The shift of the centre of gravity of shipping eastwards has been happening for many years. It was gradual and left the people involved (traders, shipowners, shipyards, service providers) in the East, as well as in the West, sufficient time to adapt.
The changes to the ship financing landscape on the other hand have been much more abrupt. The demise of so many European lenders to the shipping industry was totally unexpected and took the market by surprise. Within 10 years more than 50 % of the European lenders (that dominated ship financing for 40 years) have disappeared and, in my view, the exodus is not over and most importantly, not reversible. I have seen it before, when the American banks that used to dominate the global ship financing market in the 60s and 70s, left shipping, in the wake of the shipping crisis of the 1980s, and never came back.
What is sadder, in my view, is that this time round, the mass exodus of the European lenders was not as a direct result of an appalling shipping market but was predominantly collateral damage of the financial crisis of 2008, caused by haphazard lending practices elsewhere.
The long-term effects of the global financial crisis were much more dramatic for European than for Asian banks. Local governments that came to the rescue of the European banks imposed strict conditions to bail them out. Central Banks came up with new rules for lending and empowered the regulators to make sure that these new rules were adhered to. Ship financing fell victim to these rules. It was decided that lending to shipping is more prone to cause losses to banks. Ergo, lending to shipping had to be penalised.
The introduction of the Basel IV reforms would put a further nail in the coffin of ship financing for European lenders as the new rules will penalise asset-backed lending.
Shipping is a capital-intensive business and cannot function without substantial amounts of debt. The void created by the departure of so many of the big European lenders needed to be bridged. First off-the-blocks were the Chinese leasing companies which in the course of 10 years vastly increased their exposure to global shipping. More recently Asian banks, without much (or any) previous exposure to non-regional shipowners, started checking out the European and US owners and realised that there was a vast market out there populated by some great companies that were paying significantly higher pricing that what they were able to charge domestically.
So today Japanese, Korean and Taiwanese banks, one after the other are throwing their hat in the ring to join the ranks of the new international shipping lending brigade.
Incidentally, many of these Asian countries have adopted Basel recommendations, but the degree and the timing of their implementation by Asian banks seems to be progressing at a more gradual pace than that of European banks.
Another source of funding again from Asia is the JOLCO (Japanese Operating Lease with Call Options). Although JOLCOs have been widely used in aircraft financing they are now trying to increase shipping footprint. One of its main attractions is that it can provide as high as 100% financing for selected projects.
The tightening regulatory Banking framework and the increased focus on ESG, by shipping banks and the investment community, may negatively affect shipowners’ access to capital. In this changing ship-financing landscape, it is prudent to develop a diversified pool of capital sources. After all, the shipping industry is known to be cyclical but also highly capital-intensive.
The Eurofin Group, through its Singapore based subsidiary Seafin, has been keeping close tabs on this gradual drift and has made significant inroads into the Asian ship financing market – it was not a walk in the park. Convincing lenders and borrowers to venture outside their comfort zone is never easy, but in time, hard work and perseverance pays off.