What Should I Know about Boat Financing?

Vessel financing refers to the use of ship assets (including ships under construction, the same below) as the second source of repayment to mortgage the ship assets (including the ship under construction) or the pledge of cash flow from the use of the ship assets to meet the borrower's needs for construction, purchase, leasing, maintenance, and use of ship assets. Loans, guarantees and other credit businesses are limited to the borrower's main business related expenses. The ship financing business is mainly applicable to customers with large asset scale, strong market competitiveness, good financial efficiency, high management level and sufficient net cash flow.

Ship financing

(Chinese words)

Right!

Chinese name: Ship financing

1. Large amount of funds required and difficult to raise

The increasing size and modernization of ships have made their value increasingly expensive, the amount of investment in ships is large, and the investment recovery period of ships is generally longer, usually more than 10 years. Due to the large amount of funds required by ships, the long investment recovery period, and the high risks, it is difficult to raise funds and increase the difficulty of ship financing.

2. Multiple financing methods and decision-making difficulties

At present, no shipping company can and is willing to fully use its own funds to purchase ships, but often finances it through one or more of government subsidized loans, commercial bank loans, issuance of stocks, bonds, and financial leases. . Because each method has certain advantages and disadvantages, the financing conditions of each method must be carefully considered when making decisions. In actual operation, decision-making needs to achieve the optimal combination of cost, risk, and benefit, and there are many factors affecting these aspects and there is uncertainty, which brings certain difficulties to ship financing decisions.

3 High risk

The shipping industry is a high-risk industry. As an essential part of the operation of shipping companies, shipping finance is not only affected by political and economic influences, but also affected by changes in financial markets and shipping markets. The risk is also high. For example, the use of foreign export credits is subject to the political relations of the country; the use of a single currency is subject to the risk of loss in exchange rate changes caused by exchange rate changes and the financial risks caused by excessive debt financing.

4 International and geopolitical boundaries of ship investment

The international and non-territoriality of ship investment are the main characteristics that distinguish it from other financing. Shipowners in Hong Kong were able to easily borrow a second-hand ship from a German bank with an office in Singapore, and the money was eventually paid to Van Culver in North America. Similarly, the country where the ship is built can be different from the country where the ship owner is located, and the ship's construction funds are usually financed through foreign currencies.

Due to the large amount of financing required for the purchase of ships and the high risk, different financing methods directly affect the cost level of funds, which in turn affects the economic benefits of ship investment. Therefore, the ship financing decision must not be taken lightly, and it must be scientifically analyzed and decided on the basis of research on production allocation. Under the same conditions, different decision-making levels may lead to different results. If the decision is correct, you can use small financing costs to raise funds with low risk and large amount of money; if the decision is incorrect, the enterprise will suffer losses in the light of the decision, and it will bring heavy debt burden to the company's future development, and even bankruptcy Danger. In addition, due to the difficulty in raising funds, shipping companies must further study ship financing in order to open up multiple financing channels, attract funds from domestic and foreign capital markets for our use, and expand the fleet for future development. In short, only by studying the ship financing well can the financing decision reach the satisfactory goal of being technologically advanced, economically reasonable, and objectively possible.

There are many ship financing channels, including government funding, commercial bank loans, loans from international financial organizations and institutions, financial leasing, and shipping companies issuing stocks and bonds, and other financing methods. The cost of funds involved in different financing methods, repayment terms, Repayment methods and other restrictions are different, and the ship financing environment is also very complicated. In addition to internal factors such as the internal asset structure and management level of the company, national politics, economy, law, and international financial markets and international shipping markets Many objective circumstances, such as changes in logistics, have restricted the financing activities of shipping companies. Under the constraints of such complex subjective and objective conditions, companies must finance the minimum amount of funds needed to expand ship capacity at a lower cost, and control financing risks within the solvable capacity of the company, which will necessarily involve ship financing. Decision problem.

