Finance Monthly speaks to lawyer Rona Kaspi about trends within Maritime Law.
What’s your general opinion on the current position of vessel financing environment realized since 2008?
The maritime sector is one of the sectors affected by the global crisis after 2008. The global crisis started a chain reaction causing a constriction in trade, resulting in a negative impact on both the shipping and banking sectors, which, in turn, had adverse effects on the rapid financing of the maritime sector. The maritime sector, which takes up little space on their balance sheets, has become a sector that larger banks, and, in particular European banks, want to exclude from their portfolios due to the losses it causes them. Other than a few banks that have the expertise and are efficient in the maritime field, several German banks that do not consider maritime clients as their target audience made the decision to withdraw entirely from the maritime sector, especially in Turkey. They have chosen to transfer the credits to third parties by giving 30-40% discounts on the debt amount of the principal, for the sole purpose of removing it from their balance sheets. While executing such transfers, the loan repayment performance of the indebted companies have not been considered. They removed the companies that do not have other source of income and are not managed in a professional manner and have limited the number of vessels in their portfolio.
After the unfavorable market in 2016, improvement in the sector is being projected by ship owners and shipyards in 2017 onwards. What is your opinion on this? Where do you think the financial opportunities will come from?
2015 was quite fruitful for tanker owners but, as mentioned, 2016 was not a productive year. Currently, the conditions for dry cargo and tanker markets look positive and I can confidently say that Turkey has a very influential position in the region in relation to shipyards.
It is impossible to find availability repair and docking services at the shipyards. This is an indicator of the success of the services provided by the shipyards in the region.
However, the maritime sector is no longer a primary sector whose investment is supported by European Banks, neither in relation to ship owners nor to shipyards. The rapid fluctuations caused a disincentive to banks which would be interested in earning money in a short period of time through high interest rates expected for a limited number of banks. The European Banks consider the labor force used in relation to maritime loans under €20 million as unproductive. Additionally, banks prefer giving loans to holding companies that have a more professional administration structure to family companies. Due to this, it would not be easy for Turkish ship owners and shipyards to find foreign financing. On the other hand, local banks continue to actively provide a support to the maritime sector. However, during client selection, the local banks consider not only the financing of the vessel, but also the previous loan transactions of their clients and their relationship with the banks during the previous crisis period.
Today, firms which continued their activities find themselves to be grateful to the local banks that supported them during the financial crisis. This has changed the sectorial companies’ opinion on the banks. Although local banks offer higher interest rates when compared to foreign banks, they now have more customers in the sector due to the support they’ve offered to their clients. Local banks will continue to provide their financial support, however, access to foreign financing sources will gradually become difficult.
What is the risk perception in respect of maritime assets and, among others, are there any less-risky vessel types? How eager are the banks to take maritime investment risks?
While the foreign finance institutions make sector assessments for long terms, local finance institutions offer lending for smaller amounts and shorter terms. Foreign finance institutions prefer providing funds to the publicly-traded firms or maritime companies, rather than financing an individual vessel.
Before the 2008 crisis, when the market was at its best, financing of general cargo vessels was as common as financing larger ships. Perhaps this has deteriorated more rapidly after the crisis, in comparison with other vessel types. Is it likely that the banks specialised in global vessel financing may again show such an interest in the short and medium term? How accessible would financing be for small vessels and ship owners?
As far as local banks are concerned, coaster-style small vessels will always continue to be attractive to them, however, they are out of the scope for foreign banks. In my opinion, local banks will continue to finance coasters by taking additional guarantees, such as maritime hypothecation.
In this context, how risky are the short-distance sea transports and general cargo vessels, according to banks?
Local banks will always deal with local trade. Nevertheless, there will always be requests for additional guarantees. Most of the local banks do not consider the clients they finance as business partners and they do not consider vessel loan transactions as project financing – to them, this is asset financing. Hence, this always necessitates additional guarantee requests that are not ship mortgages.
Have European banks overcome the crisis or are there any new mergers and consolidations in the future?
As far as European Banks are concerned, the issue is not restricted only to a maritime crisis. Actually, one of the reasons behind the crisis in the maritime sector is the global banking crisis. Many banks leave the maritime sector, make major discounts on their credits, sell the credit or pressuring their clients to settle the loan, as they’re not familiar with maritime market and they don’t have control over the market. Although the risks are generally small, maritime creates significant issues in the balance sheets of foreign banks. Overall, banks are doing well and I don’t think that they will be faced with any unfortunate surprises in the near future.
The vessel prices reached rock bottom, which presents a great opportunity for the ship owners who would like to enlarge their fleets. On the other hand, financing opportunities are very scarce too. So much that, even if there are financial means, it is not possible for some vessels to generate enough daily revenue to make the repayments in the current markets. In this regard, would it be less risky for the banks if they finance the vessel purchases at the current lower prices with more convenient payment conditions and then increase the repayments when the vessel prices increase?
The developments in our maritime sector gained momentum after 1995, but real growth was achieved in the beginning of 2000s, due to the involvement of foreign banks.
During those years, banks and finance institutions played a great role both in the second-hand market and in supporting the construction of new ships. However, when we’re in foreign countries, we see companies making continuous investments to the maritime sector. It is not possible to reach a strong capital structure within a short period of time. Although rapid growth seems attractive to people, the status of the companies that do not have the adequate capital structure to overcome the crisis will always be a danger. In the maritime field, the most impossible situation can be encountered. It is vital to ensure that your company has a strong capital at all times to take the necessary measures and be able to position itself in the event of a crisis. Instead of targeting a rapid growth for their companies in the short run, the partners of the company should target a company structure, which is managed professionally, maintains the speed of growth within the frame of a specific plan and ensures survival by relying on its strong capital structure in case of a risk. A consistent growth should be targeted; our recent experiences showed us that a rapid rise might lead to a sharp decline.
Finally, we are all aware that standards such as Basel 3, which require greater transparency, have been introduced. In this respect, what are your suggestions to the Turkish ship owners about the transparency requirements that need to be satisfied by banks in the future?
First of all, they must ensure a more professional administrative structure. Many banks have actually witnessed the problems which occurred in family companies. Having witnessed issues resulting from family-related problems, banks which previously had a large number of clients in Turkey have now stopped to gravitate towards the country. Family members can be the partners of the company but their personal issues should not affect the daily business of the company. Besides, transparency in the capital structure is also required. Evidence about the source of the capital should be made available. Now there is no off-the books money. The companies should be professionally managed, their accounts should be audited and the audit reports should be submitted to the banks regularly. Today, the application forms of the banks that needs to be filled by standard clients require the name of the audit firms and lawyers. Refraining from auditing may result in saving a small amount, but it is important to mention that the companies that submit regular audit reports have better reputation in the eyes of banks.