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SHIP INVESMENT

1. Elwas Cahya Wahyu Pribadi 04211745000001


2. Yudha Prasetiyo 04211745000002
3. Andre Tri Mulya 04211745000003
4. Viorel Herzina 04211640000118

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Table of Contents

1. INTRODUCTION
2. SHIPPING
3. CAPITAL STRUCTURE
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1. Introduction

Over the last eight years, ship financing has probably changed more than in the last couple of centuries. After
years of continuance of boom and bust cycles in the start of the millennium, the shipping industry experienced
one of the greatest booms of all times in the period of 2003 through 2008. With increased demand for
seaborne trade fuelled by the emerging Chinese economy, freight rates skyrocketed leading to a mass
expansion of the world shipping fleet. Such expansion needed funding with shipowners primarily tapping bank
loans and public equity markets. By 2008, the demand for seaborne trade had reached its culmination point,
and when the financial crisis hit, world trade was negatively affected resulting in a substantial overcapacity of
ships. This caused the freight market to collapse. As a result of the crash in the financial market, a series of
bankruptcies rippled through the market causing counterparty credit concerns. With the trust gone, short term
funding costs went through the roof, causing bank liquidity to dry up. This led shipowners to turn to the bond
market for financing. By the end of 2009, market sentiment had again recovered, resulting in a new round of
investments. The recovery was, however, short lived, as the European Sovereign Debt Crisis emerged by the
start of 2011.
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2. Shipping PT. MUARA JAYA

The following theory section for shipping is taken from Martin Stopford’s, Maritime Economics 3rd edition (2009).

Investment in merchant ships, 1997–2007

Source: CRSL

The concept of shipping has existed for thousands of years. Ever since the first transportation of cargo that dates back more than
5000 years; seaborne trade has led to exploration and discoveries that have shaped the world of today. With global development,
trade has increased which has led to greater demand for transportation. Today, more than 90% of world trade is transported by the
shipping industry, making it a truly global industry.
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A. Segments

The shipping industry can be divided into three segments: bulk shipping, specialized
shipping and liner shipping.

Bulk Shipping:
The bulk shipping segment carries large homogeneous parcels, such as raw material cargo
and can be split further into the following sub segments:

Liquid Bulk The five major bulks

Minor bulks
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Liner Shipping

The liner shipping or general cargo shipping, which it is also known as, carries parcels
that are too small to justify a dedicated bulk shipping operation. The container
shipping segment is part of this group. There are no fixed rules for what characterizes
as general cargo, however, boxes, bales, machinery, 1000 ton steel products are
typical examples of general cargo.
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Specialized Shipping

Specialized shipping is specially built ships that carry non-homogeneous cargo such as
motorcars, forest products, refrigerated goods, chemical and liquefied gas. It can
therefore be viewed as a combination of the bulk and liner segment, as it bears
characteristics of both.
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2. The Four Shipping Markets

Global sea transport is provided by four directly related markets; freight market, the
market for buying and selling of second-hand ships, the newbuilding market, and the
demolition market.

A. The Freight Market


The freight market is the market where sea transport is sold and bought. Today, there is
one single international freight market, however, within this market there are separate
markets for each different type of segment.
Voyage Charter: Contract that Contract of affreightment: Under
arranges for the transportation this contract the shipowner
of a specific cargo from one agrees to transport a series of
destination to another, for a cargo parcels for a fixed price per
fixed price per ton. ton.

Time Charter: A contract that Bare Boat Charter: Provides a


provides operational control of company with full control of the
the vessel transporting the ship without owning it, typically
cargo to the charterer. used in leasing deals.
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B. The Sale and Purchase Market

In this market, second-hand ships are traded between shipowners. Since second-hand
ship prices are dependent on freight rates, age, inflation and expectations of future
earnings, the value of ships can be volatile. The volatility in price is thus important to
shipowners, as the trading of ships is a major source of revenue.
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C. The Shipbuilding Market

This is the market where new ships are ordered from the shipyards. Since the ship has to be
built, this ads complexity to the contract process in the form of specifications, delivery date,
payments and financing of the purchase. The ship prices are related to the prices in the
second-hand market, market expectations, the capacity of the shipyard and the access of
affordable financing. The investment in a new ship is of considerable risk, since it takes
two to three years for it to be delivered, thus with the volatile nature of the shipping
industry, the market conditions may have changed upon delivery.
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D. The Demolition Market

The demolition market (often referred to as the recycling market) is the market where old
or obsolete ships are dismantled and sold for scrap. The procedures are similar to the
once under the sale and purchase market, but the customers here are scrap yards, rather
than shipowners. The major scraping markets are today located in eastern Asia. The scrap
price has historically varied substantially over time. The price is determined by the supply
of ships and the demand for scrap metal, which in Asia, is usually dependent on the
demand in the local steel market.
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3. Cycles

Economic cycles can be defined as the varying pattern of economic activity over a
period of time. Market cycles in the shipping industry are a prominent part of the
business. Martin Stopford uses the analogy of poker to describe the behaviour of
shipowners in shipping cycles. Like poker, profiting from the cycles is a combination of
skills, luck and psychology for the shipowners, which is a game that has been played
for centuries.

With cycles we can distinguish between three different types, in relation to how long
they last:
 A long-term cycle refers to a cycle lasting for several decades that is driven by
advancement in technology, change in economic conditions and regional changes.
Thus, it is important for shipowners to pay attention to whether the market is in
the downturn or upturn of the cycle.

 Short term cycles or business cycles typically last anywhere from 3 to 12 years.
Within the short term cycles of shipping, there are four different stages which have
the following characteristics:
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Figure : Cycles in shipping

Source: Stopford (2009) p 102


o Trough: Characterized by surplus shipping capacity and freight rates falling to the level of operating costs for the least efficient ships. The
low margins can lead banks to foreclose on firms, forcing shipping firms to sell modern ships at distress prices. The prices of old ships fall
to scrap prices, leading to increased demolition activity, which again reduces the oversupply of ships.
o Recovery: While market sentiment is still uncertain, supply and demand start
to move towards equilibrium, causing freight rates to move above the operating costs.
o Peak/Plateau: Supply and demand tighten, while freight rates start to rise. The freight rates typically rise 2-3 times above the operating
costs. The peak can last for weeks or years, which is dependent of how the balance between supply and demand develops. As the
excitement increases an almost euphoric sentiment is created in the market. High earnings and increased asset values led to; banks being
more lenient with credit, talks of a new era in shipping, public offerings of shipping firms in the stock market, as well as increased ordering
of newbuildings. In the second-hand market, ships are sold for more than their replacement price, while modern ships trade for more than
their newbuilding prices.
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o Collapse: In this stage, the oversupply of vessels in the market exceeds the demand, drastically driving down the freight
rates. This decline can further be reinforced by economic shocks like the financial crisis. As ship prices decline,
shipowners are reluctant to sell ships due to the previous prices in the peak period.

4. Shipping Taxation
The shipping industry generally benefits from very low effective taxes due to favourable tax regulations in most countries. Since
shipping activity is not geographically bound, like other industries, this means that shipowners are free to choose what country they want
to register their fleet and operate from. There is, therefore, a strong incentive for the governments to offer favourable regulations in order
to attract foreign companies and avoid flagging out of domestic operators. The taxation regimes within shipping can be split into three
categories.

1. Tonnage tax regimes

The tax paid under the tonnage tax regime is not based on the actual profits generated by the firm, but rather on the actual tonnage of the
vessel. The tax is calculated by multiplying the tonnage of the vessel by a fixed amount that represents the estimated profit per ton. Under
the tonnage tax regime, there are two prominent models, the Dutch and the Greek model.

Comparing the Dutch model with a regular taxation model, the main difference is how the profits from shipping activities are calculated
and what vessels are included under the respective model. Other than this, the shipping firm and income from non-qualifying activities
will be taxed under the regular taxation system. The Greek model is overall more lenient, including all vessels and shipping activities
under it. In addition, the two models also have special criteria for ownership, lock-up period, capital gains, flag requirement and the way
the management is organized. However, the overall taxation will differ from country to country, even though they use the same model, as
the governments will tailor it for their home country.
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Geographically the Dutch model is implemented in most EU countries as well as Japan, USA, South Africa and South Korea, while the
Greek model is only used in Greece, Cyprus and Malta.

2. Shipping incentives regimes (special benefits for shipping)

This refers to the tax provision provided to shipping companies operating in the respective country. There are many different incentives,
however, most incentives are typically associated with very low taxation. This is either done by reducing the tax rate, narrowing the tax
base or through tax redemption. These kinds of tax regimes can be observed in countries like Liberia, Malaysia, Marshall Islands,
Panama, Russia and Singapore.

3. Tax efficient regimes (low effective tax rate)

Tax efficient regimes refer to countries that do not have any special tax regimes targeted towards the shipping industry, but rather treat
all foreign operators on equal grounds. Despite the fact that there are no shipping specific tax regimes, it can still be attractive for
shipping companies to register their vessels and operate out of countries like this. This may be due to exemption of taxation for foreign
investment or accelerated amortization for the ships. Some of the countries practicing this are Antigua, Barbuda, Bermuda, Estonia and
Saint Lucia (PWC, 2009).

2.5 Today's Shipping market


Looking at the market conditions in shipping today, one can see that the market is still suffering from the collapse of the world economy
in 2008, following the booming years between 2003/4 and 2008. Today's market is characterized by dire market conditions, with freight
rates being severally depressed due to an oversupply of tonnage relative to the demand for seaborne trade. At the moment, however, we
do not have a demand side problem, with the growth of trade increasing with 3% in 2011 and 3.5% in 2012. On the
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other hand, we do have a supply-side problem. This oversupply has been created by the rapid fleet expansion and ordering during the booming years,
which was followed into the recent years of economic recession. As the freight rates of the recent boom reached astronomical levels, only
comparable with those of the First World War, many of the operators built up substantial capital. This capital has now being put to use to build up
cheap countercyclical investments. This is illustrated by a growth of 37% of the world fleet from 2008-2012.

