While the outlook remains uncertain, the events of the previous year will inevitably influence the future course of the market. 2021 will see the following opportunities and challenges for the industry to focus on.
The position of indirect financing is unshakable, but internal differentiation is further intensified
The banking sector is still the number one source of funding for ship financing. However, for banks engaged in ship finance, the focus of their business will be on adjusting their ratings accordingly to the stratification of their customer base and thus deciding who to lend to. In general, experienced credit committees are increasingly favoring larger, more entrepreneurial shipping groups. However, banks of different sizes and stages of development have different criteria for doing business specifically. At a recent Marine Money London webinar, Citi's head of shipping, Shrias Chipalketi, said the bank sees two main segments as ideal borrowers, namely companies that are performing well in 2020 and those that want to move away from hydrocarbons. This represents the general view of a number of European and American commercial shipping banks that are still active and large in the ship financing market.
In addition, there is a small group of new entrants to the market in the form of smaller European, Middle Eastern and Asian banks that serve mainly local clients and choose the right clients to build a portfolio of ship loans based on their capital profile and level of risk control.
A similar situation will happen in the leasing market. Leasing companies have different focuses in terms of customer size, business focus, leasing terms and conditions, etc., and the target customer groups will naturally be stratified. For those shipping enterprises that do not have access to bank financing, leasing companies can hardly be their "savior", but they will continue to provide financial leasing services for most of the participating enterprises in the international shipping industry. Compared with bank loans, leasing transactions are more leveraged, have longer terms, and are compensated by profit margins, with some leasing companies offering fixed interest loans.
The author predicts that Chinese banks will still maintain their financing support for Chinese newbuilding in 2021. Chinese leasing companies will have more options in their business and the market share of leasing business will continue to grow, but the growth rate may slow down.
Traditional financing gap increases, innovative financial market has emerged
Objectively, ship financing is no longer dependent on banks or the open market, and despite the challenges of the epidemic and other uncertainties, most shipping companies have potential sources of financing. In recent years, direct lenders, once known as "alternative lenders," or "private capital and private solutions," have continued to grow in market share due to their focus on smaller, more profitable companies and their ability to offer flexible, more structured financing to their clients. structured financing or even allow them to participate directly in the distribution of earnings. In particular, new fintech platforms in ship finance have grown rapidly in the past year, with products expected to be offered for the first time in the first quarter of 2021.
The industry generally believes that the overall figure of short- and medium-term new ship orders in 2021 will remain low. The author judges that the newbuilding financing in the ship financing market will also maintain a low share in 2021, and the gap of traditional financing methods in second-hand ship financing still exists. In this context, the power of alternative innovative finance will continue to brew and accumulate.
Green finance system will be landed, and related products may be accelerated
The recently held 2021 People's Bank of China Work Conference clarified the ten key tasks this year, the first time specifically deployed "green finance". The meeting called for the implementation of carbon peaking, carbon neutral and major decisions and deployments, and the improvement of the green financial policy framework and incentive mechanisms. I believe that this will promote the Chinese financial institutions as the main force of ship financing in accelerating their own ability to manage climate change-related risks, while accelerating the introduction of green ship financial products with reasonable pricing. Overseas, western ship finance banks such as Citibank, DNB and Societe Generale are committed to collecting emission data and continuing to promote the Poseidon Code. Japan's Sumitomo Mitsui Trust Bank, the world's fifth largest ship finance bank, has joined in early 2020, and other Asian financial institutions are expected to follow suit in 2021.
As domestic and foreign regulators and self-regulatory organizations promote the implementation of green financial system, we expect to see more financial institutions launch green financial products in 2021, and green ship financing may be accelerated.
In addition, the risk of benchmark interest rate conversion still requires continued attention. By the end of 2021, the London Interbank Offered Rate (LIBOR) will be permanently retired. All financial institutions will need to revise all LIBOR-linked financial contracts by the end of 2021 to develop a back-up benchmark interest rate solution to address the significant risks and challenges associated with the termination of LIBOR. The global switch involves multiple alternative interest rates that are not all the same. Banks, borrowers and investors should be proactively prepared.
In summary, looking ahead to the ship financing market in the coming year, the divergence will further intensify and Murphy's Law will be highlighted, with large banks still insisting on providing financing for "best-in-class" companies and newbuilding, and head charterers choosing to lean towards quality customers and quality projects. The funding gap caused by this trend will objectively make ship financing more diversified, and a large number of second-hand ship financing and refinancing projects will be financially supported in financial innovation. Whether for financing institutions or borrowers, investment in projects with better returns may be a "golden key" for all market participants to cope with uncertainty.
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