Shipping Finance in Asia

This essay explores the current market trends of maritime financing in Asia, specifically Singapore and Japan. It highlights the advantages of their strategic locations and the impact on trade volumes and GDP. The essay also discusses the role of maritime finance in the economic development of Japan and the challenges faced by the industry. It provides insights into the financing options available and the role of banks and lending organizations.

SHIPPING FINANCE IN ASIA

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Maritime or shipping financing includes number or transactions including sale or
purchase of maritime equipments. It involves alternative or owner financing. Financial aspects
related to the commercial activities of maritime industry are entirely covered under maritime
financing. Commercial activities also includes purchasing and selling of ships, repairing and
development of instruments and gadgets and also the marine law payments and insurance. Like
other domains involving external financial element, maritime finance also requires pre set
conditions to be fulfilled. There is high volatility in marine industry, therefore it becomes
imperative for meeting these requirements and no default is made on them. Following
conditions are required to be met; high creditworthiness, high cash reserves and strong back up
for indemnifying against deprivations. There essay will highlight about of the current market
trends of the maritime financing in centres of Asia, Singapore and comparing them with that of
Japan.
MAIN BODY
There are two main geographical factors that put the maritime industry of Singapore and
Asia at advantageous position are their coastline and strategic locations around the shipping
highways. From decades shipping routes have been used by countries for trade and showing the
strategic strength of countries. Increased investments in this sector can increase the contribution
of this sector trade volumes and GDP of economy. Various projects have been laid down by
countries for increasing the contribution like port modernization, coastal shipping developments,
inland waterways. Industry is seeking hike through public private partnerships responding to
initiative adding to vibrancy of sector. This shows that private and public players are increasing
their interest in the sector and are planning to play a bigger role in this sector (Trends in Finance
Ship, 2019).
In the present times around 90% of the goods are transported through sea routes. Iron ores will
be shipped 2.5 times more in 2018 as compared from 1998. Cost of transporting from Asia to
US a jeans pair is much less than taxi ride for going and purchasing them. It is questionable what
would be the consequences if the traditional investors of maritime financing reduces their
commitment for funding constructions, secondary sale or purchase of ships on which the global
economy is relying for international trade.
Over the years large number of developments had been seen in defining the maritime transport
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and in shaping an international seaborne patterns of the trade in Japan. Evolution of the Maritime
industries has followed a trend that is been moulded by emergence of the new main players in
the different sectors, specially in the developing countries. Determining the main factors for a
country's competitive advantage in the given port or the sea shipping business might provided an
interesting opportunities for attaining growing success for the developing countries. Maritime
transport is considered as an integral part of the international logistics and also accounts for the
80% of volume of a world trade. However, physical continuity of the freight movements needs
use of the multimodal system of transport and it remains as the backbone of the worldwide
international trade. As shipping is counted as a derived demand, trends in maritime financing are
shaped across the globe with the macro-economic conditions. Over the previous decades,
maritime finance had grew at average annual rate of the 3% , increasing from 2.6 billion in the
year 1970 to the 8.4 billion in the year 2010. During the year 2011, volumes shows a rising trend
at annual rate of the 4% for reaching to 8.7 billion tons.
The trend of shipping finance in the capital market of Japan with that of the other
countries like Asia, Singapore etc. showed that the issue of bond has been reduced over the
years. Due to the shrinkage in capital market, shipping finance in Japan has been resulted as
good because of the removal of credit crunch in the banking industry for several year in the past
periods. In Japan, financiers needed borrower in providing personal guarantee that is been issued
by the directors of borrower or the corporate guarantee that is been issued by the affiliated
companies.
For example- As international bank of the Japanese origins, the group of SMBC has
global shipping finance network, anchoring bank worldwide presence fro the sake of their
customers across the world. Almost around 39% of the gross tonnage is been delivered in the
year 2011 that was built by the Chinese shipyard from republic of the Korea, Philippines and
Japan.