Even though there has been a gradual reduction of new orderings from its peak of 2009 and a gradual increase in demolitions, the supply of ships still
far outgrow the demand, having a growth of trade of about 3.5%, paired with a 10% increase in the world fleet last year. It is expected that by 2014,
there will be a fleet surplus of about 20% leading to severe excess capacity. Such structural unbalance leads to low projected growth in the future, and
with another possible round of countercyclical ordering around the corner, the trough can be further prolonged.

Going further in detail, the tanker sector is currently struggling with the structural problems mentioned, and the sector is losing growth due to the
combined effect of high oil prices, and the emerging completive sources of oil; like shale oil and deep water oil from the Persian Gulf and Brazil.
Bulk trade is doing a bit better, with Asia being its main driver. This demand is, however, not only created by China, but Asia as a whole, where China
accounts for half of the demand. Liner trade experienced its first negative shock in 40 years in 2009, with a 6% decrease in seaborne trade. It has,
however, partially recovered, but indications are now that the market is likely to be more volatile in the future (Stopford Presentation, 2013).

Looking into the future, according to Wilbur Ross, emerging markets such as China, Brazil and India are likely to carry the shipping market in the
following years (qtd. LaRocco, 2013). This view is further reinforced by the recovery in world trade being led by these developing countries, having
been much of the driving force behind the recent economic recovery.

The resurgence of oil and production in the US, due to technological advances in attaining the reserves in the shale rock, is also an event that could
cause large changes in both seaborne trade and oil production. It is predicted that the US will become a net exporter of oil by 2030, but this
development is dependent upon the oil prices remaining at fairly high level. It is expected that a drop of the oil price under $70-95 per barrel
would make it
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Looking into the future, according to Wilbur Ross, emerging markets such as China, Brazil and
India are likely to carry the shipping market in the following years (qtd. LaRocco, 2013). This view
is further reinforced by the recovery in world trade being led by these developing countries, having
been much of the driving force behind the recent economic recovery.

The resurgence of oil and production in the US, due to technological advances in attaining the
reserves in the shale rock, is also an event that could cause large changes in both seaborne trade and
oil production. It is predicted that the US will become a net exporter of oil by 2030, but this
development is dependent upon the oil prices remaining at fairly high level. It is expected that a
drop of the oil price under $70-95 per barrel would make it unprofitable to extract these
resources (Bartis et.al., 2005), and with it being just seven years since everybody predicted oil
prices to sustain at $20-25 per barrel until 2030, the future is clearly not set. It is, however, likely
that the success factor of this extraction will be an important variable in the in the world trade for
years to come. The initial effect of the shale oil can already be seen, by among other things, Saudi-
Arabia decreasing its export to the US, and shifting their exports to a larger degree towards China
(IEA, 2012).
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3. Capital Structure
In this section, we wish to present the various capital structure theories, in order to better analyze the capital structure
decisions that have taken place in the shipping industry during our sample period.

The term “capital structure” refers to how the firm is financed through equity, debt or hybrid securities (Berk, DeMarzo,
2011).

1. Miller and Modigliani.

In 1958, Merton Miller and Franco Modigliani (MM) published their article “Theory of investment”, stating that under
perfect capital markets the total value of a firm is independent of the capital structure. Despite initial criticism, this
contribution by MM has become the cornerstone of modern financial theory.
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Their assumptions for perfect capital markets where:

- “Investors and firms can trade the same set of securities at competitive market prices equal to the present value of their
future cash flows.
- There are no taxes, transaction costs, or issuance costs associated with security trading.
- A firm’s financing decisions do not change the cash flows generated by its investments, nor do they reveal new
information about them” (Berk, DeMarzo 2nd edition 2011, page 455).

MM put forward two propositions:

Proposition 1: “In a perfect capital market, the total value of a firm is equal to the market value of the total cash flows generated
by its assets and is not affected by its choice of capital structure” (Berk, DeMarzo 2nd edition 2011, page 455)

MM supported their reasoning behind Proposition 1 with the arguments from the Law of One Price and Homemade Leverage.

The Law of One Price states that under the assumption of perfect capital markets, all the cash flows generated by the firm will be
equal to the cash flow paid out to all. This is
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consistent with the Law of one Price, meaning that the value of the firm assets must be equal to its securities. This in turn means that as
long the firms’ choice of securities does not change the cash flow of the firm; the value of the firm is independent on the source of
financing. If the law of one price was violated one would have an arbitrage opportunity.

Homemade Leverage
The homemade leverage argument states that if investors are unhappy with the capital
structure the firm has chosen, they can simply add/subtract leverage to/from their portfolio by borrowing/lending out themselves. This is
known as homemade leverage, and as long as the investor can borrow or lend at the same rate as the firm, the added/subtracted leverage
will be a perfect substitute for the use of leverage by the firm.

Proposition 2: “The cost of capital of levered equity increases with the firm’s market value debt-equity ratio” (Berk, DeMarzo 2nd edition
2011, page 461). Given an all equity financed firm, as the firm starts to lever up with cheap debt, the risk of the equityholder increases
proportionally. When the debt level reaches a sufficiently high enough level, the risk of bankruptcy surfaces. Additional leverage above this
level results in an increase in risk for both equity- and debtholder. As a result of the increased risk, the equity- and debtholders will
demand a higher risk premium and therefore a higher expected return. The levered return of equity formula and Figure 2 shows this
relationship:
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the way the firm finances its new investments does not change the value of the firm, as the NPV of the cash flows are
discounted with the same WACC regardless. This causes the value of the firm to remain unchanged.

Figure : Cost of Capital

Where:

is the weighted average cost of capital

is the equity to enterprise value

Source: (Berk DeMarzo p 462, 2011)


is the cost of equity

= is the debt to enterprise value

is the cost of debt

is the cost of unlevered capital

is the cost of capital for the firms' assets


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3.2 Trade-off theory:

The trade-off theory rationalizes the use of a certain debt ratio. This is because the incurred interest cost from the debt
is tax-deductible on the firms’ taxable income. As a result, the tax paid on the firm’s income is offset by the interest
tax-shield created by the interest expense, leading to a lower taxable income for the firm. However, with increased
debt levels the probability of financial distress increases. In this respect, the trade-off theory says that a firm will
increase its leverage to the point where the marginal net present value of the interest tax shield is just offset by the
increased net present value of possible costs of financial distress (Myers, 2001).
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The following formula displays the relationship:

Where:

VL is the value of the levered firm VU is the value of the unlevered


firm
PV (Interest Tax Shield) is the present value of the tax shield created by the interest from debt
PV(Financial Distress Costs) is the present value financial distress

Source: (Berk, DeMarzo, 2011)

The net present value of financial distress can be separated into direct and indirect cost. The direct costs refer to the
legal and administrative fees relating to lawyers, accountants, and other professionals involved in the bankruptcy
filing (Weiss, 1989).
While the indirect costs consist of a variety of unobservable expenses and opportunity costs
that are difficult to measure. These include loss of: customers, suppliers, employees, receivables and fire sale of
assets (Berk, DeMarzo, 2011).
A study by Andrade and Kaplan (1998) shows that financial distress costs of highly leverage firms that became
distressed, make up between 10-20% of the firm value.
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Figure : Trade-off Theory

Source: (Johnsen, 2011)

The theory suggests that all firms should lever up as long as the costs of financial distress are less than the benefit from the
added tax shield. Empirically this does not hold, since studies show that the most profitable firms tend to borrow the least
amount. This is counterintuitive to the trade-off theory, since these firms would have large taxable incomes that would benefit
from the deductible interest tax-shield, created by the added debt (Myers, 2001).
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3.3 Pecking order theory:

The pecking order theory created by Myers and Majluf (1984) describes the firms’ hierarchal view on use of financing
options. In their analysis, they looked at a firm with asset-in-place that required further financing to realize a growth
opportunity.

The theory can be summarized:


1. The firm prefers internal funds to external funds.
2.The target dividend ratio is changed accordingly with the firms' investment opportunity, as the firm tries to keep abrupt
changes in dividends to a minimum.
3.As a result of dividend policy being "sticky" and the profitability and the investment opportunities varying over time,
the capital expenditure sometimes exceeds the internally generated funds and vice versa. Should the funds exceed the
capital expenditure; the firm will pay down debt or invest in marketable securities. However, should we have the opposite
case where the capital expenditure exceeds the internal funds, the firm would use its cash balance or sell its marketable
securities to achieve balance.
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4. In the case where external finance is needed, the firm will issue the safest security first; from safe to riskier debt, and
finally equity as a last resort (Brealey, Myers, Allen, 2011) (Myers, 2001).

The reason firms prefer to issue debt over equity is that there exists information asymmetry between the management and
the market. Assuming that the management is acting in the best interest of the existing shareholders, the management will
not issue equity when they view the company as undervalued, as this would be a gift to new shareholders. If they view
the firm as overvalued they will be more willing to issue equity, as this would benefit the existing shareholders. However,
since the market is aware of the information asymmetry between management and shareholders, it will quickly react to
the issuance of equity, and drive down the stock price, eliminating this overvaluation. Therefore, assuming both
management and shareholders are rational, the management will issue debt over equity whenever this is possible.

The pecking order theory does not give a target debt ratio, since the two types of equities, internal and external, are
situated on top and bottom of the pecking order list. The observed debt ratio of a firm is therefore a sign of the cumulative
requirements for external finance.
Compared with the trade-off theory, the pecking order theory actually explains why the most
profitable firms have the lowest debt ratio. This is because they have excess internal funds, and therefore do not require
external funds to finance new projects. Less profitable firms on the other hand, need to borrow to make up for the funding
gap between their capital expenditure and the internal funds available (Brealey, et al., 2011).
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3.4 Market Timing Theory

The market timing theory refers to a hypothesis put forward by Baker (2002), which states that firms will choose the cheapest source of
financing at point of time when the financing is needed. They will hence pay attention to the market conditions and attempt to time the
market, choosing the best alternatives of financing from equity and different debt instruments.

