Shipping Finance

1. Shipping Finance
Dr.M.Bina Celine Dorathy
Professor, School of Commerce and Management
Studies
Jain University, Bangalore

2. Shipping is international in nature and
shipping companies have wide range of
financing options besides traditional sources
such as shares, debentures and bonds. In
shipping major part of finance happens only
through bank loans (from large international
banks) and little through IPO and other debt
securities
Financing options for shipping business

3. Financing options for acquiring a new vessel
There are two financing options available for a
shipping company to acquire a new vessel
1. Traditional financing - Borrowing from banks
2. Seller’s credit – Buyer agrees to purchase the
vessel on deferred payment terms with credit
provided by the builder (yard)

4. Traditional Finance
Under traditional financing
The buyer can obtain a huge loan to pay for
the ship in full or
Get refinancing facility on its payment of pre
delivery installments

5. Seller’s Credit
Ship building contract normally provides for the buyer to pay in
instalments over the duration of the contract.
Scheme of payment under seller’s credit (a model)
 Signing of contract- 5%
 6 months after contract- 4%
 Beginning of keel laying- 4%
 Launching- 4%
 Delivery- 3%
First 20% of the contract price is expected to be paid by the buyer out of
his own resources, balance 80% to be repaid (treated as advanced from
seller) at regulars intervals with interest (fixed or floating)

6. Bank guarantee in case of seller’s credit
When ship builder is providing seller’s credit to buyer, he needs security for repayment
It may be in the form of
 Mortgage over vessel on delivery
 Assigning of insurances and earnings
 A bank guarantee on behalf of the buyer
In case of bank guarantee, the yard requires the bank to issue a commitment letter to
the yard at the time of or within a short period of signing the building contract. The
Banker insists on mortgage over vessel or other security to secure buyer’s counter
indemnity.
The yard requires the buyer to issue promissory notes for series of payments and the
builder gets the benefit of assigning sellers credit to third parties by endorsing them.

7. Financing options for acquiring Second hand
ships
 Very rarely seller’s credit is available since in most cases the buyer is also another
shipping company
 The Core activity of a shipping bank’s business is lending loans to finance second
hand ships.
 Banks not only assist owners in purchasing a second hand ship but also
refinancing balloon instalments at the end of the life of a loan (Balloon payments
are lumpsum repayment made apart from regular instalment in order to reduce
interest burden.

8. Loan facility is made available either as a term loan or revolving credit .
Term loan – one time drawing repayable in equal instalments.
 Interest rates are tied to LIBOR, Bank’s lend on lower margin for highly reputation companies
while new companies borrow on higher margins.
 Actual Interest rate is fixed periodically with the borrower given the option of fixing the interest
rates for 3-6 month periods, sometimes 1,6,9 months are also available, borrower selects the
length of each interest period.
Revolving credit – repayments and redrawing against available amount, most likely payable in
every three or six months. Revolving facility suits shipping companies that buy and sell on regular
basis, allowing them to repay while selling and draw to purchase new tonnage. The whole facility
still needs to be repaid by a fixed date. Interest is fixed in the same way as a term loan.
Loan and guarantee facilities from banks for second hand
ships

9. Guarantee Facility
For financing new buildings, banks are asked to issue
guarantee, rarely if second hand ships are sold on credit,
then seller expects a guarantee from bank.
Owner indemnifies the banker and also pays commission
for this service Owner also mortgages the ship or grants
security to provide counter indemnity

10. loans with multicurrency options
Mostly loans are borrowed by shipping companies in US$ to match operating
income, but if an option to convert loans into other currencies are required then
international loans with Multicurrency Options are available from international
banks. In such cases the borrower is permitted to specify an alternative currency
and the loans and interest payment will be denominated in that currency.
 Borrowers opt for this to take advantage of linear interest rates applicable to
certain currencies
 But it exposes the borrower to currency fluctuations, because his operating
income is in a different currency.
 Banks also run into risk if the selected currency moves too much away from base
currency (US$) during the interest period. In such circumstances the borrowers
are asked to make additional repayments

11. Syndicated loans (consortium loans)
 One lead bank will administer the facility on behalf of syndicate
 The lead bank has the largest share of the loan
 Syndicate loan agreements contains provisions regulating relationships between
members
 If one bank fails to make available it’s part, others are expected to step in
 Borrowers dealings are with the lead bank (agent)
 Security can be given in favour of one bank – Name of the bank to be stated in
security trust deed
 Mortgage of ship (Governed by the law of the flag) – can be in favour of agent
bank, but an express declaration of trust of the benefit of mortgage by trustee
bank in favour syndicate members is needed.

12. Mezzanine finance
Mezzanine financing – this refers to raising finance by issuing hybrid
instruments that has both the features of owned and borrowed
sources.
Eg :Convertible debenture, this is a borrowed source which can be a
converted into share (an owned source) after a specified period of
time. Thus it has the features of both debt and owned source and
therefore a hybrid instrument, Similarly preference share is also a
hybrid instrument where even though it is a owned source its
dividend is a fixed percentage as in the case of interest paid on a
borrowed sources

13. Thank You