1. SHIPPING COMPANY EONOMICS Financing ships and shipping companies Marina Zanne, M.Sc. Marina.Zanne@fpp.uni-lj.si

2. Introduction Ships are expensive, shipping marekt is volatile, shipping companies can adopt less formal structures and choose their legal jurisdiction  Who would be interested to finance a shipping company?

3. Ship finance Investors prefer: Predictable earnings Well-defined corporate structures Well-defined ownership Consistent growth High yields

4. Ship finance In 2007 investments in new ships were 187,5 billion $ In 2007 second-hand sales reached 53,5 billion $

5. Ship finance Paradox: too much finance options Mortgages 150 banks targeting the ship finance market

6. Ship finance Investment in merchant ships, 1997-2007; Stopford M. (2009), p.270

7. History of ship finance Modern ship finance, 1850s: –“sixty-fourth” company; ship is registered as 64 shares. Shares held by: Individuals on their own account, Individuals organized into partnership or Investors in a joint stock company London, 1848: 554 vessels, 89% were owned by individuals, 8% by trading partnerships and 3% by JSC.

8. History of ship finance Second half of century: JSC became preferred way of financing the ships –Limited Liability Act, 1862; protection of (small) investors Tyne Steam Shipping Company Ltd., 1864 – owner of the first bulk carrier John Bowes. Nominal capital: 300.000₤, 12.000 shares Family business; borrowing instead of having an investor

9. History of ship finance Financing the business from accumulated depreciation reserves –Earnings are usually not enough to fund the expansion From 1950-1970 the return on British shipping companies shares was cca 6% while for all copanies it was 15%.

10. History of ship finance Charter-backed finance, 1950s and 1960s –Industrial shippers; oil companies and steel- makers  time charters as an incentive to order large ships  instrument of transport costs reduction –Time charters & mortgage on the hull was used as a security to obtain a bank loan  expansion of the bulk fleet with only a little equity of shipowners –The one-ship company: FOC, management handled through agencies

11. History of ship finance –Newbuildings restricted by the availability of charters –Changes in trade structure –Small profits from long term contracts Asset-backed finance, 1970s –Bankers see ship as “floating real estate” –Petrodollars  huge expansion of tanker fleet

12. History of ship finance Mid 1980s shipping crisis –“Asset play” – buying at low and selling at high prices –New sources of finance were required; small mortgage loans Corporate finance in the 1990s –Privatr partherships providing finance for container ship operators

13. History of ship finance Shipbuilding credit –Instrument of competition during recession period –Known in the 19 th century, later know as subsidized crediting

14. Private funds Owner’s private resources: –Earnings from his business –Investments or loans from friends or family Widely used in the 19th century

15. Bank loans The most important source of ship finance Quick acess to capital while ownership over ship remains intact –Limited size of the loan; 50-80% of ship’s value –Short repayment period of 5 to 7 years –Mortgage against the ship is mandatory

16. Leasing ships Separation of use and ownership over the ship –Lessor = legal owner –Lessee Risks: –Revenue risk; will the leesor be paid in full for the asset he has purchased –Operating risk; who will pay if the ship breaks down –Residual value risk; who gets the benefit if the ship is worth more than expected at the end of the lease

17. Leasing ships Typical lease finance model, Stopford (2009), p. 308

18. 14 options for financing merchant ships, Stopford (2009), p. 283

19. Sources of investment funds: –Companies –Private investors –Financial institutions Markets where funds are traded: –Money markets –Bonds markets –Equity markets Intermediaries & risk-takers: –Commercial banks –Investment banks –Finance houses –Ship credit schemes Where the money comes from to finance ships, Stopford (2009), p. 277

20. Example Financed by a loan: size of loan source of loan interest rate terms of loan

21. Example Cash price = 45.000.000 $. Terms of loan: down payment 15.000.000 $ interest rate: 7% (per year) paying period: 5 years, repayments once a year, fixed instalment

22. where r – interest rate (for adeqaute period of time) n – number of instalments

23. No.PrincipalInstalmentInterests Partial principal 030.000.000,00 1 2 3 4 5

24. Sources & further reading Stopford M. (2009), Maritime eonomics, Chapter 7