The theory is based on behavioural finance and differs from the traditional pecking order theory and trade-off theory, as this theory does not
try to choose between equity and debt. The theory rather tries to find which source of capital that benefits the firm the most. The goal is not
to find the optimal capital structure, but rather to take advantage of the market conditions by regulating the firms' capital structure.

The theory further separates itself from the pecking order and trade of theory by not trying to explain why mispricing occurs or why the firm
has a better ability to price the firm than the market. The theory rather assumes that mispricing does exist, implying that that the market is
not perfect and that the management knows better.

The empirical evidence for this theory is, however, mixed, like many other hypotheses in behavioural finance. Baker and Wurgler (2002)
claimed in their paper that an index of financing from market trough and upswings illustrated this hypothesis, while other papers, such as
Alti’s paper (2006), have found that this effect falls away after two years. It has furthermore been difficult to prove that certain firms are able
to consequently beat the market, hence questioning the reliability of the theory.
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3.5 Relating financial theory to shipping

According to Grammenos and Papapostolou (2012), the shipping industry has in the three past decades
gone through a significant shift in the use of financing options. During the 80s and 90s, the Pecking
Order theory fit the behaviour of shipping firms. Shipping firms mainly used debt, as the retained
earnings was generally too small to finance a large ship investment. Stopford (2009) supports such
statement by describing ship financing as dominated by bank loans, with bonds as the second choice of
capital as long as the firms had the creditworthiness to issue debt.

However, according to Grammenos and Papapostolou (2012), the development during the last decade
suggests a shift from the Pecking Order theory to the Market Timing Theory. This has been especially
evident in the US shipping market during the period 2003-10, where there has been a shift from the
traditional debt financing towards the more untraditional equity financing.

The main reasons for the shift towards the equity market were:
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- The banking crisis of the 1980’s that led to large losses in the financial sector.
- The depletion of the equity base of shipping firms in the mid-80s.
- The large scale-vessel replacement programs with increased capital requirements as well as high vessel prices in the 1999 and 2000.
- A new generation of ship-owners and management that has a different perspective and academic background (Merikask,
Gounopoulos, Nounis, 2009)(Grammenos, Papapostolou, 2012).

In addition to the increased use of the equity market, there was also an increase in the popularity of the high-yield bond market. This
development suggests that shipping firms raise their external capital based on their perception of the cost of equity and debt, and in that respect
what is the best for the particular firm in the current state of the economy.

Given the cyclical and volatile nature of the shipping industries, we do, however, believe the financing choices and preferences of the industry
operators are likely to diverge from the norm. We, therefore, believe that we will see divergences from the general financial theory, which
consequently may explain why financial theories only hold for a certain period of time for the shipping industry.
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3.6 Ship financing general overview.

The shipping industry is one of the most capital intense industries in the world. Therefore is the choice of financing imperative for the
success of new investments. Because of the truly mobile nature of the shipping industry, shipping firms face a less rigorous corporate and
legal structure compared to other industries that are as capital intense. The volatility of the earnings and the value of the assets contribute to
make it an exciting industry for shipowners, while more challenging for lenders, who seek stability and transparency.

During normal market conditions, where the shipping industry generates respectable profits, shipping firms will generally have little
problem to secure financing for their new investments. In fact, some would even say that the industry has been plagued by an abundance of
capital, thereby resulting in an oversupply of ships (Stopford, 2009). Bank loans have been the prominent source of capital for the industry.
However, in times when the financial sector experiences deteriorating credit markets, they will cut back on loans, thereby limiting the
supply of credit to the shipping firms (Stopford, 2009).

When the "cheap" bank loan source dries up, shipowners have to look for alternative financing sources. The second prominent source of
capital is the public equity and debt markets. As we will later discuss, there has been an upswing in the use of equity during the last decade.
In addition, the lack of bank funding led to the resurrection of the high-yield bond market from the mass defaults seen in the late 90's
(Grammenos, Papapostolou, 2012).
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Table of Contents
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4. Equity-financing of ships and
shipping companies

- In a capital intense and volatile industry such as the shipping industry, with
vessel values tying up the majority of capital, there is a real threat of financial
distress. Therefore, the way the firm finances its vessels is a key
component of the busines
- For the shipping industry, the capital markets acts as a link between investors
and shipowners, providing capital to fund new investments and growth. With
changing market conditions, shipping companies have explored new ways to
finance their investments.
- Equity financing can be separated into externally and internally raised equity
1. Internal equity refers to the use of the owner’s private equity, retained
earnings from operations and the profit from selling ships (asset play) to
fund investments.
2. External equity refers to public or private equity offerings in the
capital markets (Stopford, 2009) (Merikas et al., 2009) (Grammenos,
Papapostolou, 2012).

[1] Development of Ship Financing


A study of the 2008 Financial Crisis
Lorentz Greve Rokne and Jon Philip Lilland
Supervisor: Roar Ådland
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4. Equity-financing of ships and
shipping companies

The most common form of equity financing in the shipping industry is the private
placement of equity. This is mostly due to the fact that most shipping companies
are relatively small and an IPO carries large up-front costs. Therefore, equity is
often injected from the owner, family, friends, private equity funds or hedge
funds, who want to diversify their portfolios. While historically, retained earnings
and family’s and friends’ money have dominated the equity financing, today
private equity companies and hedge funds show large interest in the business.

The process of placing equity privately is rather unstructured when it comes to


families and friends. Private equity companies and hedge funds hire an
investment bank that structures the process and gives buy-side advice. Families
and friends usually have limited influence in steering the business, whereas
private equity and hedge funds get involved in optimizing operations and
controlling their investments.
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4. Equity-financing of ships and
shipping companies

- This means that capital from smaller


investors as well as institutional investors is
collected by a fund manager in order to build
a portfolio of ships or stakes in shipping
companies.
- Usually, those funds leave the management
of the ships to shipping specialists or the
1. Financing management team of the shipping company
is the set-up and act as passive investors.
- Closed funds and actively managed funds
of a ship fund exist with the difference being that closed
funds stick to the portfolio that they have
built in the beginning while actively managed
funds can engage in asset play and adjust
the portfolio according to recent
developments.
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4. Equity-financing of ships and
shipping companies
- The least common form of equity-financing
for ships is an IPO. An IPO requires the
involvement of an investment bank that
steers the process of listing the shipping
company’s shares on the public stock
markets.
- The shipping company has to make most
4.2 Initial Public information on itself public and fulfill several
requirements necessary to list. The process
Offeringings (IPO) is very lengthy and expensive.
- This is why only the largest shipping
corporates list their shares.
- An advantage of listing is the publicity that
the company gets, the large amounts of
equity it can collect and the possibility to use
itsown shares as a currency for acquisitions.
However, IPOs are relatively uncommon in
the shipping sector except for large
multinationals
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4. Equity-financing of ships and
shipping companies
2.1 Initial Public Offerings
Initial Public Offerings (IPO) refers to the process of a firm
listing itself on the stock exchange, in order to raise new
capital in the form of a share issue. Firms that go public,
work with an underwriter, which is an investment bank
that manages and structures the deal. For the underwriter,
there are three levels of commitment:
-Firm commitment, where the underwriter guarantees the
4.2 Initial Public issue by purchasing the whole issue and then re-offers it
to the public. The firm is then guaranteed that it will get the
Offeringings (IPO) money, even though the issue should fail on the
underwriters’ part.
-Best efforts agreement. Here, the underwriter will sell the
issue in the market; however, the firm has no guarantee
from the underwriter that the issue will raise the intended
amount of capital.
-Book-building method, where the underwriter collects bids
from investors and sets the issue price based on demand.
This is the most common method used for shipping IPOs.
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4. Equity-financing of ships and
shipping companies
Initial public offering (IPO)

- The process of offering shares in a private


corporation to the public for the first time is called
an initial public offering (IPO). Growing
companies that need capital will frequently use
IPOs to raise money, while more established
firms may use an IPO to allow the owners to exit
4.2 Initial Public some or all their ownership by selling shares to
the public. In an initial public offering, the issuer,
Offeringings (IPO) or company raising capital, brings in
underwriting firms or investment banks to help
determine the best type of security to
issue,offering price, amount ofshares and time
frame for the market offering.

https://www.investopedia.com/terms/i/ipo.asp
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4. Equity-financing of ships and
shipping companies

Understanding Initial Public Offering - IPO


Some people refer to an IPO as a public offering or “gong
public." There are other ways to go public like a direct listing
or direct public offering. When a company starts the IPO
process, a specific set of events occurs. The chosen
underwriters facilitate these steps.
4.2 Initial Public 1.An external initial public offering team is formed, comprising
underwriters, lawyers, certificate public accountants and
Offeringings (IPO) securities exchange commissions (SEC) experts.
2.Information regarding the company is compiled, including
financial performance and expected future operations. This
becomes part of the company prospectus, which is circulated
for review after it has been prepared.
3.The financial statements are audited, and an opinion is
generated.
4.The company files its prospectus and required forms with the
SEC and sets a date for the offering.