In accordance with the BIS, at the end of the 2nd quarter of the 2014, balance of loans the
made to the non-banking segment by banks in major 7 countries involving Germany, France,
Japan showed 9.05 trillion dollar or an increase of around 1.3% over prior period quarter. The
balance of the loans made by the banks in the Japan country showed an increase of the 1.0% over
the past periods quarter while those of the Germany and a France showed a 1.2% & 1.1%
respectively.
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Foreign lenders need to work in compliance with the banking law for qualifying a
shipping business in Japan and for extending the credit to the borrower that is been organised in
the Japan in case the finance is been made during an ordinary course of action or the business.
Japanese law designated as the governing law of the finance agreement, the interest rate
restriction law is been applied that limits up-to 15 % per year where an amount of the principal
credit is seen as greater than 1 million. The shipping finance in Japan is been dominated by the
European banks as Asian lenders are been catching up with the Europe. Banks in Europe share of
global maritime portfolio that declined from 83% in the year 2010 to 62% in 2015.
Shipping companies in Japan is seen as traditionally relied on the bank debts and the
equity market for financing their operations and acquiring vessels. However, since 2008, it has
been witnessed that a significant changes in landscape of shipping finance with availability of the
bank finance declining and the shipping companies seeking an increased level of access to the
international market of bond and making introduction to the private equity (Palit, 2017).
Outlook for shipping bank dent market is not counted as overly promising as bank has
tightened its credit lines and has recently started taking action against the defaulting shipping
enterprises as banks had been facing heightened legal requirements. Weakening of the
valuations, low interest rates and credibility have made shipping companies very attractive in
terms of opportunities for the the PE investments. There are wide range of the strategies in
relation to PE investment which emphasize on various segments ranging from the leveraged
buyouts that might be acquired as mature business in Japan(Luo and Shin, 2018).
All have acknowledged that business cycles face growth period, that are followed by
adjustments phase and corrections of misallocation that are generally due to expansion that is
credit fuelled. Investments in maritime assets in 2002-08 was not an exception but was driven by
ascendancy of China in 2001 to WTO. Fact is after the eight years also the countries are facing
big dislocation among demand, supply and the asset pricing which are outside traditional trends
level. Over a broad sense it is actual but it is perceived in few sub sectors. Perceived miss-
allocations are causing high upside risks in assets class that is positive but is missed by most. In
actual overcapacity areas with life of assets averaging around 20-25 years industry is
approaching for halfway period for the tonnage deployed during the time of credit crisis.
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Because of low profitability levels, industry has accelerated the scrapping of old and vessels that
are not well maintained.
Need for maritime finance
Japan is 4th biggest buyer of US products and 3rd largest economy of the world. It is most
advanced and dynamic country of the world and market that is considered by American
exporters. Shipbuilding industry of Japan is working for overcoming the competitive issues. For
coping with issues focus is shifting from construction of one type of ships. Industry is focusing
on the development of green innovations. Focus is led on green shipbuilding and LNG ships.
Japan is adopting various ocean policies that will lead country in market. They are essential for
adopted for concrete actions to take place. As per Seatrade Maritime news, country is having
good track records in building the ships and vessels of large types, and building of environment
friendly and fuel efficient. Japanese costs are comparable with China and South Africa and are
consistent. Maritime finance is having significant influence over the economic development and
history of Japan. Maritime cluster is significantly important for country as it is an inland nations
that has few natural resources therefore it depends heavily over the seaborne trade. Valuation of
Japanese maritime industry was around 5 trillion yens in 2011.
There is an increased pressure for financing of maritime industry and is topic of debate
around global trade fundamental. Whether the strategies that are export oriented and the related
trade imbalance is correct that is driving the demand. This is not because of asset inflations
collapse, decline in consumer consumption that is debt based banking rules around the finance
for risk weighted assets. Maritime owners are changing their approach for financing for their
survival.
Deutsche Bank in 2014, estimated that maritime tonnage for cargo transportation valued
US $ 820 billion. Maritime assets are generally equity funded that are provided by individuals
with high net worth, private corporates that are outside the forums of institutional investments.
