Making Ends Meet: Juggling With Finances Can Help Shipowners Achieve Profitability

If recent experience of t h e freight markets has taught us anything, it is that shipowners would get a better rate of return by putting their capital under the mattress than investing in new ships.

At the same time we know - because everyone involved keeps telling us so - t h a t the world merchant fleet is in urgent need of replacement. Indeed, the spate of accidents involving old tankers and bulk carriers has confirmed this need. Owners expect their tonnage to have a limited economic lifespan, and those serious about being in the business make arrangements and allowances to cover this. However, if owners cannot guarantee to recover new investment, let alone make any return on capital, how is this fleet replacement program to be effected? Who will fund it? What will it cost? In a new report entitled "Finance for Ships," Drewry Shipping Consultants Ltd. takes a considered look at the current mismatch in the ship finance sector: between owners who would like to borrow but can't afford to repay loans out of operating income, and banks who have money to lend, but are increasingly skeptical about lending to the shipping industry. Estimates of newbuilding demand to the end of the decade, together with potential secondhand activity, suggest t h a t owners may be looking to raise between $240 and $320 billion from lending institutions and other investors between now and the year 2000.

As many banks were stung in the previous market downturn in the 1980s, they are becoming more reluctant to lend funds for shipping investment and, given t h a t they only have limited reserves available, they can afford to choose only the more secure projects and creditworthy borrowers.

It is enlightening to realize that, on the basis of representative cost and income, a VLCC built in 1970 or 1971 quickly repaid the owner's investment, but since then there has never been an occasion when capital has been fully recovered over the normal working life of a VLCC. A similar, though less dramatic picture can be painted for smaller tankers and dry bulk carriers. This illustrates the importance of tax advantages offered to shipowners. Without tax advantages, investing in shipping would appear to hold no hope of making a profit as well as showing that flags of convenience Source: Drewry Shipping Consultants Ltd. are, for many, a requirement rather than a luxury. Of course, sometimes it is better to pay the tax t h a n invest in ships, and it appears t h a t 1993 is one of those times.

On the other hand, for cash-rich companies and individuals looking for the possibility of a big return, the secondhand market offers many opportunities to pick up tonnage at what may well in a few years time seem bargain basement prices. However, the high-profile failure of a number of investment vehicles set up in the late 1980s to take advantage of asset plays on the S&P market, meaning that private placements or public offerings of equity in such ventures are likely to be met with a stony response.

Owners do have the ability to exert some influence over the cost of their borrowings.

As the table shows, the total interest payments on a newbuilding can vary by as much as 50% - although the most expensive funding arrangements tend to be those which offer lower repayments in the short term, and may be the only way to allow owners to run to profit. The problem of adequate funding is central to the development of the shipping industry over the next decade. The pace of investment in new tonnage will largely be determined by the ability of owners to raise funds from investors, and in turn will provide a direction to the freight market. Anyone involved in the shipping industry will need to be aware of the scale of the problem and remain informed of the options available. Drewry's new report provides a valuable tool to all those with an interest in shipping, as owner, charterer, builder, or financier. For more information, contact Drewry Shipping Consultants Ltd., 11, Heron Quay, London E14 4JF.

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