Shipping Finance Shift to Asia - Paper Example

Typically Asian banks including China, Taiwan Singapore, and Japan supported domestic clients before entering the international market. It was because they offered terms which could not be matched by the global market. But the Asian banks were not active on the worldwide scene until late 2009. It is important to know what caused ship financing in Asia improve and expand. The boom in the shipping cycle between 2007 and 2008 led to the attraction of many international players in the business. Asian banks at this moment were convinced to join the market. What is this shipping cycle? It is an economic concept that describes how companies in the shipping business and freight charges respond to supply and demand. The cycle also tends to explain what influences the selling price of a fleet and the types of ships that highly sell during low business periods. There are four phases of shipping cycle rooted on customer demand. These four stages include; trough, recovery, peak and collapse.

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Trough

This is the first stage of shipping cycle; it involves excess capacity. At this stage, the accumulation of ships at trading ports tends to be high, some slow down their shipments by delaying their arrival in the full ports. Ships transporting goods also reduce their pace of travel with the aim of decreasing fuel costs. At this stage also is where the freight costs start reducing. The costs then fall to the level of vessel operation cost. Generally, it is at this point that organizations start experiencing negative cash flow. Reduction in cash flow affects the prices and types of ships.

Recovery

It is the second step of shipping cycle. Here, supply and demand tend be at equilibrium. Meaning that the levels of demand and supply match each other closely. Freight charges in this stage start to increase exceeding the operation costs. Accumulation of ships at the trading ports reduces due to the rise of new orders stimulated by high demand. The optimism of the market at this stage remains unstable. Cash flow also increases because of an increase in demand that leads to the rise of promising orders.

Peak

Peak is the third stage of shipping cycle. Just as the name suggest, everything at this stage tends to be at peak. The freight charges are very high almost double or triple the operation cost. Many fleets operate while the only ones with most inefficient and unworthy ships are left idle in the trading ports. Cash flow in this stage is quite high compared to the recovery stage.

Collapse

Collapse is the fourth stage of shipping cycle. At this phase, things tend to take a different course. The level of supply at this stage start to surpass that of demand. Freight charges also reduces due the decrease of demand. Fleets begin to accumulate in the trading ports once again. Though the level of cash flow may remain high, fleets start to slow their operations. They may delay the delivery of goods.

The boom in the cycle only lasted for four years (2003-2008) before a sudden collapse caused by prolonged shipping cycle. The following factors led to the short-lived boom of (2003-2008); insufficient ship building-capacity, little yard capacity for normal fleet renewal process, the rise of China after entry in WTO in the year 2001 and investment in infrastructure and high level of liquidity in the market. After the (2003-2008) boom, a collapse followed. The fall resulted to over capacity, bankruptcy and fall of the market. Banks and financial institutions in the West tightened and added regulations in their lending process. These changes resulted to the shift of shipping finance to the East from 2009 making the Asian banks to display in the international scene.

Banks and other lending institutions tightened and introduced bottlenecks in their loaning process from 2008-2008 for example, according to the report given by Reuters in November 2016, the Bank of Ireland removed the ship funding sector from its lending list. The information from Industry publications Marine Money and shipping sources reveal that the shipping finance portfolio of the Bank of Ireland ranged close to two billion US dollars in 2009. Financial sources approximate that the bank has five hundred million US dollars remaining for shipping loans. The report also reveals that the South African bank asset manager Investec had made a decision of declining more shipping borrowing after their assessment. The report further states that the Royal Bank of Scotland had also started to wind down its shipping contributions after being a top creditor for several years.

The slump in the international market was unprecedented collapses in both shipping and financial markets (Oates, 2014). Various banks in the shipping finance sector experienced challenges of liquidity and overstretched balance sheets on loans with inadequate securities. Fleet owners experienced decreasing orders and reducing day rates. These are some of the major factors that discouraged financing of the segment.

The withdrawal of banks from shipping finance sector meant their absence in the segment. The exit of the banks occasioned the rise and development of Export credit finance aimed at playing the roles the Banks played in the sector before withdrawal. According to Harwood (2006, p 41), in the new millennium, the Eastern Asia administrations have started seeing the importance of the role played by Export Credit Agencies (ECA). What is the meaning of Export Credit Agencies? They are public institutions that help in financing for home country exporters and international investors especially in developing countries and developing market economies (Oates 2014).

Having defined Export Credit Agency, it is therefore important to know its advantages that make them widely recognized and employed by many Asian nations. Some of these merits include; availability, long-terms, high loan amounts (Murphy & Tenold, 2008).