tps://www.investopedia.com/terms/i/ipo.asp
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4. Equity-financing of ships and
shipping companies
2.2 Advantages of going public
The major advantage of using equity financing in
the form of an IPO, is the mitigation of the financial
risk and obligation associated with issuing debt.
Using debt, the company is obligated to make
interest and principal payments to its creditors. On
the other hand, the firm has no obligation to pay
4.2 Initial Public shareholder dividends. The reduction of financial
Offeringings (IPO) risk is especially important in the volatile shipping
industry, as a falling market may threaten the very
existence of the firm. In addition, there are a
number of other advantages and disadvantages
associated with going public:
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4. Equity-financing of ships and
shipping companies
Advantages of going public
The newly raised equity will make the company
more tolerant to the use of additional debt, as the
gearing level of the firm has decreased
(Grammenos, Papapostolou, 2012).
- The added liquidity from the listing might decrease
the illiquidity premium associated with privately held
4.2 Initial Public firms and therefore lead to an increase in the market
Offeringings (IPO) value of the firm (Damodaran, n.d.). This does not
necessarily apply to shipping firms, as the main
assets of the firm are ships. Vessels are generally a
liquid asset and therefore the illiquidity premium will
likely be lower compared to other firms with more
specialized "hard to sell" assets.
-
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4. Equity-financing of ships and
shipping companies
Advantages of going public
For family-controlled firms that go public, Brancel
and Mittoo (2008) find that these families feel that
IPOs give them added bargaining power with
creditors without handing over control.
- The success of the IPO will improve the reputation
of the firm, increasing market coverage and transfer
4.2 Initial Public the monitoring costs from creditors to the stock
Offeringings (IPO) exchange authorities (Brancel, Mittoo 2008).
- Finally, the stock exchange listing leads to stricter
control over the company, thereby reducing the
probability of the management acting fraudulent
(Grammenos, Papapostolou, 2012).
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4. Equity-financing of ships and
shipping companies
2.3 Disadvantages of going public:
- For the existing shareholders, the IPO might cause
them to lose their controlling stake in the company.
- By diluting the current shareholders, they will in the
future receive a smaller portion of the firms' profit, as
they now hold a smaller proportion of the firms'
stock.
2. Initial Public - Public companies have to regularly inform the
Offeringings (IPO) market in accordance with the regulations of the
stock exchange where the company is listed. This
makes the management’s job more time-consuming
and less flexible.
- The company’s performance on the stock
exchange is not only related to its own performance,
but also the overall condition of the stock exchange.
- There is a considerable one-time cost that the
underwriters charge when going public
(Grammenos, Papapostolou, 2012).
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4. Equity-financing of ships and
shipping companies
2.3 Disadvantages of going public:
A majority of the listings are related to firms in the
bulk segment, thus the IPO price will be set close to
the market-adjusted net asset value of the firm. This
pricing is only reasonable when net asset value
reflects the full earnings and cash flows of the
company. According to Merikas et al. (2009), this is
4.2 Initial Public generally not the case in shipping, as the second-
Offeringings (IPO) hand prices of vessels do not always reflect the
future cash flows of the ship. They find that the
prices in the second-hand market do, however,
generally reflect a high multiple of operating cash
flow. This pricing will hence create problems when
the shipping market is in a downturn and the
earnings for the certain bulk segments are negative.
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4. Equity-financing of ships and
shipping companies
2.3 Disadvantages of going public:

- Finally, there is the observed IPO puzzle. It


states that IPOs are systematically underpriced,
and that an IPO offering typically increases just
after the offering given its underpricing. In
4.2 Initial Public general the increase last between a day and a
year, before underperforming the following
Offeringings (IPO) three to five years (Berk, DeMarzo, 2011).
Merikas et al. (2009) also find support for this
underpricing, when it comes to shipping IPOs.
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4. Equity-financing of ships and
shipping companies
- Follow-on offerings are common in the investment
world. They provide an easy way for companies to raise
equity that can be used for common purposes.
Companies announcing secondary offerings may see
their share price fall as a result. Shareholders often
react negatively to secondary offerings because they
dilute existing shares and many are introduced below
market prices.
4.2 Follow-On - After going public, a firm will generally seek to grow and
explore additional investment opportunities leading to
Offerings (FO) the need for more capital. A follow-on or seasoned
equity offering (SEO) is where an already public firm
offers new shares for sale to the public. Within FOs
there are two possibilities, cash offer or rights offer. In a
cash offer, the firm offers new shares to anyone,
thereby having a dilutive effect on the existing
shareholders. In a rights offer, on the other hand, the
firm only offers shares to the existing shareholders,
thereby protecting them from dilution.
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4. Equity-financing of ships and
shipping companies
- The market reaction to a FOs is generally
negative. As with IPOs, the management is only
willing to sell at a price that is correct or
overvalues the company. This leads to the market
believing that the company is overpriced, thereby
resulting in a price drop. In addition, FOs have the
same tendency as IPOs to underperform after
4.2 Follow-On issuance. Researchers have been trying to
explain this phenomenon, explaining that it might
Offerings (FO) be the conditions leading up to the choice of FO
and not the FO itself (Berk, DeMarzo, 2011).
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4. Equity-financing of ships and
shipping companies

4.4 Private
Placement

- Private placement is the process where a company, that is either public or private,
offers securities to individuals or a small group of accredited investors. Securities
offered, can either be of equity or debt, and private placement will hence also be
described under our debt section. In such offerings, the investor can for example be in
the form of banks, mutual funds or private equity firms. In the US, this does not qualify
as a public sale of securities; therefore it does not have to be registered with the
Securities and Exchange Commission (SEC) or fulfill the usual reporting
requirements. Contrary to an IPO, private placement is a cost effective and less time
consuming procedure for a firm to raise capital (Private Placement of Securities, n.d.).
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4. Equity-financing of ships and
shipping companies

- 4.4.1 Private Equity


4.4 Private
- Private equity refers to a firm that has raised equity
Placement capital in order to invest in privately held
companies. Private equity is usually organized in
the form of funds, which pools money from a range
of investors and invest collectively into a company.
The strategy of the private

- equity funds differs according to the nature of their investment and their means of
realizing the profits from the transaction. The profits can either come from operational
income or from exit strategies such as IPOs, mergers and acquisitions, selling or
leveraging of the assets (Snow, n.d.)(Imhof, n.d.).
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4. Equity-financing of ships and
shipping companies

- 4.4.2 Private Equity and its Role in


4.4 Private Ship Financing
- Private equity has traditionally not been a conventional
Placement source of financing within shipping, as their term return
objective has historically made shipowners reluctant to
use this type of funding.
- Shipowners have previously found that their incentives
rarely are similar to those of the private equity firms.
- However, given the financial condition that several
shipping firms found themselves in, following the financial
crisis, shipowners had to seek alternative ways of
financing, with much of the bank loans issuance gone,
due to the financial difficulties of the banking sector.
- Private equity funds saw this as an opportunity to capitalize on the tight credit market and
the subsequent historical low vessel values, expecting to see a significant return, once the
shipping market rebounded. Given the lack of other opportunities and the promise of access
to great funds, several shipping firms/owners accepted the offers from various private equity
firms. In the years of 2010 and 2011 there was a surge of private equity firms entering the
shipping industry.
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4. Equity-financing of ships and
shipping companies

- 4.4.2 Private Equity and its Role in


4.4 Private Ship Financing
- The most common approach made by private equity
Placement funds, when entering into the shipping industry, is by joint
ventures. This is typically done together with another
investor who is either a shipowner or a manager. Since
the shipping industry is very different from other
industries, the private equity firm will have to rely on the
expertise of its partner. This is due to the many laws that
affect shipping, which can severally differ from
jurisdictions. In addition, there is the conflict of interest
between the shipowner/ management and the private
equity fund, since private equity funds may have a
different view on the objective and the strategic path to it,
compared to the shipowner/manager
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4. Equity-financing of ships and
shipping companies

DIFFERENT
PUBLIC
EQUITY &
PRIVATE
EQUITY
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5. Mezzaine Financing
- In between debt and equity there
is a half thing called mezzanine
finance. The term is
loosely defined but it is usually
applied for high yield debt with
equity “kickers”
attached, such as warrants.
Mezzanine finance has been
scarcely used within the
shipping industry and it is not easy
to place
- Mezzanine finance is a
collective term for hybrid forms
of finance. All financing that fall
between the two main types of
financing, senior debt and pure
equity financing, are defined as
such. There are various types
of mezzanine finance, each
having its own unique
characteristics (European
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5. Mezzaine Financing

- The most common form


of mezzanine finance is
subordinated loans. This
type of financing refers to
junior unsecured loans,
implying a lower ranking
in case of bankruptcy
compared to senior debt.
This type of financing is
typically used to finance
the expansion of existing
companies, and as a
result of the inferior claim
on assets, it usually
- Even though this type of financing is clearly debt, it possesses equity like requires a higher interest
characteristics, since most mezzanine lenders typically receive warrants, rate compared to regular
which may be exercised to transform the debt into equity in the borrowingdebt.
company. Warrants can be defined as a derivate security offered by the firm
itself, which allows the warrant holder to purchase stock in the firm at a
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5. Mezzaine Financing

As stated at the begging of this thesis there is an ascending relationship of risk, priority of
payment and consequently cost, between the three major financing methods. Going from
senior and collaterized debt to convertible bonds and finally equity the corresponding risk and
cost substantially increases. Regarding the priority of payments, either regularly or in a
liquidation scenario, mezzanine capital is subordinate to senior debt, like commercial lending
and bonds, while it is senior to common equity capital.
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5. Mezzaine Financing

SENIOR SUBORDINATED DEBT


- Subordinated debt is by definition the debt, which in a default or liquidation scenario
will be paid after the senior or collaterized debt.
- Therefore, it bears greater risk and requires higher rate as a compensation for
undertaking it.
- The adjective senior before the subordinated has been put to express that this debt
will be serviced prior all the other subordinated types of capital.
- Given that in most cases senior subordinated loans do not have embedded
mortgages or if they do, these mortgages are junior in ranking too (second in-a-row
mortgage), borrowers normally give an extra incentive for making this type of debt
appealing to investors.
- This incentive is usually the tied in the loan agreement warrants granting the right to
investors to exercise them and, therefore, gain ownership of the borrowing company.

[2]Prevailingship financing methods applied to


major dry-bulk companies
Angeliki Christodoulou
Thesis
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5. Mezzaine Financing

SENIOR SUBORDINATED DEBT

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS

- A widely used sub-category of bonds’ financing is that of convertible bonds. As their name
implies, these bonds provide the ability to be converted, under certain terms though, to
common shares of the issuing company. At their issuance, they are simple bonds functioning
just like a straight bond and making coupon payments regularly, usually in a semi-annual
basis. When a conversion into shares takes place, the same bonds will cease acting as a
fixed income security by paying coupons but they may pay dividends according to what the
convertibles’ initial reported prospectus stipulates.

