The State of

Ship Finance
Q3 2023
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The Quarter in Review

Welcome back! As ever, there have been many topics of interest over the past quarter. The
slowdown in rate hikes, the slowdown in SnP activity and many more topics have piqued our
collective interest.

However, we see a deeper issue as the most interesting talking point. Specifically, how
differently shipping is viewed by debt and equity investors. Banks, Debt Funds and Lessors have
showered shipowners with relatively inexpensive capital over the past 24 months. Meanwhile,
equity investors are rare both in public and private markets. Why is this the case, and what
opportunities do these circumstances present?

First, the availability of finance has changed dramatically over the past half decade. We are
certainly no longer in 2018. Back then the main story regarded bank exits and restructurings
following a decade of historically poor earnings. The increased presence of Debt Funds,
Japanese and Chinese Lessors as well as heavy deleveraging from shipowners has made
banks work much harder to maintain portfolio volume.
recent transactions & indications
Vessels FMV LTV Borrower Lender Margin
NB Panamax USD 65 Mio. 70% German European Bank 3.00%
Container
MPSV/IMR USD 29 Mio. 50% Far East European Bank 4.76%
INDICATIONS

7x Handy BC USD 154 Mio. 47% German Japanese 1.50%

Vintage USD 14 Mio. 75% Indian US Fund 8.15%
Panamax BC
OSV
Construction USD 123 Mio. 85% European European Fund 7.65%
Vintage LR1 USD 120 Mio. 50% UAE European Bank 3.25%
Fleet

This increase in capital availability is crashing into a larger trend – the decreasing effect to
‘lever up’. The increased SOFR rate is driving this, making lower leverage or all-equity
investment relatively more attractive. In response to pricing pressure both from this factor and
increased competition between banks, margin compression is clear to see.

From 2020 to 2022 the average margin arranged via oceanis dropped 1.50 percentage points
while LTVs and loan amounts stayed the same. For the lower-LTV non-recourse bank
financings of a reasonable size, margins in the 2s really have become the new 3s!

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In addition, many financiers are developing new products or moving into new markets.
Chinese Lessors are breaking new ground, offering terms to smaller shipowners also without
corporate recourse.

Their terms outcompete European banks on leverage, with pricing not far behind. Meanwhile
some European banks are returning to a forgotten friend: the Offshore sector. Non-recourse
financings are back, having been unavailable for almost a decade. While currently only
available for vessels with firm employment, this positive sign will benefit the recently
underinvested sector.

So, given the bullish debt markets, where is the equity?

Using the words of Howard Marks: "We’ve gone from the low-return world of 2009-21 to a full-
return world, and it may become more so in the near term. Investors can now potentially get
solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier
investments to achieve their overall return targets".

Attracting external equity from institutional investors for shipping assets has become an uphill
battle. Institutional investors, seeking to maximize risk-adjusted returns are flocking towards
less risky investments, which have been bolstered by the surge in base rates. Consequently,
equity risk premiums have been propelled into the demanding terrain of double-digit returns,
making equity positions in shipping assets a less enticing proposition.

Remarkably, asset valuations across various segments have not adapted to the escalating
cost of capital. The resilience, it appears, is sustained by shipowners' substantial liquidity,
coupled with their limited willingness to look at investment alternatives at scale, aspirations for
fleet revitalization, and often miscalculated equity pricing. Or are we missing something that
the top names of the industry are anticipating and is not yet visible?

As things stand, institutional investors are veering towards debt investments in the shipping
sector. The prospect of embracing shipping equity hinges on the emergence of counter-
cyclical opportunities or the recalibration of discount rates for future cashflows,
acknowledging the prevailing high interest rate landscape.

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Project Financing Terms

The core of this report is an overview of projected financing terms across each of the major

segments, showing the best terms available for vessels in the market today.

We have assumed that each vessel is financed on a non-recourse basis with a 1 year Time

Charter to a counterparty accepted by the lender. Further definitions for each case are below.

Age

We assume 5 year old vessels as ‘Young Eco’ and 13 year old vessels as ‘Mature’.

Leverage Aim

Low leverage refers to Bank financing, while High leverage refers to Alternative debt.

LTV

Loan-To-Value, the ratio of loan amount to Fair Market Value. We show the highest LTV

possible; lower leverage reduces quarterly repayments and the interest margin.

Amortisation

Quarterly repayments which reduce the outstanding finance amount. This is shown as a

structure and profile. The structure shows whether a financier will require accelerated

payments during the first year or time charter period, while the profile shows the overall

trajectory of the loan from the initial amount towards zero dollars outstanding at a set age.

As each individual vessel has a different market position and ability to earn, the exact dollar

repayment during any period of front-loading will vary too much for a single report to cover.

However, the overall repayment profiles are relatively standard across vessels so these can be

shared in detail.

