Is New Shipping Finance Model A Game-Changer Or One-Off?

Ship finance matters to ocean freight because vessel capacity ebbs and flows based on how much money sloshes around the system. Ship finance also matters because financial arrangements, particularly debt agreements, can hamstring vessel owners, sometimes to the detriment of the shippers of freight.

Seaspan Corporation SSW, the largest U.S.-listed lessor of container ships, has spent more than a year toiling behind the scenes on a new model for ship finance, one that keeps the borrower's hands untied.

"Shipping finance has a long and storied history," said Seaspan chairman David Sokol on a conference call with analysts. "It's rare for a new structure to fundamentally change the way business can be done in this space, but that's what we feel we've done here, at least as it relates to Seaspan."

The new debt deal is unquestionably advantageous to Seaspan, but will other ship owners follow its lead and use the same model?

According to financial experts speaking to FreightWaves, it could be possible, but only for larger players in very specific markets.

Traditional vs Seaspan model
In ‘plain vanilla' secured shipping debt, a loan is made against a ship or ships, with those collateral vessels each owned by separate companies. The entity controlling the entire fleet is a holding vehicle that owns each of the subsidiary vessel-owning companies.

An owner of a large fleet, through its subsidiaries, could owe debt to dozens of different banks that each count different ships as collateral. Because each ship is tied to a specific loan, and each loan has restrictions on the borrower, the owner faces limitations on what it can do with its fleet.

The Seaspan loan scheme, which was structured by Citigroup Inc C, is collateralized by vessel assets, just like a standard senior mortgage ship loan. The difference is that it's collateralized by a flexible pool of vessels, not specific ships for the lifetime of the loan.
"This program allows for a diversified [collateral] pool that has flexibility with respect to adding and removing vessels. It will be a huge benefit to our customers."--Bing Chen, CEO, Seaspan Corp

The initial loan amount is for $1 billion, secured by a portfolio of 36 of the company's 112 vessels, with plans to expand debt capacity to $2 billion over the medium term. Seaspan eventually plans to house all of its secured debt within this facility, negating the need to juggle myriad senior loans with various individual lenders.

As Seaspan chief financial officer Ryan Courson explained on the conference call, "From the time of Seaspan's inception, we had amassed over 50 credit facilities, so we will achieve efficiencies from the consolidation of our bilateral loans. This will really be impactful in terms of the ‘return on time' for each of our members in the treasury department."

More importantly, the new structure will allow Seaspan to better serve its customers – the liner companies that lease its ships and transport containers around the globe for cargo shippers. The key point is that Seaspan can add and subtract vessels from the collateral pool, as long as the pool meets the requirements of ‘concentration levels' defined in the loan agreement, which determine the allowable mix of charterers, charter durations, ship sizes, and ship ages.

According to Bing Chen, chief executive officer of Seaspan, "Our customers increasingly need flexibility to better serve their end customers. We have seen an increasing demand from our customers in terms of changing up the vessels, substituting the vessels, and changing the [charter] duration of the vessels.

"Traditional financing would put a lot of limitations on that kind of customer request, simply because of the nature of the financing," said Chen. "This program allows for a diversified [collateral] pool that has flexibility with respect to adding and removing vessels. It will be a huge benefit to our customers in terms of facilitating their business needs."

Sokol commented, "With individual financing structures, there are ‘cash traps' and restricted cash issues that just don't provide this level of flexibility." He also stressed that flexibility is crucial on a through-cycle basis, allowing the company to better take advantage of opportunities in down-cycle periods.

Industry veteran Randee Day, a former banker and current chief executive officer of ship-finance platform Goldin Maritime, echoed Sokol's comments on constraints of traditional bank loans. "It has been getting even worse in the last couple of years," she told FreightWaves.

She explained that if a loan is guaranteed by several ships and the owner wants to sell one, because it's too old, for example, "you're tied to all of these covenants and there may be a partial liquidity sweep with money going back to the bank, or it could affect the loan-to-value covenant, which could diminish the overall liquidity of the company. And often, this happens just at the time when you need the cash, which is why I find that the flexibility in this [Seaspan loan] is interesting."

Broader applications?

The question for the shipping industry is whether owners can use a Seaspan-style flexible collateral pool model for their own syndicated bank debt. Mark Whatley, senior managing director at investment bank Evercore, voiced skepticism, saying that Seaspan's plan "raised more questions than it answered, for me."

"It looks like the type of loan you see in other sectors that gets syndicated by the banks through their conduits," he told FreightWaves. "When I was at Merrill Lynch, we did a similar facility for U-Haul on their truck fleet, where they could add and remove collateral throughout the course of the loan as long as it met certain criteria and they were in compliance with their covenants."

"This concept is particularly well-suited to sectors that have steady cash flow. It makes sense for containers, and particularly for LNG. But if you look at dry bulk and tankers, all those ships are trading on a voyage basis or on very short-term charters."--Randee Day, CEO, Goldin Maritime

Asked whether other ship owners might be able to use the same model, Whatley replied, "I'm sure Citi is out pitching the product to other owners. This might work for others, but I think it would only be applicable for owners that have a long-term charter approach."

For a company like Seaspan, the collateral pool is effectively comprised of both ship assets – the values of which are highly volatile – and a mix of long-term charters, which represent revenues that can be valued on a discounted cash-flow basis.

Container ship lessors, container liners, and liquefied natural gas (LNG) carrier owners are the only shipping industry sectors that have extensive long-term charter coverage. Asian leasing houses also have tonnage with significant charter coverage.

Other segments such as dry bulk and tankers are heavily dependent on spot employment, implying that a collateral pool structure wouldn't work for them, even for the larger players, because they wouldn't be able to use charter cash flows to offset the asset volatility risk.

"This concept is particularly well-suited to sectors that have steady cash flow. It makes sense for containers, and particularly for LNG," said Day. "But if you look at dry bulk and tankers, all those ships are trading on a voyage [spot] basis or on very short-term charters."

Whatley sees another restriction to the new model – having a collateral pool versus specifically identified collateral would not be palatable to many shipping lenders. "In my experience, traditional ship lenders like to feel and touch their collateral, so my instinct is that the banks in this case aren't holding this paper, but selling it out the back door, though it's tough to tell from the outside looking in," he said.

Speculation that debt may be resold, whether in this transaction or future ones, raises the possibility of securitization – slicing the debt up into different tranches of risk and reward for different investor appetites, as was done with housing loans prior to the 2009 financial crisis.

Whatley named one of the world's largest investment banks, and said that it "tried to bring the securitization market to shipping a few years back, largely mirroring what goes on in the aircraft market, but was unsuccessful in making it work, to my knowledge. The biggest issue was always that the shipping asset values are just too volatile."

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