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- Conversion provisions incorporated in the bonds’
indenture make the creditor to become shareholder
and the debt instrument to become hybrid
respectively. As long as the bondholder has not yet
exercised his conversion option he receives fixed
income under coupon payment form, while at the time
he decides to convert all or a part of his bonds into
shares, he may receive discretionary dividends or
realize capital gains.
- When these bonds are outstanding are subject to YTM fluctuations, while if they
convert into shares they are going to be subject to stock’s fluctuations. The
indenture governing the convertible bonds stipulates in detail when and how the
bonds’ conversion into shares shall take place. Apart from the most important
terms of convertibles, such as exercise time, conversion price and ratio etc, the
convertible bond’s prospectus contains every other related detail as well as the
cost of the bonds’ issuance breakdown.

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- ADVANTAGES & DRAWBACKS

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- ADVANTAGES

Lower coupon rate than "plain vanilla"


notes: The conversion option, else, the
“equity kicker” embedded on the company’s
notes reduces the risk which a “plain vanilla”
note bears and consequently the company’s
convertible notes are issued at a lower coupon
rate.

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- ADVANTAGES

Lower required return than common equity: At their issuance and before being converted the
convertible notes constitute debt securities and their holder is one of the company’s creditors. Given
this, convertible notes, like any other type of debt financing, cost less for the company compared
with the financing through equity. Obviously, this is not the case if the notes convert into common
stocks where they will encompass all the pros and cons of a common equity share.

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- ADVANTAGES

No management involvement: Bonds' holders, as it is abovementioned, are firm’s creditors and


creditors, normally, have no voting power. In convertibles, though, the scenario changes when the
conversion option is exercised and the notes actually become common shares encompassing voting
right and all the other corresponding features.

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- ADVANTAGES

No need to repay borrowings if


conversion put into effect: The
conversion option will normally be
put into effect when and if the
firm’s common share, else, the
note’s underlying security
outperforms. In other words, if the
market price of the share is higher
than the specified exercise price.
When this takes place, the
company will be obliged to repay
its indebtedness to those who have
not exercised their conversion
option and they are still holding
the notes, if any.
[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- ADVANTAGES
Less dilution effect in common shareholders:
Given that convertible notes are issued with a
higher exercise price than the share’s current
market price, the company’s shares will have to
substantially perform so as the option’s exercise to
be materialized. This serves as a kind of protection
against over dilution in common equity
shareholders.

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- ADVANTAGES

Tax-deductible payment: Like any other


debt obligation, the regular coupon
payments of the convertible notes derive
from the company’s pre-tax income and,
therefore, are tax-deductible, provided they
have not been converted into common
shares.

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- DRAWBACKS
Higher financing cost than bank loans: Convertible notes may have lower coupon rate than that of
the “plain vanilla” notes, but they are still notes and as notes they bear higher risk and cost compared
with that of commercial bank lending.

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- DRAWBACKS
Downward pressure on share's price: Due to the potential common shareholders’ dilution the
conversion option of these notes entail, there is a downward pressure on the share’s price. Some of the
existing shareholders in the light of a potential dilution of their portion may decide to sell their shares
leading the share’s price to fall. Additionally, some of the potential equity investors may be
discouraged to put their money for purchasing a portion of ownership that in a while may be smaller,
leading again the share’s price and the firm’s market capitalization to fall.

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- DRAWBACKS

Fixed payment and principal's return:


Another feature of convertible that may
be deemed as a disadvantage is the fact
that if the shares do not outperform and
consequently are not be converted into
common shares, the issuing company
shall continue to meet its debt
obligations. Particularly it shall continue
to make its coupon payments during all
the notes’ tenor and repay the note’s
face value or principal at whole at the
maturity day.

[2]
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5. Mezzaine Financing

CONVERTIBLE BONDS
- DRAWBACKS
Covenants imposed mainly by firm's senior
lenders: Considering that this debt mezzanine
capital ranks junior to almost all other types of
debt financing, the covenants included shall be
in accordance with that of senior debt capital.
Apart from the new covenants, former
covenants already being imposed by senior
lenders may be included in the notes’ indenture.
Hence, a thorough examination of the covenants
imposed directly or indirectly by the firm’s
senior lenders would be beneficial for the
mezzanine capital providers before investing.
The most common covenants’ package
incorporated in mezzanine debt securities refers
to restrictions in sale of assets, change of
control, liens, restricted payments and affiliate
transactions.
[2]
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5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- Convertible Preferred Stock is actually an equity mezzanine capital being more like an equity
capital, but also sharing similarities with debt to the extent that its holder will receive promised
dividends until he converts the preferred into common shares. In essence, by owning
convertible preferred stock an investor owns a company’s proportion just like a common
equity shareholder with different, though, terms.

[2]
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5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- A preferred stock shareholder actually holds a fixed income security given the fact that he is
going to be paid regularly with the form of dividend. To clarify, there is a major difference
between the preferred and the common shareholders regarding the dividend paid which to the
formers is compulsory and to the common shareholders lies within the company’s own
discretion. The dividend paid to preferred shareholders is compulsory on the grounds that the
preferred stock’s dividend is a by the agreement a promised dividend.
- Some preferred stocks are issued in much higher prices than that of common shares,
addressed mainly to institutional investors and traded usually over-the-counter (OTC).
- Preferred stock holders usually do not have voting rights in the company, thus they cannot
participate in the decision-making procedures. Nevertheless, such provisions are always
contained and interpreted solely in every single case and there is not a concrete 60 rule
settling all these. In the vast majority of cases though, the only class of stock carrying full
voting rights is the one of common shareholders.

[2]
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5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- The main document governing this type of financing is the certificate of designation,
presenting in appendix. There are many different provisions incorporated in each certificate of
designation altering the structure of preferred security as well as the entailed benefits and
drawbacks. Firstly, the terms accompanying the conversion option may affect substantially the
risk of the convertible preferred stock.
- The conversion of preferred securities into common shares may be optional, mandatory or a
co-existence of both. Regarding the optional conversion, as its name witnesses, the holder of
preferred securities may convert them at its own discretion at a pre-specified conversion price
and during a usually not limited time span.
- In case of mandatory conversion, the issuer has beforehand explicitly stated and explained
into the certificate of designation in light of which specific circumstances its “preferreds” will ex
officio be converted into common shares. Mandatory conversion in fact imposes some
limitations to the holders posing also threats of deteriorating their fixed income distribution and
portfolio. For that, holders of mandatorily convertible preferred shares shall always be aware
of and monitor the probability of a conversion.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- An important difference between the convertible bonds and the convertible preferreds
is the priority of payment.
- As stated in convertible bonds’ paragraph, convertible bonds are a subordinated type of debt
but still debt meaning that they are paid from the firm’s pre-tax income whereas the
convertible preferreds are actually an equity security thus they get paid from the firm’s after-
tax income as the common shareholders
- Preferred stocks keep the priority in payment though. In plain words, the convertible preferred
stocks are junior to the convertible bonds but senior to the common stocks.
- One of the most important reasons of why a firm will be benefited by issuing preferred stock
seems to be the improvement of debt-to-equity (D/E) solvency ratio. Companies heavily
loaded by senior debt, having a debt-to-equity ratio far beyond the optimal of one, may desire
to increase their equity side without leading to a common shareholders dilution or without
granting new voting rights.
- Additionally, if it comes to bank institutions, issuing preferred stocks is a rather preferable
practice for raising capital considering that preferreds do not increase bank’s debt
deteriorating its debt to equity ratio, do not cause shareholders’ dilution but they do constitute
Tier 1 capital needed in case of recapitalization.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- ADVANTAGES & DRAWBACKS

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- ADVANTAGES
Improving Debt to Equity ratio: When a company is highly leveraged, quite usual in capital-
intensive shipping industry, the idea of raising additional capital needed by concluding new loan or
issuing bonds seems to be not a beneficial option for both the company and the shareholders at all.
The interest payments will be at even higher levels making it difficult for the company to meet its
obligations to both its creditors and shareholders.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- ADVANTAGES

Lower required return than common equity: Despite being an equity item, convertible preferred
shares do not bear the same risk as common shares since they promise a dividend to their holders
and they give the right of converting them into common. Due to their lower risk, preferred
shareholders require lower return than common shareholders do, else, financing by issuing
preferred shares costs less than by common shares. Obviously, that is the case until converted into
common stocks.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- ADVANTAGES

No management involvement
entailed: Preferred shareholders
normally do not have voting rights and
they do not participate in the
company’s Board of Directors (BoD)
and the decision making process.
Thus, the firm’s management enjoys
flexibility and privacy always until the
conversion of preferred shares, if
same is exercised.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- ADVANTAGES

No dilution effect in common


shareholders: Until the time the
preferred shares convert into
common there is no dilution in the
common shares. In any case, though,
since there is a conversion option
embedded to the preferred shares,
common shareholders shall always
be aware of when and under what
conditions a conversion can take
place.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- ADVANTAGES

Constitute Tier 1 capital: This advantage refers to banking institutions. Tier 1 Capital1, the
measurement of a Bank’s capital strength or adequacy, is of critical importance for the good
performance and sustainability of a bank. Regulations on Banking Institutions such as Basel I, II and
III have set specific requirements a Bank shall be in compliance to. Since there is gradual increase in
the level of required Tier 1 Capital of a bank, the issuance of preferred shares seems to be rather
preferable.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- DRAWBACKS

Higher financing cost than debt: Undoubtedly,


since preferred capital is an equity item,
preferred capital cost more for a company than FINANCING
borrowing money through debt. For this
reason, companies usually opt mezzanine
capital when either debt financing is not
available or stringent terms are required for
restricting much the company’s operations.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- DRAWBACKS