They are matched by few banks that are comfortable in providing debt facilities to the shipping
industry. Around 80% of the banks that provided high findings faced sever hit during the
financial crisis. Funding of maritime assets come under the high cost categories. Largest junior
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and senior debt providers because of the rules for risk weighted assets downsized their
commitments. Middle east and Asian bankers are facing same rules, and also are not having the
expertise to fill gap. Excluding the constraints of balance sheet estimated say that industries are
still facing shortfall of around $100 billion.
During the last ten years the manner in which ships were financed have considerably
changed and market is continuously evolving till now. After the financial crises new financing
structures for the ship have developed and various new financial sources have been introduced
to the industry. Despite of changes in shipping finance industry undergone in last ten years
survey of Norton Rose of The Way Ahead Transport Survey shows that majority of the
respondents of shipping industry believes funding will not be accessible in medium term. In total
27% believed that funds availability will increase in next five years (Kavussanos and Visvikis,
2016).
Conventional ship financing includes includes security arrangements with banks or
lending institutions through which money for purchasing vessels are granted in exchange for
security interests in vessels. Security interests takes form of 1st preferred Mortgage of ship.
Promissory notes are executed by borrower containing the promise to pay loan and 1st preferred
mortgage of ship that pledged the vessel for loan security. Agreements personally obligates the
borrowers so that when the vessels are sold or foreclosed borrowers are required to pay the
deficiency if the prices recovered on sale of vessel are not enough to pay the loan. Ships are
pledged as security by mortgagor for the loan amount and is given priority over other claims that
are not pledged (Wen, 2018).
There will be big opportunities for finance players with raft of technology firms that are
coming in. Over the current trends Asian giants are becoming the financial leaders of the field.
Ongoing pull backs by large Asian ship financing brands will continue the trend. Shipping
finances have seen are seeing a retreat with an announcement of 10 billion dollars (Fiott, 2018).
There is a typical wrong logics between leading banks, they are not having the cyclical
mentality which may affect the financing of industry. There were many opportunities for the
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bankers when values were very low but no banks came around for lending to shipowners who
were wisely investing in bulker during 2016. In recent times ship financing prices have become
much realistic with margins of 4-5%.
Business structure of Japan in maritime industry is having close relation with other
Japanese industries. In the maritime cluster of country there are 3 major sub groups ship owners,
shipping companies, shippers or manufacturers and shipbuilding companies. It is an unique
feature of maritime industry of Japan that three of these industries have been independently set
up. Strong cooperation in this group and financial support of financial combines of Japan has led
the maritime cluster to successful results. There are numerous organisations for enhancing the
cooperation between the maritime industry (Till, 2016). Japan is working for increasing the
maritime international cooperation. They are focusing over the green growth in maritime
industry.
Even after fierce competition company opportunities are there for the Japanese maritime
industry for enhancing the competitiveness. Over the past decade cargo movements have
increased around 50% during past decade. This shows that market is rising at a rapid speed and
bringing opportunities for industry (Evans, 2015). Industry for meeting the demands and needs
of the time associated with maritime industry will require huge funds. Financing is very
important for the sector as companies are not always available with sufficient funds for
purchasing the required ships and equipments. Maritime financing is increasing in Japan seeing
the role maritime industry is playing to boost the economy of company. Financial institution are
required to support the industry by making available the required funds for purchase and sale of
vessels.
Over the last couple of years leasing companies of Japan have been providing finance to
Japanese clients and mostly favoured to clients dealing in Japanese shipyards. Two tiered lending
markets will continue to dominate like lending model. Generally low costs facilities are given to
top owners with the flexible terms where small owners struggle for securing the finance. Equity
financed funds are not promoted in maritime industry as they face high costs even after offering.
Detailed and maritime financial operators are
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Banks and Lending organisation
They are conventional maritime financial service provider existing in the industry. As
lending organisation, banks take detailed inventory regarding the companies that approach them
for financing purposes (Daxecker and Prins, 2017). On satisfaction of the credit worthiness of
company or if company is having long term associations with them only then the required funds
are invested by the banks. Receivers of the finance generally mortgage the ship or pay initial
deposits according to the banking norms. Banks generally claims initial deposit amounting to
10% to 40% while the assistance for maritime industry is provided for about 60 to 80 percent of
commercial activities. Bank rates of interests are also variable depending on the association of
party with bank opting for maritime financing.
