Altered Finance Landscape

By Carly Fields

For all the talk and concerns around “greenwashing” – deliberately misleading or embellishing environmental credentials – there really are few places left to hide if you are not well on the road to greening your multipurpose ship operations.

Financiers were the first to demand environmental credentials through the Poseidon Principles, kickstarted by Citi, Societe Generale and DNB in 2017, developed by the Global Maritime Forum and now an established, International Maritime Organization-aligned framework for assessing and disclosing the climate alignment of ship finance portfolios. The Sea Cargo Charter followed in October 2020, providing an international framework for aligning chartering activities with responsible environmental behavior to promote international shipping’s decarbonization – the industry has an eye to June 2022 when the first climate-alignment scores for this initiative will be published. Now the industry is moving towards the Poseidon Principles for Marine Insurance, launched in December 2021 and bringing the same environmental focus to the marine insurance sector.

Weaving between all these industry-led initiatives are the green goals published by the IMO, Europe’s Fit for 55 plan for a green transition, the UK and U.S. strategies to achieve net zero by 2050, and China’s pledge to reach peak emissions before 2030 and carbon neutrality by 2060.

Last year, COP26 then saw the launch of the Clydebank Declaration, supporting the creation of green shipping corridors, the Getting to Zero Coalition’s Call to Action and the Declaration on Zero Emission Shipping.

Any shipowner looking to avoid green operations and zero carbon sooner rather than later is fast finding limited room to maneuver.


Money Troubles

While in the multipurpose vessel sector’s fallow years, sourcing finance to support newbuild programs was problematic, to say the least, the same cannot be said of today. But the comparative abundance of finance available today for MPVs comes with distinct green strings in support of the global environmental agenda.

Halvor Sveen, CEO of Oslo, Norway-based Maritime & Merchant Bank ASA, a niche private bank offering first-priority mortgages to the shipping and offshore services industry exclusively, said that environmental, social, governance, or ESG, is on everyone’s agenda. While it hasn’t drastically influenced the bank’s terms yet, over a period of time “it definitely will.” That applies to everyone, he added. “My recommendation is for operators to stick to the green stuff and ESG. A commitment to environmentally friendly solutions will open finance options.”
Some banks already include a premium and more attractive financing terms if you are pioneering environmentally friendly solutions. “We have not done this yet, but we will look at it and there is definitely a clear focus on this moving forwards in Norway.”

Hannes Hollaender, managing director at Hamburg-based ship broker Toepfer Transport, agreed that ESG is a “big topic” when it comes to financing terms. “For the majority of projects, you cannot secure finance for a newbuilding which is not environmentally friendly, which is not optimized, which has no new angle on the propulsion side and so on.”

However, he said it is not difficult to comply with these requests: “The technical part is a given on ESG as everybody is working on this path. Ships are not like they were 15 years ago.” The difficulty comes with the specificity of the MPV sector, compared with other shipping sectors vying for the same pot of cash. “You have various investors out there, especially funds, and MPVs are a little bit different to other shipping businesses. The sector is very diversified with many small players and is very fragmented,” Hollaender said.

That said, the finance landscape has changed massively for MPV operators over the past few years. “Five years ago, the income side was very bad; 2017 was the low point,” Hollaender said.

Since then, MPV indexes have been climbing to the point today where rates are something to celebrate, not drown sorrows in. “What has happened now has not been seen before. The indexes are going sharply up, and this is phenomenal. Five years ago, it was very difficult to attract finance interest and to qualify for finance. Whereas today, the finance – whether that’s funds, private equity, private placement or owner’s own money – is all of a sudden there.”


Haunting Past Performance

But financiers have history to overcome when it comes to funding MPVs. “We used to call multipurpose ships ‘multiuseless’ ships – they crushed a number of shipping banks and funding them was a complete disaster,” Sveen said. “The MPV market was totally overtonnaged and rates were dreadful. As soon as there was an upturn, laid-up tonnage was made available and ghost tonnage controlled by the banks just appeared.” It took generations to get “a fine time” in this market, he added.

MPV operators have undertaken some good initiatives to consolidate, clean-up and make the sector tidier – in time for the market surge. This turnaround has prompted Maritime & Merchant Bank ASA to “look seriously” at the sector, engaging with the connections the Bank has in the German sector. But the bank will not consider speculative finance, only finance attached to contracts, making it difficult for tramping services to tie down funds. However, there are traditional banks out there, especially in Germany, that are committed to the industry, Hollaender said. “They are financing their clients without long-term charters and they are financing clients without large balance sheets – that is happening again. They are committed and they understand the philosophy and how the business works.”

KGs – the German Kommanditgesellschaftthus scheme that gives tax breaks to individuals investing in ships – are back. And with the MPV market on a roll, more are expected. “Shipping is always needed – in crisis, in peace or war,” Hollaender said.

There is room for everyone offering finance and a lender for everyone, Sveen said, pointing to the continuous increase in the variety of lenders open to shipping finance. Hollaender agreed that it is becoming easier for MPV operators to secure finance today, in contrast with previous years. And the more money comes in, the easier it is to achieve that all-important ESG compliance.

Hollaender goes a step further to observe that today there are not enough ship financing projects out there for the demand from interested investors. The bottlenecks to increasing the number of MPV projects are market complexity, ship complexity and the difficulty in undertaking due diligence. Also, while significantly better than just a few years back, MPV returns still can’t compete with those for the container ship sector, he said. But this may be the MPV sector’s saving grace. This, as Hollaender noted, will “put a nice lid on it,” and avoid a rapid return to ship oversupply – sidestepping the cyclical pattern of previous upturns. In the past, overordering and a lack of discipline “destroyed confidence” in financing for MPVs, Sveen noted. But today the sector is looking more attractive, and funding is now there for the taking – just so long as the green doesn’t wash off.

Carly Fields has reported on the shipping industry for the past 22 years, covering bunkers and broking and much in between.

Image credit: Danny Cornelissen, Portpictures.nl