Limited liquidation ability: Due to the narrow


preferreds' market, they cannot be liquefied easily
before converted into common shares. They indeed
constitute more a fixed income security than a
tradeable one, thus, their holders valuate them
differently from the common shares. LIMITED

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


5. Mezzaine Financing

CONVERTIBLE PREFERRED STOCK


- DRAWBACKS

Non tax-deductible but promised payment:


From the issuing company’s side, the
dividend they have promised to pay to the
preferred holders is not tax-deductible since
it derives from the company’s after-tax
income and not from the pre-tax as all the
other debt obligations do. Therefore, the
company is obliged to make fixed and regular
payments without though enjoying any tax
concession.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


5. Mezzaine Financing

CONCLUSIONS

- Although the mezzanine financial instruments are not so popular among shipping companies, they
are gradually gaining ground since they are coming to fill the gap between debt and equity
capital in a continuously altering national and international economic landscape.
- There are indeed, many cases that a mezzanine financial product is the most advantageous as
regards to the other types of financing.
- When, for instance, it comes to a highly leveraged company seeking to raise additional funds but
either not willing or not able to issue more shares, the financial solution that suits it better is that
of mezzanine capital.
- The improvement of debt to equity ratio, the lower cost than the equity capital and the flexibility
they provide, with all the terms and clauses, constitute some of the major advantages. The fact
though that the mezzanine financing includes many different features, since it shares
characteristics from both debt and equity capital, is either a benefit or shortcoming for a firm
considering that the flexibility the company enjoys from these hybrid attributes can be switched to
complex operations.
- Indeed, with no careful handling and no well-educated personnel to be in charge of the finance
department, adverse effects might occur. Being closer either to debt or to equity, mezzanine
financing constitutes a valuable tool for the shipping companies provided the management has
weighed in advance the benefits and shortcomings each type of this hybrid instrument entails.
[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

- Generally speaking, debt financing charges interest rates, which are in principal lower
than the shareholders’ required return, thus, making instantly the debt’s cost of capital
lower than the equity’s.
- The latter briefly explains why shipping companies have historically preferred
borrowing debt capital than raising equity, magnifying their leverage and sometimes
facing adverse effects.
- Moreover, financing methods via debt enjoy payment priority in each fiscal year,
simply because of the payment ranking in a shipping company.
- In particular, in a first to last order, the labor gets paid, creditors get paid, tax
authorities get paid and finally shareholders get paid
- According to the basic finance and investment principal, the higher the risk the higher
is the return required. Based on this, shareholders are entitled for the residual income
(net income), given in the form of dividends, if any.
- Debt financing comprises Commercial loans, Bonds and Leasing.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

COMMERCIAL LOANS

- Commercial loans encompass every loan granted by a bank or syndicate of


banks to a borrower. In financing through commercial loans, the ship-owning
company borrows money (the loan) from the commercial lending institutions
(banks) on an either floating or fixed interest rate for a shorter or a longer
period of time. The terms, clauses and types of each loan differ to a great
extent depending on several factors analyzed below, as each case is treated
separately.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

COMMERCIAL LOANS

 Bilateral & Syndicated Loan


- In bilateral loan there is a single lending institution, which loans a single borrower; consequently there
are just two contractual parties.
- The difference between syndicated and bilateral loans lies on the fact that the debtor does not
borrow the entire capital from just one financial institution but from more, thus forming a syndicate.
- The difference between syndicated and bilateral loans lies on the fact that the debtor does not
borrow the entire capital from just one financial institution but from more, thus forming a syndicate.
[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

COMMERCIAL LOANS

 Bilateral & Syndicated Loan


- In bilateral loan there is a single lending institution, which loans a single borrower; consequently there
are just two contractual parties.
- The difference between syndicated and bilateral loans lies on the fact that the debtor does not
borrow the entire capital from just one financial institution but from more, thus forming a syndicate.
- The difference between syndicated and bilateral loans lies on the fact that the debtor does not
borrow the entire capital from just one financial institution but from more, thus forming a syndicate.
[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

COMMERCIAL LOANS

 Senior & Subordinated debt or loan


- If a company liquefies or goes bankrupt the first debt paid will be the senior, consequently, senior
debt ensures the creditor that he will get repaid at priority. There is a worth mentioning exception
though, marine liens are paid always at first.
- Meaning that any maritime claim that arises either a cargo or a ship lien will automatically put in a
second position the loan’s repayment. For instance, in the case that a ship-owner owes money to a
bunker supplier, the latter, by the supply contract, has a lien on the ship. Therefore, in the
unfortunate situation of a liquidation of the shipping company the first party to be repaid will be the
bunker supplier. Contrary to senior debt, subordinated debt stipulates that its repayment will take
effect after that of senior’s. Undoubtedly, the creditor has to bear greater risk and for that reason he
normally charges higher interest rate.
[2]
YUDHA PRASETIYO
SECTION
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PT. MUARA JAYA


6. Debt Financing

COMMERCIAL LOANS

 Secured & Unsecured loan


- The debtor may secure the loan by providing a guarantee to the creditor. When a loan is secured and
if a debtor’s default occurs, the creditor will be eligible to seize the collateral, serving as guarantee.
The collateral can be either the vessel per se or other vessels or even other company’s assets (cross-
collateral). Without regards to exceptions, the ship-owner will pay lower interest rate by concluding
secured loans and higher by concluded unsecured. Whether the debt should be secured or not is a
controversial issue that depends on various factors.
- As a general rule, robust shipping companies not facing default risk will secure their loan so as to
take advantage of the lower interest rate.
- In contrast, struggling companies will try to conclude an unsecured loan but they will be charged
[2]
with a higher interest rate
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

COMMERCIAL LOANS

 Recourse & Non-Recourse loan


- This differentiation occurs when the debtor has already defaulted and the creditor, after seizing the
collateral(s) securing the loan, has not yet gained his money back from the sale.
- The difference between purchase and market value of the vessel, provided the former coincides with
the loan value, constitutes the money actually owed by the borrower to the lender.
- If it comes to recourse loan the lender has the right to go after the borrower’s other assets until the
loan is fully repaid. Otherwise, in non-recourse loan, the lender does not have the same right and
his actions are limited to collaterals’ seizure. Profoundly, recourse loans are preferable from
creditors while non-recourse loans from debtors. As for interest rates, a non-recourse loan will
normally charge a higher rate than the recourse owning that to the higher risk entailed.
[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS

- When it comes to conclude a loan, ship-owners shall be aware of some specific terms
and points incorporated in the agreement. They determine and significantly affect the
borrower’s liquidity position, the ability to meet his financial obligations and to generate
profit, as well as the level of his exposure to risk. Some of these crucial points are
presented below:

[2]
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PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS

The figure 2 shows the 3-month USD


Libor from 2006 through 2014 based on
monthly intervals.

Interest rate

The lender charges the borrower with the interest rate in order to be remunerated for
not having the right to use the amount he has loaned. Debt can be issued on an either
floating or fixed rate according to each separate case, but the former seems to be more
common. Loan concluded on a floating rate does not restrain its swapping to fixed rate
in the future or vice versa. In general, fixed rates seem to be higher than the floating
yet this does not surely constitute a rule.
[2]
YUDHA PRASETIYO
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PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS

Repayment Schedule and Tenor

Loan’s repayment schedule determines when the installments have to be paid. In London,
same shall be paid either semiannually or quarterly. Tenor is another important point for a
loan indicating the exact time of its repayment. For example, a 20-year senior mortgage debt
has a 20-year tenor. Tenor is for loans what maturity is for bonds and other fixed-income
instruments. Not only defines the initial length of a loan, but also the remaining, meaning that
a senior debt issued with a 20-year tenor after a 5-year period will have a 15-years tenor.
Another important issue is that when a loan’s tenor is prolonged then the installments ae
reduced.

[2]
YUDHA PRASETIYO
SECTION
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PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS

Loan Amortization Schedule

- Through this schedule both the borrower and the lender can monitor what proportion of the
installment goes toward interest and what toward principal repayment.
- In essence, it is a quite simple table, which provides a breakdown of the periodic installments
- One borrower with a fixed rate loan will be well in advance informed of both interest and principal
amount since the interest payable is calculated by multiplying a fixed rate with the loan balance
[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS
Payment methods

The contractual parties, upon agreement, set the method


with which the loan repayment will be executed.
Despite having been defined from the conclusion, loan’s
repayment method is not irrevocable but may be
renegotiated during the loan’s tenor. There are plenty
ways for loan repayment, each one benefits and addresses
to different debtor’s profile. The most common
repayment methods are:

[2]
YUDHA PRASETIYO
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6. Debt Financing

CRITICAL POINTS
Payment methods

 Stable tranche: Tranche is predefined, equal and stable upon


maturity. Each installment consists of both interest and principal,
leading to an interest reduction during time due to less principal
outstanding. Therefore, stable installments not only allow
borrowers to manage their quarterly financial obligations, but they
also result to less over all interest payable.

