Ship finance: banks must seize the opportunity

Ship finance: banks must seize the opportunity
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First Published: Fri, Jul 24 2009. 01 15 AM IST

Updated: Fri, Jul 24 2009. 11 15 AM IST
Sometime late last year, when financial turmoil hit global businesses, an Indian shipping company faced a crisis arranging loans to buy a capesize ship, the biggest dry bulk cargo carrying vessel.
Ship prices were at their peak a few months earlier. This Mumbai-based shipping firm had agreed to buy the ship for $140 million (Rs677.6 crore at today’s rate) and was to rent it out to a Chinese firm at a day rate of $75,000 for five years. As the financial turmoil spread, foreign lenders, with whom the shipowner had finalized a loan, backed out of the deal. The global liquidity crisis deepened and foreign loans were not forthcoming.
The ship purchase plan was wilting due to lack of debt funding until three Indian banks, namely, Bank of Baroda, Bank of India and Axis Bank Ltd, came to the firm’s rescue. Through negotiations, the ship price was scaled down to $95 million from the $140 million agreed earlier and the Mumbai owner agreed to lower the ship rental to $67,500 a day from $75,000. It was a win-win situation for all involved given the global crisis. The three Indian banks lent $65 million to the Mumbai firm to buy the ship. Mint cannot name the shipping company because that was the condition for sharing the information.
The liquidity crisis in Europe has hurt plans of local shipowners to invest some $20 billion over the next five years to replace part of their ageing fleet and expand cargo carrying capacity. Indian shipowners have so far relied heavily on European banks, particularly shipping banks in Scandinavia and the Nordic region, because loans from these specialist banks were much cheaper than local funds. Besides, Indian banks cannot lend money for longer periods. They can lend only for two-three years, whereas shipping firms typically need money for tenures ranging between eight and 15 years.
The liquidity crisis has led the local shipping industry to lobby for a soft loan corpus of Rs10,000 crore from the government to part-finance their ship acquisition plans. Earlier this week, Union shipping minister G.K. Vasan told the Lok Sabha that the finance ministry was not willing to provide such a corpus. At the behest of the finance ministry, the Indian Banks’ Association (IBA), a bankers’ lobby, had constituted a working group to examine a proposed extension of credit facilities to shipping companies in India for the purchase of ships. The IBA has, however, recently said it has no role to play in the matter and shipping companies should take up the matter with individual banks.
Local shipowners are staring at a funding crisis for buying ships. Many of the troubled global banks bailed out by their respective governments first have an obligation to serve their local clients. That was one of the conditions on which many bailouts have taken place.
The time has now come for the shipping industry to change course and look at getting ships included in the list of infrastructure sectors. This will help them tap funds and refinance facility pledged by government-backed lenders such as India Infrastructure Finance Co. Ltd. Infrastructure status brings tax holidays and access to special funds for firms operating in sectors such as roads, bridges, railways, seaports, airports, inland waterways, urban transport, power, water supply, sewage, solid waste management, gas pipelines, infrastructure projects in special economic zones, international convention centres and tourism projects.
For those with access to money, this is the best time to buy ships as a steep decline in ship rentals and volatility in the shipping equities market over the past year have pulled down asset values substantially. Currently, Indian ships, with a combined cargo carrying capacity of about 9 million tonnes (mt), carry some 12% of the 740mt a year of cargo headed into or out of the country. In the next four-five years, the total export-import cargo is expected to rise to 1 billion tonnes a year and further to 2 billion tones by 2017.
Clearly, there is an opportunity for Indian banks to come to the rescue of local shipowners. The question now is whether Indian banks can match the terms offered by European ship financing banks. But then, when you are up against the wall, as the Mumbai shipowner mentioned in the beginning was, something is better than nothing.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday.
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First Published: Fri, Jul 24 2009. 01 15 AM IST