Shipping finance out of the cold winter but recovery is still early

After a long shipping downturn, the mood among shippers at the Third China Maritime Finance (East Xinjiang) International Forum, which ended last week, was no longer one of confusion. However, can we say that the industry will usher in a turning point? Is this a good bargain hunting opportunity? What segments are there opportunities? I'm afraid these questions are not easy to answer.

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As an old industry, shipping is also a highly cyclical one, usually going through a cycle every seven to eight years, but the impact of the 2008 financial crisis is clearly more profound. In 2016, the BDI index fell below 300 points in history, and the shipping industry fell into a deep trough. In addition, oil prices remain low for a long time, which has not spared the offshore manufacturing industry. What's more, the exchange rate reform has broken the expectation of long-term unilateral appreciation of the RMB exchange rate, which makes the domestic shipping industry face higher cost of locking foreign exchange.

Take container leasing business as an example. Currently, the leasing industry presents the characteristics of "two low and one high", from high income to low income, from high growth to low growth, from low risk to high risk. As global capacity continues to grow, supply has been maintained in excess of demand. Global capacity grew 8.5 percent in 2015, while sea traffic grew only 1.3 percent. In 2016, capacity grew by 4.9 percent and sea volume by 2.4 percent. Industry insiders predict that supply and demand relations may not improve until 2020.

But it is certain that the worst is over. Jin Hai, investment director of shipping finance of Cosco Shipping Development Co., LTD., and general manager of Far Sea Shipping Fund (offering), said that from the perspective of asset allocation, the current real estate price is at the top of history, while BDI index is hovering around 10% of the historical peak. Ships are still relatively good relative value depression. Capital profit-driven long-term value allocation of physical assets including ship assets, shipping investment window began to appear.

But does this mean the industry has turned a corner? Jinhai believes that the main strategic focus of the current shipping enterprises is to repair the balance sheet, improve cash flow and business strategy adjustment, plate market rebound conclusion too early. However, in terms of market segments, there are still some structural opportunities for specific shipping companies and shipping projects.

For example, the popularity of second-hand bulk carriers surprised many people. According to relevant statistics, 612 second-hand bulk carriers were sold last year, with a year-on-year growth of 1/3. This is the largest number of second-hand bulk carriers since the precipice drop in the shipping market in 2008, which also makes many shipping people think that now is a good time to enter.

However, Zhu Jiafeng, general manager of the ship leasing department of AVic International Leasing Co., believes that it is not recommended to greatly increase the position when the recovery, and shipping investment is more in the pattern of long flow. For finance leasing companies, in addition to a few century-old shops, most of the customers are small and medium-sized enterprises with an average life span of 3-5 years, while the service life of a ship is 30 to 50 years. During this period, many small enterprises cannot survive, so how to recover their assets tests the asset management ability of leasing companies. "Choose a durable model, especially one with versatility, and invest in a portion each year," he advises. In addition, there is a difference in the cycle between the bulk container and the cruise ship, so that the leasing company does not find that all the projects are going to go wrong when systemic risk comes."

Diversified financing

Shipping finance has fallen off a cliff over the past few years, particularly in international shipping markets, where European banks have scaled back sharply to repair balance sheets, and at home, where liquidity is tight, where banks are less willing to support shipping finance. Sun Jiawen, director of transportation at Standard Chartered Bank (China) LTD., said banks are still conservative about ship financing. But, he said, the appetite for new capital to enter shipping is very active, and the forms and channels of capital are becoming broader.

"We are also seeing a proliferation of new financing structures in the market, from traditional ship mortgage finance leases to innovative financing arrangements such as securitisation and private equity, and even complex financing arrangements that take advantage of favourable tax policies in different tax jurisdictions." Sun said.

Asset securitization is one of the new financing modes. Jinhai believes that because of the huge value of ship assets, long-term lease allocation will generate stable cash flow. Shipping assets are especially suitable for long-term value investment allocation, which is suitable for asset securitization in the capital market.

Last year ICBC Financial Leasing Co LTD successfully sold a shipping-based securitization product in the US. Of course, for more leasing companies, small scale, not high rating will inevitably lead to low market acceptance. Even if such a business were launched, the cost of issuing it would increase significantly.

Zhou Song, general manager of China Development Securities Hebei Branch, believes that the securitization of ship assets still faces some constraints. For example, the shipping market is far from a turning point, and the market downturn has made regulators and investors more skeptical about this sector. At present, most of the ships are registered overseas and belong to overseas assets. From the perspective of currency, most of the ship charter or operation contracts are contracts in US dollar, while the more mature market for RMB fund raising in China is also explored and innovated in US dollar products. However, the amount of capital is not as abundant as overseas bond issuance, including overseas ABS.

In the context of the combination of industry and finance, traditional shipping enterprises, shipping and offshore manufacturing enterprises began to set up their own financial leasing companies, financial leasing companies, captive insurance companies and commercial factoring companies, rapidly mastering and utilizing financial instruments and extending upstream. On the other hand, the emergence of shipping industry funds also provides more diversified financing means. For example, CIMC Ocean Engineering Co., LTD., a leading enterprise in the field of offshore equipment manufacturing and technical services in China, set up a 10 billion yuan offshore industry investment fund in eastern Xinjiang on the basis of joint strategic investors to boost the transformation and upgrading of China's offshore industry. At the end of 2016, Minsheng Trust set up a ship fund to invest in dry bulk carriers through financial leasing. After less than a year's deployment, the number of ships in the shipping sector is close to 20.

Meanwhile, Jinhai revealed at the forum that Zhongyuan Haifa is currently leading some central enterprises to prepare for the establishment of a far-sea shipping fund. The fund, which consists of RMB and US dollar funds, focuses on bad assets investment, asset restructuring of shipping companies or asset securitization. Market-oriented, the fund is not limited to ship investment and financing, but provides services for shipping as a financial service provider. He did not say how much.