[2]
YUDHA PRASETIYO
SECTION
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PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS
Payment methods

 Bullet payment: A bullet loan is a loan that does not amortize


over time and must be repaid with a single large payment (also
called a balloon payment) at the end of the term of the loan. Each
installment goes toward only interest and the entire principal is
paid at maturity date. Repaying the loan by this way ends up to a
great cost since the interest rate is multiplied with the initial large
amount of debt. This way of payment refers to a non-amortizing
loan. In spite of the fact that it entails a greater amount of interest
payable, under certain conditions it may be not so prohibitive a
proposal.
[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS
Payment methods

 Balloon payment: he term "balloon" indicates that the final payment is significantly
large. Balloon payments tend to be at least twice the amount of the loan's previous
payments.. “Balloon” is the pre-agreed principal given as a lump sum amount at the
loan’s maturity. It is reckoned as a percentage of loan payable at the end of the term.
Loan concluded with a 50% balloon payment means that the half principal will be paid at
the last tranche and all the other periodic payments will consist of the other half
principle allocated equally plus the interest. Note that the interest is calculated on the
loan’s balance, which decreases only by the principle payable until its term. This type of
payment is quite preferable by shipping companies especially when the freight market
downturns.
[2]
YUDHA PRASETIYO
SECTION
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PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS
Gearing (loan to asset value ratio):

- The ratio given from the bank varies depending on several factors. The most popular
among them are the bank’s own economic situation, the name and credibility of the
borrower, the age and type of the ship (new-building or second-hand), the collateral
given, the right to recourse other assets or not, the overall lending policy and the
competition between banks.
- Not only determines this ratio how much capital will be provided by the bank but also
how much it remains and needs to be funded by other ways of financing. In historically
high freight market this ratio regarding the reputable clients has surged to 80% requiring
from the owner to place only another 20% to materialize the investment. Nowadays, yet
at the shadow of global economic crisis, the hitherto dominant players of commercial
[2] lending are endeavoring either to decrease their shipping portfolio or to give a quite low
gearing.
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6. Debt Financing

CRITICAL POINTS
Currency Risk

- There is a risk for the borrower in regards to the currency in which the debt is issued.
Banks usually lend in dollars, euros or other major currencies thus the expected cash
flow must be in the same currency so as the borrower not to be exposed to currency
risk.
- Verily, most shipping companies borrow money with the three-month Libor in US-dollar
since their revenues and operating cash flows are in the same currency. Due to freight
market’s volatility and high risk, few are the borrowers opting to bear concurrently both
the financial and the currency risk.
- The strategy of finding a stronger currency and swapping the debt from USD from
example to CHF may seem attractive, but the hazard of CHF currency decrease lurks. The
[2] borrower the moment of swapping maybe owes less to the lender but in a potential CHF
fall he will owe more than prior to swapping.
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PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS

ADVANTAGES & DRAWBACKS


The most important advantages and
drawbacks of commercial lending from the
ship-owning side are presented in the table
below:

[2]
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PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS

ADVANTAGES

Lower cost of financing: Bearing in mind the simple payment hierarchy prevailing in every
shipping company, «labor gets paid, debt gets paid, taxes get paid and finally shareholders get
paid” it is clear why bank lending has the lower cost. Debtors, such as bankers, are exposed to
the lowest risk among the other capital providers, thus they normally charge the lowest cost.
Apart from preceding in the payment hierarchy, bankers most of the times grant secured loans
having as a mortgage at least the purchased vessel, if not even more vessels or other assets as
cross-collateral. Thus, they bear lower risk compared, for instance, to the bondholder of an
unsecured bond. Indeed, all loans in the examined companies have embedded vessels’
mortgages and stand senior in ranking. As for their cost of commercial lending, it ranges
between 3.9% -4.6% with DSX having achieved the lower of 1.5% averagely in the last 4 fiscal
years.

[2]
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PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS

ADVANTAGES

Negotiable payment methods and terms: The ship-owner along with the banker’s own
consent may choose the terms and payment method that suit better his interests and
business. Stable installments, balloon or bullet payments are some of the methods a bank can
offer, always depending on each company’s profile. After the loan has been granted the two
counterparties can renegotiate on the terms, if need be, or certain circumstances taken place.
Undeniably, the commerciality that a loan may offer enhances the company’s flexibility, a
rather crucial fact when considering the volatile shipping market.

[2]
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PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS

ADVANTAGES

No need for public exposure, no management intrusion: In contrast to bonds or equity capital
raised from markets, commercial lending does not only address to publicly traded companies
but to every single company, from a small scale traditional private shipping company to the
most sophisticated and complex public shipping enterprise. Therefore, there is no need for
public exposure; a private company has access to loans without having to enter the capital
markets. Additionally, the company has the privilege to share with the bank only certain,
predefined in the agreement activities, for instance selling the vessel, and not every
management movement and decision. Traditional ship-owners really appreciate this
advantage due to the fact that privacy, hands-on approach and intuitive knowledge have
always been precious attributes for them.

[2]
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6. Debt Financing

CRITICAL POINTS

ADVANTAGES

No risk of losing firm’s control: In case of a breach on the agreement, the firm’s control will
not be at stake unless differently stipulated in the agreement. If the ship-owner cannot fulfill
his obligations against the bank then the latter shall run after the embedded in the loan
collaterals so as to be remunerated.

[2]
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PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS

ADVANTAGES

Partner on vessel purchased by loan: The bank being a partner on the vessel purchased
protects the ship against potential third party claims. There have not been a few times that
Banks intervened in disputes between ship-owners and third parties so as to guarantee or
even to pay third parties for dismissing the vessel. Since disputes are in day-to-day life of
ship’s operation and may raise significant expenses, this advantage is quite important for ship-
owners leading even those in no need of financial aid to ask for a loan. Consider only that the
charterer has the right to seize either the cargo (voyage charter) or the vessel (time charter)
thus causing the vessel to lose hires for days.

[2]
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PT. MUARA JAYA


6. Debt Financing

CRITICAL POINTS

DRAWBACKS

Partner on vessel purchased by loan: Being a partner is not only a blessing but also a curse
considering that if the loan to asset’s value ratio drops below the accepted level then the
Banker has the right to force the sale of the vessel to mitigate damages.
Prerequisite collateral, strict covenants imposed: No loan can be concluded without
collateral, the least collateral that a Bank will require for lending money will be the ship
purchased, or alternatively, more ships or other assets (cross-collaterals). Covenants on
corporate governance issues and certain financial ratios are usually imposed restricting
management’s flexibility. The most commonly imposed covenants, as noticed in the panel
companies, are certain members of the Board of Directors to remain in their positions and
ratios such as loan to asset value, debt to equity, quick ratio as well as restricted cash to
maintain at specified levels.

[2]
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6. Debt Financing

CRITICAL POINTS

DRAWBACKS

No ample source of capital: Bank lending is not an ample source of capital but the amount
lent depends on various factors both microeconomic and macroeconomic. The various factors
affecting Banks and determining whether they shall invest in shipping or not, are stated
above.
Risk on property: As aforementioned, in a default case the lender may seize or sell the
mortgaged property and even chase other assets in case of recourse right or cross collateral.
Furthermore, many loans have incorporated provisions of a corporate guarantor or a personal
guarantor to compensate the bank if the collateral’s sale has proven not to be enough.

[2]
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6. Debt Financing

CRITICAL POINTS

DRAWBACKS

Restrained flexibility of vessel’s operations: The flexibility’s restriction derives not only from
the covenants imposed, stated above, but also from some cases that the bank does not
permit the vessel to trade freely wherever the management elects to, for instance the bank
sets specific trade zones exclusions.

[2]
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6. Debt Financing

CRITICAL POINTS
CONCLUSIONS

- Regardless the latest decrease of banks’ shipping portfolios, commercial lending will
continue to be a fundamental source of capital for shipping. Every shipping company,
either public or private, has borrowed funds from a spectrum of international as well as
national banks. This preference is not haphazard at all.
- Banks provide a relatively low cost of debt capital through a variety of financial instruments
tailored to firm’s unique needs without, at the same time, having any ownership to
company’s own equity. Moreover, if need be and when circumstances allow it, re-
negotiations of loan terms are permitted.
- On the other hand, the limited source of funding, the properties that may be at stake, if
default occurs or certain covenants are breached, do constitute disadvantages that shall be
considered. Yet, the advantages far outweigh the drawbacks of commercial lending making
bank financing a crucial and dominant source of funding for the shipping industry.
- All these sources have formed a new trend of raising money in the industry. Whether these
[2] alternatives will benefit the firms it remains to be proven.
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6. Debt Financing

Shipyard credit scheme

- Shipyard credit scheme refers to a financial aid scheme offered by various governments to
shipowners, in order to add incentives to put in orders at respective domestic shipyards.
- There are three ways in which a government can make its shipbuilding credit more
attractive than commercial bank credit to the shipowner.
- Government guarantee: Here the government stands as a guarantee for the shipowner’s
loan, hence helping the firm to borrow from a commercial bank. The value of the
guarantee depends on the credit standards that the government agency applies in issuing
the guarantee.
- Interest rate subsidy: Here the government subsidizes the interest rate that the shipowner
has to pay for the debt financing.
- Moratorium: A moratorium refers to a period of time in which there is a suspension on
interest or principal payments. This is typically agreed upon with the government in
difficult times, in order to lighten the burden and give the firm time to stabilize itself. A
[1] moratorium usually does not last longer than one or two years.
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6. Debt Financing

Private placements

- Private placements can, as earlier described, either be an offering of equity or debt


security to individuals or a small group of accredited investors.
- Debt private placements refer, in more detail, to a bond issue that is not trade on the
public market, but rather offered to a selected small group of investors.
- It can, as with bank loans, also be divided up into secured or unsecured and senior or
junior placements.
- Like its equity equivalent, the advantage with this type of financing compared to other
tradable securities, is that it does not need to be registered with the SEC in the United
States. You are hence able to secure financing much quicker than what you would be able
to do with similar tradable securities.
- Furthermore, you do not need to conform to the same standards as of public debt. You are
therefore allowed a larger degree of tailoring of products. Advantages from this tailoring
include the possibility of fixed interest rate or long duration (Berk, DeMarzo, 2011).
[1]
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6. Debt Financing

Private placements

[1]
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6. Debt Financing

Public Debt

Public debt is debt that is publically traded and is


often referred to as bonds. A bond is a fixed-
obligation debt security. The premise of such a
security is that the issuer sells a certificate of debt to
an investor. In return, the issuer promises to pay back
the investor the whole amount (the principal) at the
maturity of the bond. Between the issuing date and
the maturity, the issuer is also obligated to pay, at
pre-determined dates, an agreed upon interest rate on
the principal. This interest rate is known as the
coupon rate.

