Overcoming The Challenges Of Innovation In Ship Finance

Overcoming The Challenges Of Innovation In Ship Finance Presented by Miriam Goldby and Panagiotis Vavougyios Date: 17th June 2020 Introductions - Part I: Contextual Factors and Recent Developments - Part II: Developments in Ship Finance and Innovative Solutions Contextual Factors - Compliance with measures adopted to regulate emissions: • IMO 2020 regulation on low Sulphur fuel: installation of scrubbers or switching to VLSFO; • IMO strategy on the de-carbonization of the industry: to reduce shipping's total annual GHG emissions by at least 50% by 2050; • - EU measures. Digitalization, Automation: increasing adoption and use of new technologies. • Work towards unmanned and autonomous vessels; • Digital transformation of logistics processes using blockchain and other emerging technologies (containerized cargo). Impact of COVID-19 - Sectors of the industry that have been mostly affected: cruise and containers. - Fall in demand (see BDI and SCFI graphs on slides 6 and 7). - Ports: delays and fall of activity - this is the result of various factors, including: • Production suspension; • Strict traffic restrictions; and • Additional customs checks being reported in some ports. - Shipyards: delays for delivery of vessels - impact on delivery financing. - Crew changes: It is becoming more difficult to carry out crew rotations: - • Prolonged stay on board - higher risk of infection and mental illness; and • Difficulties for those who stay onshore and cannot embark. Response of the market to tackle challenges: virtual closings and a wide use of electronic signatures. - Financiers, borrowers, yards, charterers and their respective legal counsels working closely to address these unprecedented challenges. Availability Of Finance - - Why is finance important in shipping: • Value of the vessels • Operational costs for the ship-owning companies. Shipping finance structure in simple terms: • Parties: lender, borrower and the vessel • Purpose of financing: (i) purchase of a vessel (newbuild or second-hand vessel) or (ii) refinancing of existing indebtedness in respect of a vessel. - The ship finance sector changed significantly after the 2008-2009 financial crisis: • In 2016, loan volume for syndicated ship lending was estimated to be around $50bn, (down significantly from the loan volume of $120bn in 2007). • Stricter capital, liquidity and risk management requirements imposed on the financial institutions. • A number of historically leading banks in ship finance have exited the market. • Remaining banks lend selectively, typically to existing customers with whom they have a strong relationship or large shipping groups. - New ship finance structures (alternative/innovative financing) have emerged: • Export credit agency (ECA), Chinese banks and leasing companies, private equity. Alternative Finance - Alternative providers are subject to fewer regulatory restrictions than banks, and can take higher risks, but seek a higher yield so provide finance at higher cost. - Private equity funds initially entered into joint ventures with shipowners - More recently joint ventures between Fintech providers and Asset Managers have been reported - The use of a FinTech platform gives "regular investors access to deals typically reserved for the institutional players". - A new generation of investors tends to favors ESG investments and the latter tend to outperform the wider market - The Poseidon Principles provide a governance framework for demonstrating environmental credentials New Ship Finance Governance Framework: The Poseidon Principles - "A global framework for responsible ship finance: The Poseidon Principles provide a framework for integrating climate considerations into lending decisions to promote international shipping's decarbonization." - "Signatories will measure the carbon intensity of their shipping portfolios on an annual basis and assess their climate alignment relative to established decarbonization trajectories. This assessment is based on a robust industry-appropriate methodology." - The PP are designed to incentivize international shipping's decarbonization, but they can also help respond to a growing demand for ESG investments. - 4 Principles: • Assessment of Climate Alignment of shipping portfolios relative to established decarbonization pathways using PP methodology • Accountability: use of classification societies and mandatory IMO standards for the provision of un-biased information on climate alignment • Enforcement by means of standardized covenant clause in financing contracts available from PP website; • Transparency: Portfolio climate alignment scores will be published on an annual basis. - At time of writing 18 leading banks have signed up. - Will alternative financiers sign up?