Interest Margin

Due to increasing levels of regulation in the banking sector, providing loans has become very

expensive and time-consuming over the past decade. KYC and AML checks as well as other

imposed costs are relatively consistent whether the loan amount is $7m or $70m, so banks are
Terms

forced to charge higher interest rates for smaller loans to keep the same level of profitability.

A loan request of $15m or more will generally fit into the ‘sweet spot’ of the larger commercial

lenders which are considerably cheaper than those offering loans of $5-10m, while a loan

request of $50m or more is suitable for the largest and most competitive lenders in the market.

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Dry Bulk

Perhaps the first quarter was not the bottom of the Dry Bulk market after all. Recent falls in

earnings across segments, while asset values have remained surprisingly constant, have

made investment in Dry Bulk vessels over the past few months more an exercise in faith than

trust in the markets.

Unfortunately for owners seeking to acquire or refinance, banks and funds are almost

exclusively held to today’s market projections which has limited financing volumes

considerably. Exceeding 50% LTV with an older spot-trading vessel is very difficult indeed

without resorting to higher-cost debt funds, as banks have retreated to the 40% level. Younger

vessels enjoy more respite due to the potential for lengthened repayment profiles with

breakevens set just below historic median earnings, but these repayments may prove difficult

to maintain should current market projections be realised.

More positively, loan margins are continuing to be compressed by high competition as lenders

struggle to maintain their portfolio volumes in the face of high repayments from Container and

Tanker owners.

For those shipowners with a high level of conviction that better earnings will return, some high-

cost options are available which can provide up to 75% leverage, even for older vessels.

However, it should be noted that the repayments required exceed not only current market

projections but even historic median earnings. The interest cost for this high-risk capital is also

high, with margins in the region of 8%. In short, to avoid default there must be a clear view that

earnings will be strong and that those strong earnings will come soon. We hope that this will be

the case!

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Project Financing Terms

Vessel Leverage Amortisation Interest margin

10$m 30$m 60$m

Aim LTV Structure Profile
Loan Loan Loan
(U ltrama x +)
Larger D r y

18 Year
High 70% Linear N/A 3.75% 3.60%
Young Profile
Eco
18 Year
Vessels Low 55% Linear N/A 3.00% 2.70%
Profile

Front- 20 Year
High 65% 7.25% 5.50% 5.00%
Mature Loaded Profile

Vessels
20 Year
Low 50% Linear 4.00% 3.75% 3.50%
Profile

Vessel Leverage Amortisation Interest margin

10$m 30$m 60$m

(H an dy to S upra )

Aim LTV structure profile

Loan Loan Loan
S maller D r y

Front- 18 Year
High 60% N/A 3.50% 3.00%
Young Loaded Profile
Eco
18 Year
Vessels Low 50% Linear N/A 3.00% 2.70%
Profile

Front- 20 Year
High 50% 7.25% 5.50% 5.00%
Loaded Profile
Mature

Vessels 20 Year
Low 40% Linear 4.00% 3.75% 3.50%
Profile

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Tankers

This quarter could be well described as a ‘pause for breath’ amongst financiers who, after

spending the first half of the year taking opportunities to rebalance portfolios back into the

sector, decided to reconsider these moves.

Loan amounts and margins, which both improved rapidly over the nine months to June, have

seen no great change since then. Indeed, some lenders are now becoming more cautious and

adding additional liquidity convenants or dividend restricitions as their confidence declines

slightly.

In many ways, this gives the same feeling as container markets in early 2022; the party is still

going strong, but some are thinking to book a taxi home. From experience in obtaining finance

for container vessels in late 2022, we would highly recommend entering the market while the

music is still playing.

And this music is certainly playing! Banks, funds and leasing houses remain exceptionally keen

to fund for the time being. Loan amounts on offer remain high, though as asset values have

increased more quickly over the past six months the LTVs available have contracted slightly.

Margins continue to fall, with banks partially offsetting base rate rises as well as reacting to

more intense competition for new loans.

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Project Financing Terms

Vessel Leverage Amortisation Interest margin

10$m 30$m 60$m

Aim LTV Structure profile
P ro d uct Tan k er

Loan Loan Loan

Front- 18 Year
High 65% N/A 3.50% 3.25%
Young Loaded Profile
Eco
Front- 18 Year
Vessels Low 55% N/A 2.80% 2.60%
Loaded Profile

Front- 21 Year
High 65% 6.50% 5.00% 4.50%
Loaded Profile
Mature

Vessels Front- 22 Year

Low 50% 4.25% 3.25% 3.25%
Loaded Profile

Vessel Leverage Amortisation Interest margin

10$m 30$m 60$m

Aim LTV structure profile
Loan Loan Loan
C ru d e Tan k er

Front- 18 Year
High 65% N/A N/A 3.25%
Young Loaded Profile
Eco
Front- 18 Year
Vessels Low 55% N/A 2.80% 2.60%
Loaded Profile

Front- 21 Year
High 65% N/A 6.50% 5.00%
Loaded Profile
Mature

Vessels Front- 22 Year

Low 50% N/A 3.00% 3.00%
Loaded Profile

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segments

Container
Container financing has seen little change over the past quarter, mainly due to the
consistency in earnings; financiers remain comfortable with charters even from second-tier
operators for newbuilds, while banks have a keen preference for top-tier counterparties on
mature vessels to avoid exposure to renegotiations.

