Key Developments and Growth in Global Ship Finance

The Petrofin Index for Global Ship Finance which commenced at 100 in 2008 fell by 1 point (from 65 to 64 the year before), pointing to a possible stabilisation of the decline of global shipping portfolios.

Top 40 Banks’ lending to shipping fell from $300.7 in 2018 to $294.4bn in 2019, the lowest level since we started monitoring the global portfolio in 2008.

European portfolios show a small increase, based mainly on BNP Paribas and KfW climbing to the top 2 positions.

Chinese banks continue to mark a small gradual decline in terms of direct, bilateral bank ship finance.

Chinese Leasing is increasing its exposure from $52.5 in 2018 to $59.2bn in 2019.

The outlook for 2020 and beyond
The decline of Western banks ship finance appears to have run its course. Even though there are loan portfolios by DVB and Nord LB still to be disposed, committed Western banks did absorb such declines resulting in the stabilization of Western bank ship finance. Chinese ship finance has taken a breather and showed some declines. These declines, however, are more than counterbalanced by the rise of Chinese leasing.

Overall, Global Ship Finance showed only a minor decline and the prospects were positive at the end of 2019 for a more robust performance in 2020. Unfortunately, the COVID-19 pandemic and its resultant major negative impact upon the global economic activity, international trade, and the price of oil, completely changed the scene in 2020. The effect of lockdown and travel restrictions have imposed an enormous strain on shipping. Some sectors, such as, offshore, cruising and containers took the brunt, whilst others, such as dry bulk and the tanker sector displayed increased volatility.

Banks’ reaction was one of caution. Although there were some loan restructure requests received by all banks, it was hardly a deluge. In fact, the shipping industry, as a whole, weathered the storm well with the exception of offshore and cruising industries, which faced serious financial threats. Inevitably, bank approvals became more cautious and demanding, which resulted in more stringent terms and higher pricing. At the same time, Chinese leasing companies were adversely impacted by their exposure to aviation, which combined with the higher cost of US Dollar funding resulted in a slowdown in their ship finance activities.

By mid-year, the situation has stabilized and the focus is shifted to the expected timing and magnitude of the global economic recovery. Analysts are talking either of a V-shape recovery, or of a U-shape one, or of W-shape one and yet others of no foreseeable recovery until 2021. The tanker market frenzy due to oil capacity shortages was short lived as oil demand fell. Nothwithstanding the low price of oil, the expected boom did not materialize.

Dry bulk, however, staged a strong recovery based on inventory and other seasonal and trade route factors and this bolstered confidence by banks. By mid-year, bank lending started to return across all main sectors (dry, wet and containers) with many banks actually taking advantage of the upheaval and improved margins to increase their loan portfolios.

Public markets were volatile and shipping shares underperformed. On the whole, little public market activity took place, as investors remained cautious. Alternative capital providers continued to provide capital and loans but at even higher costs, seeking to take advantage of the difficulties in obtaining finance by some owners and in order to mitigate their higher perceived risk. In all the months of turmoil in the main sectors of dry, wet and containers, there were hardly any insolvencies and for many banks, non-performing loans remained low.

The international banking environment, however, remains challenging, as the Basle higher capital ratios criteria and other central bank regulations and monitoring, limiting the ability of banks to lend. Central banks, however, have provided attractive liquidity terms to banks in order to enhance the economic recovery and this may support increased ship finance by banks.

There continues to be a trickle of new entrants consisting of smaller European, Middle Eastern and Asian banks, mainly supplying their own local clientele. Amongst the newer banks, are M&M, Berenberg, Warburg, ATB, Bank of Cyprus, Hellenic Bank, Astrobank, as well as Japanese lenders, all of whom have continued building up their loan portfolios. Looking to the year ahead, bank policy will depend on the economic recovery and a medical solution for COVID-19, as well as how the trade wars and sanctions will develop during a US presidential election year. Trade protectionism is an increasing concern, coupled with an emphasis on national rather than international policy by the main economic players.

Shipping remains at the mercy of the international trade environment. As newbuilding orders have slowed down, it is the demand side that will shape market conditions. Forecasting shipping demand over the next year appears especially difficult as there are so many factors at play. The ship finance industry may be satisfied by the performance of shipping during a very difficult period, but the geopolitical, pandemic, economic, environmental and trade factors remain. Consequently, we anticipate global ship finance to remain constrained in 2020/2021 in the absence of new positive factors.
Source: Petrofin Global Research

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