Ship finance

Abstract

Over the years shipowners, bankers and shipbuilders have shown considerable ingenuity in devising novel financing arrangements for ship acquisitions. However, by far the most common methods of financing have been either the standard ship loan secured by a mortgage with or without assignment of earnings or the fixed interest credit for new buildings advanced on behalf of the ship builder by a bank with the backing of a state guarantee. Under the standard ship loan the norm is to lend a percentage of the value of the vessel, depending on its age, against a first priority mortgage. The percentage of the value of the hull which was granted to shipowners by way of loan depended on various criteria. In fact, if one were to look into the history of ship finance one would find that banks were willing to lend different percentages of the value of the hull at different eras depending on the 'condition' of the shipping industry at that particular time. For example, during the 1950s and the early 1960s the few banks that could be said to have a specialist involvement in ship finance were conservative asset financiers. The norm at that time was to lend no more than 50% of the value of the hull. During the late 1960s and early 1970s, however, the situation changed and banks were prepared to provide 75% to 80% finance and in some cases even 100%. This change in the banks' attitude was due to several factors foremost among which was the closure of the Suez Canal, which meant that voyage distances were increased considerably and thus larger vessels were required. This brought about a boom in the shipping industry and thus banks were willing to lend more. Under this type of loan, generally, the system is for ships to be bought against long-term charters, and virtually all the banks had to do was discount the charters. However, this was not always the case. During the 1960s and 1970 most of the lending that took place was straight asset financing, with very little attention being paid to the employment position of the ship concerned. Strictly speaking, a charter does not represent security, since it is not an asset that can be seized. It is merely an indication, more or less reliable according to the status of the charterer, of income to be earned.