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Range of options widened by fresh entrants

October 3, 2006
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(Lloyds List Via Thomson Dialog NewsEdge) Competition in ship finance shows no signs of abating.

This is not because 'tourist' banks are visiting the industry to make a quick killing.

Serious newcomers have entered the industry at a time when established shipping banks are fighting to increase market share, cross-sell services and offer new products.

Moreover, shipowners are cash-rich and more creditworthy, thus having access to a wider range of capital providers outside the bank market.

Indeed, with Asian nations such as China and Singapore becoming more of a force in ship finance, this competitive trend seems unlikely to reverse in the absence of a dramatic and widespread downturn in freight markets.

Against this background, it is unclear whether banks have halted the protracted decline in loan margins, although the bottom of the market has been mistakenly called several times.

One shipping banker comments: 'I would like to say we should have touched bottom, but as long as markets remain hot and lenders compete, there is no such a thing as the bottom of the market.'

Refinancings, which have taken up capacity because of the size of the deals, may be coming to an end at this stage of the cycle.

Owners have committed themselves for five years and should be content with the keener interest rates and structures obtained.

However, a further rash of refinancings could be triggered if the shipping industry goes into consolidation mode.

Asset values continue to be dauntingly high, as exemplified by Frontline's sale of the 2006-built VLCC Front Beijing for a record price of $141.5m a good $12m-$13m above what it would cost to order a newbuilding.

VLCCs are not alone in attracting this level of optimism about short-term prospects newbuilding prices are lagging those of modern second-hand tonnage in several shipping segments.

As a result, bankers are having to grapple with loan-to-value ratios that could become disturbing if freight markets slide to a significant degree.

However, bankers are quick to point out that faith in a decision to advance funds is not only about the loan-to-value ratio but cash generation.

'If you are absolutely certain about the cash position, loan-to-values can be higher,' one financier observes.

'But you need quality charter support.'

As well as coping with low margins, albeit on loans to customers with an improved credit profile, and historically high asset prices the banks are also facing growing competition from financial sources in the East.

Singapore's new Maritime Finance Incentive show signs of taking off, with four ship leasing companies last month being granted approved shipping investment enterprise status by the Singapore government.

The scheme is designed to attract non-bank ship finance sources to Singapore through tax exemption on qualifying income.

Further east lurk the big Chinese banks.

They have yet to make their mark in international shipping finance as they remain focused on Chinese assets, but the day when they do so will not be long in dawning.

Evidence of their changing outlook emerged recently with the plans of Industrial ' Commercial Bank of China, one of the country's largest ship finance banks, to undertake a record-breaking $19bn dual initial public offering in Hong Kong and Shanghai this month.



China is not just about threats to the ship finance establishment, however; it is also about opportunity.

Last month, Norwegian ship finance bank DnB NOR became the first foreign institution to provide a mortgage loan to a Chinese shipowner with a facility to finance the acquisition of two vessels that will be flagged in China.

The landmark deal places the bank in open competition with Chinese domestic banks such as the Bank of China, Industrial and Commercial Bank of China and the Bank of Communications for a slice of the country's huge ship finance market.

In this transaction, DnB NOR has agreed to provide $38.4m to Shanghai Time Shipping for acquisition of panamax and handymax bulk carriers.

The deal was confirmed after DnB NOR won approval from the China Banking Regulatory Commission to open a full service branch office in Shanghai with a full banking licence to carry out foreign currency transactions in China.

Several similar deals are said to be in the pipeline following the Shanghai Times Shipping loan.

DnB NOR chief executive Svein Aaser comments: 'While lending to China's shipping industry will be our primary activity now, eventually the bank aims to extend its portfolio into wider maritime-related activities such as funding for port development and for work in the energy sector.'

Now DnB NOR has opened the door, will others be bold enough to follow it through?

Copyright 2006 Informa Martime Trade and Transport


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