The so-called ship financing decision is to choose the optimal financing combination solution among a variety of feasible financing schemes, to better balance the relationship between the minimum financing cost and the minimum financing risk, so as to meet the minimum amount of funds required by an enterprise to expand its shipping capacity. This is a system optimization problem with multiple decision variables and multiple decision objectives. With the establishment and gradual improvement of China's modern shipping enterprise system, as an autonomously operating, self-financing market entity, the quality of ship financing decisions is directly related to the efficiency of ship investment and the capital structure of the company. Therefore, strengthening the research on ship financing has important practical significance. First of all, as a self-operated market player, shipping companies in China need to operate independently according to the characteristics of ship production and operation, choose their own funding sources and financing methods, and independently determine the financing scale and financing structure. To this end, it is necessary to strengthen the cost-benefit analysis of ship financing, and strive to reduce the cost of capital and improve capital gains. Second, as a market entity operating in debt, shipping companies need to properly determine the capital structure of the enterprise and effectively control the risk of debt. According to the principle of financial leverage, when the profit margin of an enterprise's funds before interest and taxes is higher than the interest rate of the borrowed funds, the more borrowed funds, the higher the return rate of the company's own funds, but at the same time, the enterprise's liability risk is also greater. Therefore, it is necessary to analyze the scale of ship financing, the structure of borrowing, and the analysis of the impact of changes in the economic environment on corporate debt risks to ensure that corporate debt operations are carried out safely and orderly.

When shipping companies conduct ship financing, they must optimize the financing structure, improve the use of funds, and enhance their self-reformation, self-development, and market adaptability. The following basic principles should be followed:

1. Stability principle

The financing activities of shipping companies should maintain appropriate stability, which means that the borrowed funds can maintain a certain stability, that is, the borrowing period should be relatively long, so that there is a certain leeway in arranging the use of funds. Because the borrower's funds are the liabilities of the enterprise, if they cannot be repaid on time, it will destroy the credibility of the enterprise. Secondly, financing methods must also remain relatively stable. Generally speaking, if the financing methods of shipping companies are changed too frequently, it will be difficult for investors to understand the reputation of the companies. The third is to maintain relative stability with financial institutions that have business relationships. When shipping companies are financing, they are restricted by factors such as their business scope, their own creditworthiness, and the degree of financial market information. Therefore, they should choose financial institutions that have frequent business relationships In order to achieve the purpose of saving time and quick priority.

2. Reasonable Funding Requirement Principle

Determining the reasonable limit of the enterprise's capital requirements is the first issue that shipping companies must consider when making financing decisions. In determining the enterprise's capital requirements, the needs of the enterprise's economies of scale should be considered. Under a certain technological level, the company has a production scale that can achieve the best economic benefits. According to the law of scale economy, too large or too small a production scale will cause the cost to rise and the benefit to decline. Therefore, in the process of ship financing, enterprises should determine the optimal fleet development scale according to the needs of economies of scale and raise sufficient funds to achieve the best economic benefits for the enterprise.

3 Minimum cost of financing

Under the market economy, ship financing channels and financing methods are diversified. Enterprises should choose the financing method to reduce the overall capital cost of financing as much as possible to achieve the optimal combination of financing structures and maximize corporate profits.

4 Best Financing Portfolio Principles

The optimal financing portfolio includes the determination of financing scale, the selection of financing costs, the measurement of financing risks, and the use of financial leverage. It is required to adopt a combination of internal and external financing strategies in the overall financing plan, choose the lowest cost solution in the repayment method, and adopt a decentralized strategy in the repayment period.

5. Fundamental transformability principle

When raising funds, shipping companies should fully consider the adjustment flexibility of financing methods, that is, the ability to transform between various financing methods, and adopt diversified and decentralized financing methods to avoid or mitigate financing risks.

