Shipping is a multi-billion-dollar industry and undoubtedly an effective engine that spurs the growth of the global economy. The seaborne trade has been and will always be the channel for distributing goods and cargos, with the distance varying from one port to the next. Without adequate funding support, vessels will not be able to leave port, and commodities will not reach their intended markets. Hence, while operational efficiency must be achieved, financial sustainability must also be given equal importance.
An expensive business
In recent years, the maritime sector has been on a downturn. Shipping woes like the decelerating freight demands, rising operational and maintenance costs, and many other factors have resulted in tight financial situations, including bankruptcy, for some unfortunate companies like Korean’s Hanjin Shipping. Ship owners scramble to secure fresh financing or to negotiate existing loans from various creditors in order to stay afloat in their mounting debts.
Financing the shipping sector is an expensive business such that more banks are divesting their shipping loan portfolios and are concentrating on other projects.
The most common and easiest way to raise funds is through equity finance, which is sourced from the owners or private investors (friends, family members, and other individuals with a high net worth) in exchange for shares of stocks in the company. Mortgage loans may also be employed. This is when financing is provided by a bank, with the vessel or ship serving as security or collateral for the loan. If the mortgagor fails to settle the loan, and it becomes past due, the lender may exercise the right over the mortgaged vessel, either by forcing a sale or lease and applying the proceeds as payment to the existing loan. If the fund requirement of the debtor is huge and cannot be accommodated by a lone lender, several banks may be involved, and this is called loan syndication.
On the other hand, corporate loans are commonly balance sheet backed financing where companies opt to use their own resources to finance their shipping activities. Public offering involves offering shares (common or preferred) for subscription through the stock exchange and are traded on secondary markets. Private placement takes place when the company decides to sell either equity or corporate debt to investment institutions whereas obtaining shipyard credit involves loans guaranteed by the government or by any agency that promotes the expansion of domestic shipyards for them to be able to accept more orders. Another method is bonds issuance where long term securities (within a five-year period or longer) are offered to the public.
credits to: Manila times