Marine Money Lenders
in shipping finance money lenders are forming vital part in domain. Companies do not
opt money lenders for purpose of assistance on maritime finance. They do not provide strong
assistance when the recognised financial institutions and the banks denies for the help.
Noteworthy and important aspect of maritime financing from money lenders are they have costly
and tricky repayment options at same time. Banks have to abide by the prescribed rules &
stipulations, where the money lenders are out of the ambit of rules & stipulations that can cause
issues for the parties that choose money lenders in their lending option(Cogan, 2016).
Capital Investments
Like investment made in shares, there is option for investing in specific marine projects
in this sector. People invest in shares, similarly the people who are interested, make investment
of their funds in the project and they are credited with restricted profits. In maritime financing
capital investment is good option, at the same time it involves high risks so that if project end up
failing, every individual who has invested funds in project loses all their money. In marine
industry shipping finance is an essential cog. This is helping marine industry to reach new
heights and taking risks that attracts newer business organisations for entering into fray.
Manufacturer lending
Several big engine companies have been developing financial programs that revolve
around purchase of propulsion generators and engines. There are various major players in market
that are providing funds. Requirements of loan programs are related to building new vessels with
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specific equipments or re-powering existing vessels. Loan amount will be depending upon credit
worthiness and vessel value after completion.
Maritime finance in Singapore and Japan
All the matters related to finance and commercial activities of the marine industry are
covered under the maritime finance. In this the activities which are included is buying, selling,
developing, repairing of the products which are being used in manufacturing of ships. This also
includes insurance related to marine insurance and payments related to law. In order to get the
finance related to marine there are various conditions which needs to be fulfilled by
organizations or individual. Like for example they need to have credit worthiness which is
strong. Also the company or individuals need to have reserves of cash which are healthy.
Various parties are being involve in financing related to maritime(Chan, 2015).
It has been analysed that the parties which are investing in maritime finance are
conventionally established. But the number is really small. These are established in their
methods of operational activities. It also been analysed that finance operators related to ships are
unconventionally established in their more singular way. The detail maritime financers include
Marine money lenders, capital investment, bank and other lending institutions. The lending’s
given by them can help in manufacturing of ships, gadgets and many more products which are
being used by the manufacturing company.
Japan has also given financing options to the owners who are international.
Japanese Banks have increased their international orientation providing international
ship-owners with both Conventional Bank Financing as well as Leasing options. The panel will
discuss how Japanese financers approach international clients. It has also been noted that an
increasing number of the shipping company which are international are also raising capital in
Japan so that they can provide them with funds. In this deals the panels which are involved in
international shipping will share their experience with financers of Japan and will also measure
the finance options related to Japan to other alternatives which are available to other countries.
This can help them in showing growth related to the manufacturing of ships. It has also been
analyzed that finance related to ships has been raised in Japan again (Ship Finance.,2019).
It has also been interpreted and identified that the dominance of Chinese leasing company
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over Japan has shown an increasing trend. This can act as a serious issue or concern for Japan
when raising funds related to a maritime industry. The panel who is involved in maritime
financing of Japan will also be involve in discussing the growth of the leasing industry related to
Japan. The marine money forum and conferences next year will be held on January 22,2020. In
this the discussion will be related to the how funds will be related to develop the maritime
industry. As it is one of the most important aspect. These funds will help the maritime industry in
Japan growing. The Bank of Japan is also being engaged in funding the maritime finance. There
are also other banks like commercial banks which are involved in this type of financing such as
maritime financing. Trust banks are also involving in these kind of financing.