Ship financing can also be a type of project financing, which requires in-depth knowledge and understanding of the shipping and transportation industries, and is operated by experienced personnel. Ship financing is a high-risk financing behavior. The most important basis for the financing party to analyze whether a financing project is feasible is the return (arrangement fee, prepayment, interest, commitment fee, and distribution of ship or insurance compensation) Greater than the risks they take, whether the shipping company's operating income is sufficient to repay the loan, and whether the guarantee is sufficient. In order to reduce risks and avoid losses, the financing party often needs the shipping company to pass certain mortgages and guarantees.

The forms of ship financing include loans during construction, ship mortgage loans after delivery, and ship lease financing. Taking into account factors such as taxation, ship ownership, and debt protection, leasing has gradually become the main method of ship financing after delivery.

Generally speaking, short-term ship financing only provides loans for ship maintenance and replenishment, and long-term ship financing is for the construction of new ships or the purchase of second-hand ships. The type of ship can be oil tanker, cargo ship, inland waterway ship, passenger ship, etc., and the borrower can be the ship owner (shipping company) or shipyard.

(I) Loans during construction period (before delivery)

Compared with the traditional mortgage loan, the most significant feature of the mortgage of ships under construction is the non-specificity and uncertainty of the mortgage. The construction of a ship often requires a construction period of one year or more, during which the scope of the subject matter contained in the "ship under construction" is constantly changing. Because of this feature, this form of financing presents great risks to the mortgagee and is therefore not easily accepted. Moreover, the legal systems of many countries currently do not support mortgage registration of ships under construction. Therefore, the construction contract often becomes an important collateral before delivery.

1. Shipyard as the main borrower

(1) Amount of loan: 60% to 70% of the shipbuilding price negotiated by both parties;

(2) Duration: Generally shorter (1 to 2 years), and will be fully refunded after the shipowner's payment is received at the time of delivery;

(3) Mortgage: Shipbuilding contract and other collateral of shipyard.

2. Shipowner as the main borrower

(1) Borrower: Generally, the shipowner sets up a single ship company as the borrower;

(2) Amount of loan: 70% to 80% of the shipbuilding price, up to 90%;

(3) Duration: generally longer (5 to 10 years);

(4) Lending methods: Lending by shipbuilding nodes, for example: 20% deposit (funded by the shipowner), 10% start; 10% on stage; 10% launch; 50% delivery;

(5) Source of repayment: rental income obtained from leasing to ×× shipping company after delivery;

(6) Mortgage before delivery: shipbuilding contract, chartering contract, completion guarantee and advance payment guarantee interest transfer;

(7) Mortgage after delivery: transfer of ship and ship insurance rights;

(8) Mortgage insurance requirements: hull and machinery and equipment insurance, shipowner's liability insurance and charterers require ships to stop in dangerous sea areas or other necessary risks to cover war insurance and other necessary insurance.

(2) Financing after delivery

After delivery, the financing is mainly for shipowners. Generally, it is about 50% of the cost of the ship, and the period is between 5 and 7 years. There are a variety of collaterals.

1. Ship mortgage

After delivery, the use of ships as mortgage assets has become the main method of ship financing. The mortgage of a ship is a kind of security right. On the one hand, it does not transfer the possession of the ship, so that the mortgagor can continue to use the ship, and on the other hand, it can use the exchange value of the ship as the object to ensure the performance of the main claim.

2. Lease agreement transfer agreement

Long-term leases signed by single shipping companies and carriers or shipping companies are an important guarantee for loan repayment. The financing provider requires direct control of the transfer of its charter rights and the special account of the specified rental income to ensure that the shipowner will not use the rent for other purposes. The basic content stipulates that the shipowner is obliged to pay all rents, freight, remuneration, etc. for the operation of the ship directly to the designated account by the shipowner in advance. The funds in this account cannot be withdrawn before the maturity date, and can only be used by the shipowner's disposal, including remaining funds, after the remaining amount of the principal and interest payable in the current period is automatically deducted from the account by the account-opening bank. Ship operating costs and replenishment expenses, payment of ship repair and maintenance costs, etc. If the amount in the account is not enough to pay the current principal and interest, the shipowner is obliged to make up with other amounts.

