Not too long ago, shipowners only had to know the broad concepts of a first preferred ship mortgage and would secure a shipping loan on a handshake; for more ambitious among them, the capital horizon was broad enough to include IPOs.
Today shipping finance has evolved, bringing new terms in the shipping vocabulary; terms such as junior debt, mezzanine, junior equity, convertible, waterfalls, leasing, alternative funds, sale & leaseback structures, shipping bonds and more. When a shipping loan is out of the question (more often than not), the capital structure gets more complicated where debt comes in tranches (senior and junior), equity in slices (proper and junior), and creditors can get cash, PIK or have the right to become equity holders (convertible).
With shipping banks curtailing their activities in shipping, alternative forms of credit moved aggressively to fill the funding gap; from private equity funds and joint ventures, to credit funds and Chinese Leasing. The shipping finance model had to undergo necessary fine-tuning to adjust for realistic market conditions and returns; excess market speculation is out, need-driven financing is in.
In a weak freight market, keeping expenses under control is imperative. Technology, automation and digitization can lower operating expenses, but also ensure that vessels form an integral part of an efficient logistics supply chain – always in compliance with demanding regulations.
In an ever-changing world, competitively priced financing for this capital intensive industry is the secret of success. Whether obtaining financing for legacy transactions or securing financing to expand one’s fleet, from private investors to accessing the capital markets for equity and debt, shipping finance is a topic that a modern, successful shipowner has to master.