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Last time...

We talked about what happened in the last 15 years in the maritime shipping finance industry. In all, we have now examined the last 500 years, focusing on the period from 1950 to the turn of the century. Today we continue our exploration of the world of maritime shipping finance, as we look at what makes this industry so unique.

I want to start with a quote. Just because it just expresses so well the unique nature of the shipping industry. And why I find the maritime shipping industry so fascinating (and kind of peculiar and mysterious, but in a good way...)

Why be devoted to an industry that has colossal 20-year cycles of boom and bust, barbaric volatility and razor-thin margins on nearly every deal? It’s downright masochistic (and not that there’s anything wrong with that if you are ‘in to it’). The answer is easy: The shipping business is international, very sexy and has a flair for the dramatic. It’s a gambler’s paradise and there remains a whole swathe of money to be made - although none in the game would openly admit such for fear of giving away their scheme(s).

...it is also like Al Pacino said in Godfather 3 in re trying to peaceably exit the Mafia, "Each time I try to get out, they pull me back in!" Shipping is a family where most everybody in the industry has an overlapping Rolodex, where marriages can still create grand alliances, where trading implications for whole nations and the globe itself can still be influenced by a couple of players using a shadow broker on a mobile sipping a Singapore Sling at Harry’s listening to some Dexter Gordon rip-off act. The world of shipping business is like the royal families of the world: They are all related, may well be inbred, likely assume that whatever they touch is gold (regardless of how bad a deal may or may not smell to whatever other dumb-ass, in the deal makers’ opinion, looking at it) and are afraid of being amongst the general public – "For good reason, non shipping people are ‘shiete’". Once in shipping it usually means one is in for life and if one tries to get out, don’t be surprised when you get sucked right back in by a giant balloon-like white orb on sale-lease-back from the set of Patrick McGoohan’s "The Prisoner". "You see Number 6, you will find that it is very peaceful here". "Yes Number 2, I trust I will…" (Dür)

Most industries have (mostly unwritten) rules and features

Such rules are taken for granted in other industries. But they are often completely ignored when it comes to the maritime ship finance industry. Even other areas of in the financial industry do not operate with similar assumptions. 

One would think, for example, that real estate (asset finance) and retail (physical connection to shipping) may be similar. Two industries that one may think would be very similar in many ways to the shipping industry. These industries however, operate under very different assumptions compared to the shipping finance industry. They are also structured very differently.

As much as it might make it easier to teach an MBA class on corporate finance...

...the financing of cargo-carrying maritime vessels do not fit the mold of that of even commercial real estate. A 3 600 TEU (TEU stands for Twenty Foot Equivalent - that is the size of the container - more about different types of containers here) ship currently costs about $50 million. A 6 400 TEU vessel costs about $80 million. The prices for the largest container ships today often exceeds $150 million.

This amount of capital is just too high!

Potential shipowners cannot raise this level of capital themselves. Individuals or companies who want to invest in ships need help. Often, a combination of bank loans and private equity is required. And often from a vast number of independent sources. And that is just to buy the vessels. Then you need to operate them which is entirely different story. That is where models like the KG model, initiated in Germany, come in handy.

Therefore, although both are considered rather long-term immovable investments in a sense, the prices of cargo vessels cannot be compared with that of home mortgage finance. The value of the average cargo ship is easily more than a thousand times the value of an average house for instance.

This changes the debt/equity profile of ownership

The amount of retained earnings invested is also influenced. But again, quite simply put, there are very few people who can afford to buy a ship. Again, even the market for large commercial properties does not compare. Capital requirements here may in extreme cases approach that of cargo vessels. 

But there is another important reason...

...why the industry as a whole does not compare well to the ship finance industry. These properties often have lifetimes far exceeding that of vessels. But besides that, their values typically increase as time goes on. The value of ships almost always decreases over the lifespan of the investment. 

There are exceptions...

Some ships that were bought in the 1990's increased in value over the next decade or so. That is of course when measured  in relatively stable currencies such as the dollar. Rare cases like this can be attributed to freak events. In this case it would have been extreme volatility. The 1980's bust was followed by a period of correction that saw prices increase rather nicely...

The retail industry is also not appropriate...

...to use as a comparison for forecasting purposes in the shipping finance industry. Even though most products carried by vessels across the seas today are retailed at some point, the way that retail operations are financed differ substantially from the way ships are financed. It is easy to see the reason for this when one considers that retailing is only one end of the supply chain, a chain that very often starts with raw materials being shipped to manufacturing sites.

Even when it comes to the final stages of production and distribution...

...the shipping industry does not handle stock the same way as retailers. For retailers, shipping is simply a way to eventually get stock into outlets. The shipper, on the other hand, typically never actually owns the stock.

Retailers are more concerned with the opportunity costs. Not only in terms of interest rates. Also when it comes to procurement, warehousing, and distribution options. A shipowner easily outsources these types of functions to ship management companies.

Thanks for joining us as we explore the fascinating and mysterious world of maritime ship finance! Have a great day!

References:

Dür, Urs M., “Shipping, The Prison of True Believers,” (http://www.maritimewired.com/news15.html, retrieved 6 August 2007)

Schulte, Alexander & Schnieders, Patrick 2007. Schiffsfinanzierung aus der Perspektive einer Reederei im Rahmen des Seminars “Schiffsfinanzierung“ Universität Hamburg, 23.05.2007

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