(3) Ship finance lease

In 1972, the United States introduced the "Ship Financing Act", which stipulated a new financing method, namely ship financing leasing, which made ship financing almost without any risk to investors. Therefore, financial leasing is also favored by the shipping industry.

The ship finance lease is based on the lessee's specific requirements for the ship and the choice of the shipyard. The shipowner finances the purchase of the ship from the shipyard and leases it to the charterer, and the charterer pays the rent in installments. Ownership of the ship belongs to the lessor during the lease period. After the lease expires, the rent is paid and the charterer has fulfilled all the obligations in accordance with the financial lease contract, the ship's ownership is transferred to the charterer.

In this way, the lessee can solve the production needs with less capital, the lessor can obtain rich profits, and it has more reliable debt protection. The main forms of ship finance leasing are direct leasing, leaseback, sublease and entrusted leasing.

(I) Ship financing risks

(1) The amount is large and the financing time is long;

(2) Strong professionalism and complicated documents;

(3) The industry is in a slump, and the ship owner has abandoned the ship or the transportation capacity is insufficient to repay the loan principal and interest;

(4) The shipbuilding company has delayed delivery;

(5) Technical risks of shipbuilding by private enterprises;

(6) Make the environmental pollution blame by the society and bear the liability for compensation (oil tanker);

(7) The risk factor is high.

(II) Collateral for ship financing

(1) escorting a ship;

(2) Transfer of income (future income);

(3) transfer of insurance rights;

(4) Transfer of refund guarantee (transfer of advance payment guarantee interest);

(5) Shipbuilding contract assignment;

(6) Other guarantees.

1. Implications of government loans for ship financing Government loans for ship financing include two meanings:

(1) Government loans in the country are the way the government uses interest rate subsidies to provide borrowers with preferential interest rate loans below market rates through state-controlled banks. This kind of loan from the government of the country is actually a kind of government subsidy for the shipowners of the country to build and buy ships. With this funding, the country's shipbuilding and shipping industries have received huge benefits.

Because the shipping industry is costly and related to national security, the current method of providing preferential loans to shipowners by their governments is still being used in ship financing in various countries. One of the most popular is long-term loans with fixed interest rates. Loans are usually arranged by state-controlled banks, and loans are made at subsidized interest rates. The difference between the loans and market interest rates is replenished by the government.

(2) The credit relationship between the borrowing country and the borrowing country directly from the state budget funds is an international government loan. Most of these government loans are bilateral aid loans requested by the government, and a few are multilateral aid loans, which are a form of state capital export. Government loans are usually negotiated by the relevant government departments. In some cases, when the head of government visits abroad, the two parties will mutually agree to sign a loan agreement.

Financing for the shipping industry can also take place between different national governments. The shipping industry in developing countries can sometimes obtain preferential financing from the governments of western countries. The purpose of the Western governments to provide funds is to support the shipbuilding industry in their countries by providing funding for developing countries to develop the shipping industry. It is common practice for Western governments to offer low-interest loans to developing countries, but require ships to be built at shipyards in Western countries.

2. The main objects and characteristics of government loans in ship financing

The main objects of government loans in ship financing are:

(1) Purchaser loans. Concessional loans directly to shipowners;

(2) Supplier loans. Grant a loan to the shipyard and then transfer its benefits to the purchaser on price discounts or terms;

(3) Lessor loan. The lessor finances the shipowner as a borrower;

(4) Mixed loans. A combination of the above three forms of loans.

Ship financing government loans are characterized by long loan terms and low interest rates. International government loans are subject to international agreements. At present, international agreements for controlling shipbuilding export credits are formulated by the Organization for Economic Cooperation and Development (OECD). From the agreement reached in 1968 to today, with the increasing number of member countries absorbed by the organization, its maximum limit for non-national shipbuilding loans to signatory countries has been recognized worldwide (including some non-member countries). After several adjustments and amendments, the loan conditions are: the longest term for loan repayment is no more than 8.5 years from the delivery of the ship; 20% of the contract price is paid before the delivery of the ship, and the loan interest rate is not less than 8%.

