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Finance Execs Forecast Market Movement

To some with a pulse on the overbanked lending industry, the availability of financing in the contemporary shipbuilding market gives the indication of "easy money," although industry experts balk at the notion that somewhat freely distributed loans will enhance the market. This topic has been subject to discussion at recent industry conferences, and in late September, Kevin Kennedy, General Electric Capital Corp. Marine Financing vice president, presented his views to members of the Connecticut Maritime Association (CMA), in a witty profile of the risks and rewards of ship lending, based on the popular, if not accepted, theory that soft financing leads to an oversupply of tonnage and a subsequent market correction.

In a talk that volleyed between a discussion of the immutable laws of supply and demand, applied to the current state of the market as compared with that of the 1980s, and an explanation of how banks perceive shipping transactions, Mr. Kennedy's overall message was made clear.

"Ultimately," stated the marine financial executive, "the health of the market is the responsibility of the shipowners. They are the ones responsible for repaying the money, and are also the ones that reap the profits of a successful operation." Pointing to the trend towards major consolidation in the banking industry, as well as improved overall economic conditions in the 1990s, Mr. Kennedy forecasts a warning to the shipbuilding industry, which is currently privy to the banking industry's lending hunger. He encouraged shippers to be wary of boom and bust expansion, principally by remaining wary of the number of banks which are offering to put up a greater percentage of vessel price at lower interest rates.

He drew several parallels between the state of the current market and the pre-crash market conditions of the 1980s. Both decades are characterized by steady freight market rates, a growing supply of vessels, an availability of money for shipping transactions, relatively cheap newbuildings, and the ready absorption of tonnage delivery.

"The big difference this time is the relative absence of really easy money," said Mr. Kennedy. "Banks are lending up to 70-75 percent of the cost of the vessels. This is certainly higher than the 60 percent maximums found only a couple of years ago, but nowhere near the levels offered in the early eighties. In addition, with a few notable exceptions, tax incentives and shipbuilding promotional schemes are pretty scarce these days. This means that each deal has to stand on its own merits, particularly since long-term charters are all but unavailable today." The marine financing expert predicted that market corrections will occur after a 12-18 month period of continued health, reasoning that after supply outstrips demand, rates will fall. He added that lower rates will make vessel life extensions uneconomical, forcing older vessels to the scrapyard, and effectively reducing supply. "The biggest danger to the market is if most markets continue to grow beyond this period without a correction," concluded Mr. Kennedy. Commenting on the possible demise of Title XI financing, he stated that the elimination of the amount of money available from the program would not be enough to upset the market. And in the matter of eliminating federal shipbuilding subsidies altogether, Mr. Kennedy took a position that seemed to echo leanings of the current U.S. Administration, stating, "I believe we should let the market forces do their work. I think we should probably play ball with the OECD." At another recent industry conference, "Women In Shipping," Den norske Bank Senior Vice President Anne 0 i a n offered her views concerning challenges in ship finance, structuring her presentation around the idea that examination of a cyclical industry requires long-term vision, as evidenced by her statement: "Business moves in cycles. None more so than shipping." Ms. 0 i a n emphasized that while the speed of change continues to accelerate, it is vital to watch out for the availability of excess capital; advice contrasting sharply with the advice she reported offering clients one or two years ago, which was to renew fleets without concern for lack of capital. "If you have to choose between having lots of equity, but no cash, or less equity, but cash on hand, remember that cash is king," said the Den norske senior vice president.

According to Ms. 0ian's figures, the total worldwide shipping loan market, as estimated by London Business School, is a $76 billion market, with debt capital needed for newbuildings in the coming years estimated in the $10-15 billion range. In her estimation, 120 banks are participating in the current market — a dramatic increase from the 20 or 30 banks that participated in lending in 1992. "Accordingly, we see that shipping once again is overbanked at least for the time being, the result being reduced margins ... relaxing of credit requirements and covenants, and this at a time when they should be tightened due to where we are in the market cycle," said Ms. 0ian.

The speaker also addressed banks' lending criteria, with notable mention of environmental issues and their effects on the lenders, particularly in the U.S., with regards to the requirements of OPA 90, the need for Certificates Of Financial Responsibility (COFRs), and possible unknown environmental liabilities, especially as related to the repossession of assets.

"In general I think it is worthwhile thinking twice before doing business that is exposed to U.S. legislation, and undoubtedly, to keep a much lower risk profile if it is. U.S. law is adding a risk for the lender that is substantial. Lender's liability issues seem to be more and more addressed in several countries." Ms. 0 i a n also encouraged professional shipowners and managers to be proactive to maintain freedom of action by anticipating situations, in order to prepare for the unexpected. "Remember that the best defense is a good offense. Keep the initiative away from the banks." She continued by adding that "trust between borrower and lender must be built up over time. It is too late to start building up trust when market conditions deteriorate." And as for the influx of "easy money," Ms. 0 i a n seemed to put forth reasonable logic when she stated, "Don't believe it is that easy. Consider your financial and banking strategy carefully. Think long-term. Remember, in the long rim you have to pay premium price for premium service."

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