It has been analysed that the finance of ships in Singapore is highly developed. in
addition to more than 20 major banks with shipping finance portfolios, there is a wide array of
alternative financing options, including shipping trusts and listing on the Singapore Exchange
(SGX). Owners, operators and brokers can also take advantage of the many financial institutions,
boutique shipping investment banks and private equity arrangers with operations in Singapore.
Singapore can be also knowing as the banking related center. They also put clear and transparent
information related to maritime finance. These helps ship owners in and builders of ship to know
about the current market situation (Arvis And et.al., 2018).
This helps them in not knowing only about the finance but also the advice can be taken of
the latest advancing approaches which can be used for structuring the financing g, assessment of
credits and mitigation of risk. The maritime of Singapore is one of the most established port that
consists of global hub port and also quality services related to maritime is being provided to the
travellers or even companies. Singapore is also engage in financing the advanced technology
which has been used by the owners of ship or even the manufacturers of ship. Ship financing are
involve in the responsible for making and promoting the products of bank to develop new ship
customers and also the retain the existing shipping customers. It also lay emphasis that the credit
reviews are being performed in a timely manner. There is also e-payment services which are
being given to customers who are applying for maritime finance. They banks are also involve in
providing the credits to the consumers who are applying for finance related to ships or maritime.
Also the harbor crafts are also being made available to them. They also fund for manufacturing
parts of ships.
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CONCLUSION
From the above study it could be concluded that maritime financing plays an important role in
the growth of shipping industry. There are various big giants financial lenders hat can help the
industry to grow. From the above research it is clear that maritime finance has to change the shift
from banks and financial institutions to other sources of finance. Over the current institution are
taking back the steps for financing the industry after the financial crisis and high risks associated
with projects. It is essential for the industry to focus on increasing its credit worthiness so that
loan can be granted by banks. Governments should encourage investments in maritime financing
for completion of marine projects.
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REFERENCES
Books and Journals
Arvis, J.F. And et.al., 2018. Maritime Networks, Port Efficiency, and Hinterland Connectivity in
the Mediterranean. World Bank Publications.
Chan, I., 2015. China's maritime Silk Road: the politics of routes.
Cogan, J.K., 2016. Financing and Budgets. In The Oxford Handbook of International
Organizations.
Daxecker, U. and Prins, B.C., 2017. Financing rebellion: Using piracy to explain and predict
conflict intensity in Africa and Southeast Asia. Journal of Peace Research.54(2).
pp.215-230.
Evans, M., 2015. Maritime boundary delimitation. In The Oxford Handbook of the Law of the
Sea.
Fiott, D., 2018. Military CSDP operations: strategy, financing, effectiveness. In Research
Handbook on the EU’s Common Foreign and Security Policy. Edward Elgar
Publishing.
Jasmi, M.F.A. and Fernando, Y., 2018. Drivers of maritime green supply chain
management. Sustainable cities and society. 43. pp.366-383.
Kavussanos, M.G. and Visvikis, I.D., 2016. Maritime Business Freight Risk Management.
In The International Handbook of Shipping Finance (pp. 337-370). Palgrave
Macmillan, London.
Luo, M. and Shin, S.H., 2018. Maritime accidents. In Routledge Handbook of Transport in
Asia (pp. 123-159). Routledge.
McCalla, R.J. and Slack, B., 2016. Port, corridor, gateway and chain: exploring the geography of
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99-116). Routledge.
Palit, A., 2017. India’s economic and strategic perceptions of China’s Maritime Silk Road
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Sambracos, E. and Maniati, M., 2015. Analysis of Financial Crisis Results on Dry Bulk Market
& Financing.
Shu-wei, A.N., 2015. Impact of the “Silk Road Economic Belt and Maritime Silk Road” for
China's Regional Economic Development. On Economic Problems.(4). p.1.
Till, G. ed., 2016. The Changing Maritime Scene in Asia: Rising Tensions and Future Strategic
Stability. Springer.
Wen, X., 2018. Research on Financing Methods of China’s Shipbuilding. Theoretical Economics
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Online
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Ship Finance. 2019. [Online]. Available through :
<https://www.smfl.co.jp/english/service/category/finance/ship_finance.html>.
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