It has been interesting to see how different banks have dealt with issues such as LTV
covenants over the past 6-12 months; while some chose not to place such covenants in their
loan documentation during the post-Covid boom, others are now imposing restrictions on
dividends or requiring early repayments for vessels which are performing under well-paying
charters. This has very clearly highlighted the need for a strong relationship between
shipowner and financier so that these issues can be communicated ahead of time, and most
importantly the need to consider how each individual covenant might affect cashflows given
various potential scenarios for earnings and asset values during any financing.

Relatively little transaction volume is seen due to the majority of financings and sales having
been closed during 2021 and 2022, but newbuilds and sold vessels do still require financing. For
these vessels, we are seeing the same charter-based repayment profiles as have been
prevalent over the past two years, though with slowly decreasing margins as charter rates are
now more conservative and asset values have retreated from their Icarus-like highs. For a
non-recourse newbuild facility with a second-tier charterer, European lenders can offer terms
with up to 70% LTV at drawdown and a margin in the very low 3% region.

Project Financing Terms

Vessel Leverage Amortisation Interest margin

10$m 30$m 60$m
Aim LTV structure profile
Loan Loan Loan
Front 18 Year
container

Young High 70% N/A 3.50% 3.00%

Loaded Profile
Eco
Front 18 Year
Vessels Low 60% N/A 3.00% 2.70%
Loaded Profile
Mature Front 22 Year
Vessels High 60% 7.25% 5.50% 5.00%
Loaded Profile
Front 20 Year
Low 50% 5.00% 3.75% 3.50%
Loaded Profile

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Offshore

Lenders are continuing to return to offshore financing, with this quarter seeing the first non-

recourse terms shared via the oceanis platform from one European Bank which is new to the

sector. At the same time, several other banks and funds are maintaining their presence in an

increasingly competitive market.  

We still observe that financing for offshore assets is highly reliant on firm employment with

strong counterparties. Most financiers within the segment are looking to finance strong

offshore owners with a proven track record of operating vessels successfully. 

For the right counterparty we are now seeing moderate LTV request receiving margins around

4-5% and higher leverage requests receiving margins in the region of 5-6%. Increasing

competition between lenders looks set to further reduce these margins in the years to come. 

With OSV markets continuing to firm up, we believe financing for offshore vessels will follow as

we expect the oil and gas companies to offer longer term employment to secure their need for

tonnage as rates continue to increase. 

However, opportunities still exist for offshore owners looking to keep their vessels out of long-

term employment due to expectations of higher rates in the years to come. This is perhaps

best shown by the terms indicated for a pair of vessels under construction without a fixed

charter which attracted 85% financing at a margin of around 8%. This pricing, comparable to

that seen for similar leverage in cargo vessel financings, is a sure sign of the increased

confidence of lenders in the renewed strength of the offshore market. 

The future here looks bright. 

Product Tanker

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Overall

This quarter has been relatively subdued, with the declining Dry Bulk markets putting a small

damper on the still-strong Tanker and stable container financing markets. The overall picture

remains positive, with gently declining margins and a wide variety of competitive lenders

available to shipowners worldwide, and this is a feature which we expect to continue for some

time to come.

Average margins are continuing to fall when adjusting for leverage as banks continue to

compete in maintaining their portfolio levels. The increased spread earned by retail banks on

their deposits, as overnight earnings have grown much faster than savings account rates,

have given these banks the ability to move more aggressively which will greatly benefit

shipowners especially should base rates decrease.

As a counterpoint, LTVs have decreased somewhat as asset values have outpaced earnings.

There is a lot of faith that great earnings are ‘just around the corner’ due to factors such as low

orderbook to fleet ratios and trust in a resurgent world economy.

What happens next? We expect more of the same. With shipping remaining a profitable area

for banks, margins are likely to continue in their downward trend while loan amounts will

directly follow spot earnings projections in Dry and Tanker financings or remaining charter

cashflows for Container and Offshore vessels. And at the same time as banks slowly open up

to more geographies and a wider range of assets, we look forward to a more open and

transparent world of ship finance.

Should any shipowners aim to diversify their financing counterparts or explore options for an

acquisition or refinancing, now remains a good time to do so.

Best regards,

The oceanis team

Product Tanker

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The State of Ship Finance
This report has been created by oceanis

Contact us
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Email: [email protected]

Phone: +49 40 226 3847 40