SMM Finance Forum: ‘Banks are Lending Again’

For Dr. Carsten Wiebers, Global Head of Maritime Industries at KfW IPEX-Bank, and member of the SMM Advisory Board, innovative financing solutions are key to Europe's continued international competitiveness in maritime high technology.

On September 8, 2014, or SMM Finance Day, the SMM Ship Finance Forum will be held for the second time in conjunction with international maritime trade fair SMM. The forum, which will answer questions revolving around financing solutions for global shipbuilding and shipping, will be subdivided into three overarching topics. The first part will look at current developments in the German market. The second topical segment, titled "Shipyards: Financing Shipbuilding, Financing Exports", will examine the efforts of many shipyards to finance exports. Part 3 ("Global Financing Trends – Bonds, Leasing, IPOS") will highlight alternative financing models in the market which compete with traditional schemes. Wiebers, a member of the SMM Advisory Board, will speak at both, the SMM Ship Finance Forum and gmec, the global maritime environmental congress held on Environmental Day (September 9) during SMM.

In his interview, Wiebers addresses the current challenges facing the industry, the market environment and financing options.

1. Dr. Wiebers, on the occasion of the Ship Finance Forum 2012 you spoke of major challenges for ship financing. This year’s Ship Finance Forum is under the motto “A New Beginning”. How have the market conditions for owners and banks changed since 2012?
Altogether the underlying conditions for shipowners and financiers have improved compared to 2012. The global economy is recovering. Many banks have cleaned up their balance sheets and are lending again. Apart from classic bank financing, buyers are increasingly accessing new financing sources (for example, through the capital market or Asian leasing companies) and well positioned companies have sufficient access to loans again.

However, the industry outlook needs to be seen in a nuanced light and it has not eased for everyone.

The situation in merchant shipping remains tense for due to the overall low freight rates. In view of the large order book, recovery cannot be expected in the medium term. Competitive pressure is growing, particularly for small and medium-sized shipping companies. While large shipping companies purge their fleets of inefficient ships and in so doing are able to secure their long-term competitiveness, their smaller counterparts often lack access to capital needed for such investment projects. Many banks have learnt from past mistakes and now have a lower appetite for risk while applying tougher loan requirements – especially in merchant shipping.

In specialist shipping, on the other hand – primarily cruise ships and oil and gas offshore – the markets are intact with adequate charter rate levels. Not only operators of special tonnage can look into the future with optimism. The German maritime supply and shipbuilding industry, which is often the technological global market leader in these segments, is also profiting from orders for newbuildings in the cruise and offshore industry. KfW IPEX-Bank supports this economic trend with customized long-term financing for German maritime exports.

2. The gmec – global maritime environmental congress – is being held as part of the SMM 2014. How important are "green" technologies in shipping?
Environmental regulation is increasing for shipping operations. In the past, the maritime industry was, in comparison to land-based industries, less regulated. There was a need to catch up, which led to emissions control areas and further regulation (such as for ballast water). For banks and shipping companies, it is therefore particularly important to finance and operate "green" ships which can be utilized worldwide without restriction.

3. In which sector do you see the greatest sales potential for German shipyards and maritime suppliers?
We see a lot of potential for German exports into the offshore oil and gas industry. Greater field maturity and the increasing exploration of ultra-deep water reservoirs require huge investments into the expansion of the offshore oil and gas infrastructure. In Brazil alone, more than $140 billion will need to be invested by 2020. A large portion of these investments will fall to floating production storage and offloading vessels (FPSOs), platforms, pipeline-laying and support vessels which must satisfy highest technical requirements. Comparable technical requirements apply to the exploration of offshore reservoirs in West Africa where large-scale investment programs have also been announced and where there is additional sales potential for German exporters.

While the leading yards for complex vessel types are mostly based in Asia, drilling, safety, navigation and separation equipment are often sourced in Europe (primarily Norway, Germany, the U.K. and France). German and European equipment for offshore vessels can account for up to 60% of the total construction cost (with individual project costs of up to $2-3 billion for FPSOs). Some 400 companies from the German shipbuilding and offshore supplier industry with 68.000 employees generated a turnover of EUR 11.7 billion in 2013 of which 70% was sold as exports according to the industry association, the VDMA.

This puts the industry in a top position internationally in terms of production and exports and underlines the high competitiveness of German suppliers in this capital-intensive sector, which is strongly driven by innovation.

Also German yards benefit from the ongoing high demand for high spec vessels and are often ably to satisfy individual customers' demands (such as for well intervention vessels, seismic vessels etc.). In this respect, German shipyards have an advantage compared to Asian yards, which try to generate economies of scale effects by focusing on the construction of offshore construction ships (especially drilling ships) and LNG tankers in production series.

4. What role does export financing play in opening up sales potential in the offshore oil and gas industry?
Vessels for the offshore oil and gas industry are usually large-scale investments and the availability of financing always has an impact on a purchase decision. To access financing sources from export countries, some buyers predefine national quotas for procurement. In this way the country of origin and the corresponding availability of long-term financing, along with requirements for quality and pricing, impact procurement decisions.

While in other countries like Norway state financial institutions and the maritime supply industry have cooperated successfully for decades, comparative financing possibilities through KfW IPEXBank have only been available for a relatively short time in Germany.

5. What financing possibilities specifically does KfW IPEX-Bank offer?
KfW IPEX-Bank enhances the competitiveness of the German maritime shipbuilding and supply industry by offering long-term equipment financing to their end customer (shipping companies or contractors). This equipment based financing approach is tailor-made and may be ECA covered or on purely commercial basis, depending on the project specifics. The minimum financing volume should be around $30 million. KfW IPEX-Bank's contribution to the financing is not limited to the German equipment, but is based on the European content. This makes it possible for us to support sales activities of German suppliers despite a German content well below $30 million per project (vessel or newbuilding fleet). The loan tenor for equipment financing tranches would be up to 12 years. We have the capacities and know-how to take prominent roles (such as arranging an international financing consortium) or less prominent roles such as a simple participation, which depends on the German and European content. Total investment amounts are usually between $50 million and $2 billion.

6. What can shipyards and suppliers do to obtain financing from KfW IPEX-Bank for their customers?
Such large-volume projects are always tailor-made financings. Suppliers and shipyards should talk to us as early as possible about new projects, so that – if the project is sufficiently sound – we can complement and enhance the offer by signaling our interest in providing financing towards buyers. We also invite buyers (shipping companies and contractors) to discuss potential financing solutions for their upcoming investment projects with German content with us as early as possible.

Transparency on the sourcing potential of German equipment for certain vessel types is important. The technical departments of the shipping companies or offshore contractors often work closely together with their finance departments. The specifications of a vessel, which are determined in coordination with the shipyard, also determine the availability of additional financing sources, which may be sourced from export promoting financial institutions from the supply country. German industrial associations are currently composing vessel specific master makers lists for the maritime industry.

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