3 Buyer credit and seller credit in government loans

Government subsidized loans are essentially the government's financial subsidies for shipbuilding industries. In addition to preferential loans from policy banks, the most common form of government support is to provide fixed-rate long-term loans, specifically through buyer's credit or seller's credit. In addition, the government provides guarantees for private loans for shipowners who order new ships at their own shipyards. Because the risk of default has been effectively transferred from the shipowner to the government, this is very conducive to the shipowner's dealings with independent financial institutions, thereby reducing the risk of flooding the interest rates charged by the loans.

The buyer's credit is to give the loan directly to the shipowner on preferential terms, that is, the shipowner obtains a bank loan through the guarantee, and the shipowner pays the ship price to the shipyard. With buyer credit, shipyards can receive cash payments in installments from shipowners who order new ships to cover shipyard shipbuilding expenses.

The seller's credit is a loan to the shipyard, and the shipyard then transfers this benefit to the shipowner, either reducing the price or providing preferential financing conditions. That is, the shipyard or the original shipowner applies for a loan to build a ship from the bank, and the buyer obtains the bank guarantee for the ship price, and pays the principal and interest to the seller's bank in installments. This is a commonly used international financing method for shipbuilding. All funds for shipbuilding loans come from banks, but in order to encourage the export of domestic ships, the government often gives banks a low-interest shipbuilding loan an interest loss subsidy to compensate the banks for the interest losses caused by issuing low-interest loans. There are two ways for the government to provide interest subsidies: First, a special agency set up by the government under the guarantee of the government loans commercial banks at commercial interest rates, and then commercial banks issue loans to shipowners at lower interest rates; Commercial banks issue loans to shipowners directly at subsidized interest rates, and then compensate the government for the difference in interest. This method also requires the government to provide the bank with the necessary guarantees. Taking the British government's credit system as an example, the shipbuilding loan is issued directly by the bank to the shipowner. If the buyer is the owner of the British ship, the Minister of Industry issues a letter of guarantee to the bank and uses government funds to make up for the loss of interest; For foreign ship owners, a guarantee is issued by the Export Credit Guarantee Agency, and the Ministry of Commerce makes up for the bank's interest losses.

In export credit, the most suitable guarantee is to provide bank guarantees for the principal and interest of the loan, but it is often the first mortgage of the ship and for some initial payments (before the loan is withdrawn, the amount paid by the shipowner as a percentage of the ship price, using Bank guarantees to ensure that the ratio of loan withdrawals and cash payments is appropriate to reduce loan risk).

Government-subsidized loans and commercial bank loans are two very common financing methods for shipping companies. In the actual financing process, two types of loans are often used in combination to achieve better financing results. In many cases, government support for newbuilding financing is only part of the overall loan program.

Banks play an important role in the development of the shipping industry. Commercial banks not only provide a large amount of short-term, medium-term and long-term funds for new ship construction and old ship purchases, but also provide a wide range of other financial services to the shipping industry, including the payment of operating expenses and collection of income, handle foreign exchange settlement business, Financial information and advice, etc. In addition to commercial banks, there are specialized financing institutions such as ship financing companies and ship mortgage banks active in the shipping industry.

1 Lu Xiangru, editor. Commercial Bank Credit Culture. China Finance Press, 2010.12.

2 Liu Wei, Bai Jingtao, Chen Hongbin, Jin Zhongming, Water Transport Investment and Financing. People Communications Press, 2008.06

3 Lu Jing et al. Maritime Finance-Ship Investment and Financing. People's Communications Press, May 2001, 1st edition.

4 Li Huagen. International Settlement and Trade Finance Practice. China Customs Press, 2012.01.

5 Gan Aiping, Qu Linchi, editor. Shipping Finance. Gezhi Press, 2010.12. ^[1]

What Should I Know about Boat Financing?

Ship financing

(Chinese words)

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