is governed by the government of China and is the world’s largest ECA. Brian Ladin claims that the prevalence of ECAs within the shipping industry is already evident. Pre-2008, ECAs financed roughly 10% of the shipping industry debt, but by 2015, that number had risen to 33%. Specifically, ECAs aim to support the shipbuilding industry within their own country, and so they are often more likely to offer financing to shipping companies who order ships from their domestic shipyards.
Financing through Capital Markets
Secondly, Brian asserts that capital markets, which are financial companies involved in the private as opposed to the public market, are another method of alternative financing that the shipping industry is turning towards. Unlike export credit agencies, capital markets can offer shipping companies financing options that include longer maturities and fixed interest rates. Private equity firms have begun investing in shipping companies. Firms based in the United States have been especially interested in distressed asset sales by banks. The benefits of private equity firms lie in the financial flexibility that they offer shipping companies, shares Brian Ladin. These firms can extend more credit than banks ever could, as well as offer loans to high risk projects, many of which are considered much too risky for banks. The one downfall of private equity firms as a mode of alternative financing for acquiring ships is that there is growing concern about the issue of oversupply. Due to this new flow of capital into the shipping industry, there is worry that the market will be negatively affected, with there being more vessels in existence than there is demand for such vessels. This issue of oversupply has been plaguing the industry for several decades and Brian Ladin fears it could get worse if private equity financing remains such a large piece of the pie. That said, capital markets have been one of the most lucrative sources of funding for the shipping industry. Overall, capital market financing currently comprises 30% of all financing within the shipping industry.
Brian Ladin concludes that although financial institutions have been pulling out of shipping financing, there are alternatives that have stepped up to fill the void left behind.