Availability

This agency is available at all time. It saves the business people from being declared bankrupt because of lack of enough funds to run their businesses. It helps especially when institutional funding is not available or when the banks withdraw their support for the commercial players in the shipping finance sector.

Long-term

The agency provides a longer duration of loan payment than that provided by commercial lenders like the banks. It helps the businessmen in the shipping sector to have enough time of repaying the borrowed cash and even making profits from it. The duration also allows the business people in this sector to look for alternative sources of money to pay if they are unable to raise cash from their businesses.

High loan amounts

The people seeking loans may have the advantage of getting high amounts compared to the little sums offered by the commercial lenders. Studies have revealed that clients of this agency can to secure up to eighty percent of loan limit compared to the percentage offered by the commercial lenders which are relatively small.

Another merit of this agency is that it allows and enable sellers to earn interests that may be generated by the principal. This happens when the sellers credits are given out as loans to other business players in the sector of shipping finance.

There are vital Export Credit Agencies in shipbuilding countries in Asia. The countries with these ECAs include; China and Japan and Korea.

Japan; Japan Bank for International Cooperation (JBIC), Nippon Export and Investment Insurance (NEXI)

China; the Export-Import Bank of China (China Eximbank), China Export and Credit Insurance Cooperation (Sino-sure), China Development Bank (CDB).

Korea; the Export-Import Bank of Korea (KEXIM), Korea Trade Insurance Corporation (K-Sure).

China being one of the Asian nations with this agency, is moving to the top of the shipping finance sector. This growth is brought about by the exit of western banks from the segment and the willingness of China to continue funding the sector and her plenty capital (Liu, 2016). The Export Credit Agencies in Asia urges the fleet owners to build their ships in Asian nations. According to Oates (2014), the next change in the Asian shipping finance is leasing. What is leasing? Leasing is a process of owning a fixed asset or acquiring its use by making series of contractual, tax deductible and periodic payments. Chinese commercial banks are heading in the direction of possessing ship vessels through the creation of leasing divisions (Oates, 2014). For example; the China Banking and Regulatory Commission (CBRC) in 2007 launched and granted twelve batches of licenses of leasing to various corporations that were willing to invest in the shipping business. Some of the companies that were the beneficiaries of this project include; Industrial and Commercial Bank of China (ICBC), Bank of construction, Bank of communications, Minsheng Bank, China Development Bank and China Merchants Bank.

Outsourcing and leasing for shipping finance

According to Stopford (2008, p, 307), leasing shows a separation between the use or purpose and ownership of a vessel. He also gives a summary of risks associated with leasing and the leasing structures about shipping:

Leasing is usually for financing mechanical properties like ships. There are types of risks that must be are of importance in the process of leasing. These risks include; the risk revenue, the operating risk, and residual value risk.

Risk revenue

This type of risk explains the payment process for the asset in question. These are the hazards associated with the payment of the property in question. It is better for the lessor to be paid the full amount because it will limit the risk of repossession problems between the lessor and the lessee (Willinsky, 2005).

Operating risk

Just as the name suggests, these are risks that may arise in the process of operation of the leased asset. According to Basel, operating risk is the change in value brought about by loses that may be as a result of inadequate or failed internal processes, people and the external influences like legal risks. It is therefore important to have a knowledge of who should pay for loses in the event of their occurrences during the process of leasing especially in the shipping industry (Lau, Ng, Fu & Li, 2013).

Residual value risk

Residual value as used in shipping finance, is the extra gain of value by a vessel compared to its original value before leasing. Therefore it is important to have a good knowledge of the terms of leasing before entering into an agreement in order to avoid problems upon the expiry of the contract. Who enjoys the benefit of the increase in value of a vessel after the expiry of the lease contract remains a vital factor that should be taken to account before entering into a contract.

There are two main types of leasing structures according to Stopford and Li. This types are operating leases and finance leases. Operating leases do not commonly or are not entered into the balance sheet and are mostly used in containership. Finance leases are broad and they cover the important part of the propertys life. They are also entered in the balance sheets of organizations and are used for long-term financing of the shipping sector. Some of the ships financed by this structure include; LNG tankers and cruise ships (Stopford, 2008, p, 308; Ying, 2004, p, 13-14).

The lease as financing vehicle in ship acquisition: legal implications and empirical evaluation of theory and practice by Ying Li states that the number of variables is the major determinant of the pros and cons in the leasing market. Leasing always brings good results to all the parties involved in the transaction because it tends to evenly spread the risks on all the individuals as compared to other forms used in ship financing (Peck, 1994, p, 80).

There are several benefits of leasing brought out in leasing 1...