If the shipping industry were to go for its annual medical right now what sort of report do you think it would receive? This was the question posed to panellists at a Norton Rose Fulbright Partner event.
BLUE’s Alisdair Pettigrew was joined by Thomas Lister, Chief Commercial Officer and Vivet Puri, Chief Technical Officer both from Global Ship Lease on a panel, chaired by Norton Rose Fulbright partner Simon Hayes at a gathering of over 100 Partners gathered on May 21 at the law firm’s offices in London.
The prognosis for the shipping industry was that it continued to face many challenges, but that it was recovering from the economic equivalent of full blown influenza in 2009 and thereafter. Panellists were asked for their opinion on the new face of ship financing, with Lister providing an insight into the variances in mindset between private equity funds entering the market in recent years and in banks, as traditional institutional lenders.
“The first difference to point out is that private equity tend to be incredibly analytical in their processes; not that banks are not or that that’s a bad thing,” he commented, adding that Global Ship Lease had met with over 50 private equity firms, and actively engaged with “four of five”.
Lister went on to describe a scenario where he suggested private equity houses would often fail to look beyond the asset and the loan to value rate, when macro economic factors, such as charter sentiment, day rates and new business pipelines were strong and key factors in the rates of return forecasts for those assets. Perhaps, he suggested, over time private equity will become more attuned to shipping market dynamics, although he and Pettigrew agreed that in seeking Internal Rate of Return (IRR) of between 10-15% it was hard to see how private equity investment in newbuilds could sustain such a yield over time.
Pettigrew added: “In working with the Carbon War Room and Clean Marine Energy as consultants, BLUE has first hand experience of dealing with private equity in shipping, although with a view to investing in technologies such as eco-efficient paint, software optimisation or Bos Cap Fins in the case of energy efficiency and scrubbing in terms of regulatory drivers to installing technology, rather than newbuilds.”
“What appears to fascinate private equity with models that offer shipping companies a Capex to Opex solution is that they can look to make an IRR of 10% or more because the fuel savings or price spread (between HFO and distillates in the case of scrubbing) enables quick pay backs and the “loan” does not appear on the shipowners’ or fuel payers’ balance sheet. Nevertheless, yields of 7-9% may be more palatable to an industry used to bank lending – but I am sure banks will increasingly see opportunity in financing technology with returns from fuel savings or premiums as the market develops.”
BLUE works with the Carbon War Room, Clean Marine Energy and Norton Rose Fulbright in securing third party finance to fund retrofit energy efficiency technology, scrubbing and LNG. For more information, please email us here.