[1]
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6. Debt Financing

Public Debt

- The coupon rate the issuer offers depends upon the respective interbank rate (the
interest rate that banks charge each other for internal bank loans), the duration of the
bond and the credit rating the borrower has. If it becomes more expensive to borrow,
then this will be reflected in the interest rate.
- An important distinction when considering bonds, is to separate between investment
grade and junk bonds. All bonds rated BBB or higher are considered investment grade.
[1] Those below are called junk bonds, or high-yield bonds.
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6. Debt Financing

Public Debt
- The credit rating is decided by the rating agencies. The most
worldwide-recognized rating agencies are Standard & Poor
(S&P), Moody’s, and Fitch Rating. Between these there are
two different rating systems. Moody's assigns bond credit
ratings from Aaa to C, where Aaa represent the best and C
the worst. They divide each letter group ex (Aa) into three,
where three indicates that the company is considered to be
at the lowest segment of the letter group. S&P and Fitch,
rate based on a different system than Moody’s, where AAA
rated companies are considered to be the safest and D rated
firms is the lowest rated class of companies. Each letter
grouping here receives a plus, a minus or neither based on
its rating within that particular rating group. Even though
the rating systems differ, the systems are fairly similar, and
firms are often rated in the “similar” class. The difference is
[1] illustrated in Figure 4. We have here not included the
segment of each letter group (1,2,3 /+,-) (Moody’s, 2009)
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6. Debt Financing

Public Debt

Securitization of Public Debt

One can with bonds, as with private debt, divide public debt up according
to its seniority and degree of secured claims. Unsecure public debt can be
divided up according to maturity into notes and debentures, while secured
public debt can be separated into mortgage bonds and asset backed
bonds.

[1]
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6. Debt Financing

Public Debt

Bonds Repayment provisions


Typically a bond is repaid, by the issuer
making its coupon payments during the
duration of the bond, and finally the
principal at the end of maturity. There are,
however, other ways for the issuer to repay
the bond. The issuer can for instance
repurchase a portion of the outstanding
bonds in the market, or make a tender This type of bond is often issued by shipping companies.
offer for the entire issue (A public takeover Convertible bonds carry a lower coupon rate than a similar
bid to buy all bonds outstanding at a bond without the warrant option, and are often subordinate
specified price during a specified time, to other debt. The lower coupon rate can be explained by the
subject to the tendering of a minimum and imbedded warrant option, which makes the bond more
maximum number of shares). attractive, and hence require a lower coupon rate in order to
[1] attract investors (Brennan, Schwartz 1980).
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6. Debt Financing

Public Debt

Bonds as means of financing for shipping


In order to examine the suitability of bonds as a
mean of financing for the shipping industry, one
needs to consider the underlying characteristics of
the shipping industry. The industry is highly cyclical
and volatile both in terms of freight rates and asset
values. Most firms are heavily geared, as it is a
capital-intensive industry, and the asset life
expectancy is quite long; with the expectancy
depending on the particular shipping segment. Such
characteristics may suggest that it might be hard for
shipping companies to stay within covenants or make
coupons if the market is in a trough.

[1]
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6. Debt Financing

BONDS
A rather not traditional way of shipping financing but
currently quite popular constitutes bonds. Bonds appear lot
of differences related to commercial loans with the most
evident being the nature of lender. With this financial
instrument lenders are not banks but investors and the
borrower does not address to commercial lending markets
but to international capital markets. Primarily, the bond is a
debt security issued by the shipping company itself in a
nominated value called par value or face value. The
investors willing to place their money in this company
purchase its bonds having as an incentive to be paid
semiannually or annually the interest, where here same
called coupon, and at bond’s maturity the bond’s face value.

[2]
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6. Debt Financing

BONDS main bond’s terms


Face value or par value
- Par value is more commonly
used with bonds than with
stocks. With bonds, the par
value is the amount of money
that bond issuers agree to
repay to the purchaser at the
bond's maturity. A bond is
basically a written promise
that the amount loaned to the
issuer will be paid back.
- Face value is typically an Is simply the bond’s nominal value at which was issued.
arbitrary number set by the Bond’s face value is paid at maturity date provided there is
issuer, which is usually not an opposite provision like in callable bonds explaining
indicated on the below.
[2]
company's balance sheets.
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6. Debt Financing

BONDS main bond’s terms


Coupon rate:

- It is the rate whereby the


coupon payment is reckoned,
similar to loan’s interest rate.
Coupon rate may be fixed or
floating by linking it to Libor
or Euribor, more often
- A bond trading at a premium means that same
though coupon rate is fixed.
bonds tradable at secondary markets have rates
- Another important point
below its coupon rate. On the opposite, were
underlined by coupon rated is
bonds’ rates at secondary market are higher
whether bonds are traded at
than a bond’s coupon rate this bond is trading at
premium or at discount.
a discount.
[2]
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6. Debt Financing

BONDS main bond’s terms


Coupon or Coupon payment

Is the bond’s interest payment. In


more detail, the bond’s issuer is
obliged to pay at a predefined regular
basis, usually semiannually or •Use the current yield to calculate the
annually, the interest determined by annual coupon payment. This only works if
bond’s coupon rate, unless bonds are your broker provided you with the current yield
zero-coupon. of the bond. To calculate the payment based on
the current yield, just multiply the current yield
times the amount that you paid for the bond
(note, that might not be the same as the bond's
face value).For example, if you paid $800 for a
bond and its current yield is 10%, your coupon
[2] payment is .1 * 800 or $80
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6. Debt Financing

BONDS main bond’s terms


Maturity date
It is the predefined date at which
the bond’s face value is redeemed.
Depending on the maturity there are
short-term bonds called bills,
medium term bonds called notes
and long term bonds called just Maturity date differs from the bond’s duration since
bonds. At maturity date the the former refers to when the principal is paid to
bondholder is to receive along with bondholder while the latter refers to when the
the money given for purchasing bondholder will get its money back from bond’s
bond the last interest payment cash flows. Apparently, in some bonds, like zero-
(coupon payment), unless explicitly coupon, maturity and duration coincide whereas in
defined otherwise like in zero- others like in straight or vanilla bonds duration is
coupon bonds explaining below. less than maturity. Bonds with less duration are
preferable from investors due to their less risk
[2] entailed.
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6. Debt Financing

BONDS main bond’s terms


Yield to maturity
A quite useful way of valuating a
bond is through yield to maturity. In
essence, an investor holding a bond
wants to know beforehand what
would be the bond’s present value if
he intended to hold it until maturity The interest rate used for discounting the coupon
and not sell it at secondary market. payments is the periodic, in wit, the nominal annual
As it is apparent in the equation 2, bond’s interest rate divided by the number of
the present value of a bond is found payments through a year. As interest rates fluctuate
like this of an annuity plus the every trading day so does the bonds’ value, thus,
present value of the face value paid whenever an investor wants to evaluate his bonds
at maturity. until maturity, he shall put into practice the above
equation. Moreover, by using this equation
investors can compare the value of bonds with
[2] same maturity.
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6. Debt Financing

BONDS main bond’s terms


Yield to call
- In the case of callable bonds,
investors may find the bonds’
yield until the call date instead of
maturity date in order to evaluate
them. Finding the yield to call is
similar to finding yield to - When it comes to callable bonds and provided
maturity but the difference lies the issuing company will exercise its call option,
on the number of payments then the periodic payments is going to be less
received and the principal paid at and the principal paid at the end will be
the call date. augmented by a call premium, specified from
the bonds issuance.

[2]
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6. Debt Financing

BONDS
MAIN BOND TYPES
Zero-coupon bond
- The holder of this bond does not
receive regular payments during
the bond’s tenor but does receive
the interest payment either
discounted at the beginning or,
more frequently, lump sum at
the end together with the face - Due to the lack of regular payments, zero-coupon bonds are
value repayment (future zero- normally issued with a relatively high coupon rate serving as
coupon bonds). an incentive for the investors to buy them. Furthermore, this
type of bonds entails a higher risk than, for instance, the
straight bonds making them not likely to appear on a risk
averse investor’s portfolio.
[2]
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6. Debt Financing

BONDS
MAIN BOND TYPES
Vanilla or straight bond
- Vanilla bonds pay their holders the coupon
payment regularly either semiannually or
annually, providing them with a constant
source of income. Through this stable cash
flow stream, investors are more likely to
collect their initial capital even before bond’s
maturity and consequently they are to face
less risk but to gain fewer yields. Vanilla
bonds are quite preferable from risk-averse
investors requiring regular yield with
relatively low risk.

[2]
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6. Debt Financing

BONDS
MAIN BOND TYPES
Floating rate bond
- In contrast to bonds having fixed coupon rate,
therefore, stable coupon payment, there are
bonds whose coupon rate and similarly
coupon payment fluctuate according to the
variations of the major interest rates such as
Libor and Euribor. Volatile though the bond’s
coupon payments may be, they are paid - The bond’s coupon rate is the predefined
regularly providing to its investors certain interest rate (Libor, Euribor) plus a spread and
income. the interest paid is computed by multiplying this
coupon rate with the bond’s face value. Floating
rate bonds protect investors from interest rate
risk becoming attractive to investors reluctant
[2] to take great risks.
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6. Debt Financing

BONDS
MAIN BOND TYPES
High-yield bonds
- High-yield bonds, also called junk bonds, On account of that, there are many shipping
address to rather risk-taker investors. companies issuing high-yield bonds and a lot of
Companies ranked by the international credit investors worldwide willing to invest in and take the
rating agencies as below investment grade risk. Concerning also the present financial shortage
usually issue these bonds. Particularly, of bank’s market, shipping companies by issuing
companies rated by Moody’s and S&P as high-yield bonds can gain access to larger funds than
below “Baa” and “BBB” respectively are by borrowing from the commercial banks. High-yield
considered to be of high risk and in order to bonds usually constitute a non-amortizing debt
remunerate the investors bearing this risk meaning that the periodic payment refers only to
they offer very high yields. interest and not to principal repayment, as the
general rule for bonds. In some cases, in order the
company to be facilitated of not paying a huge capital
[2] outflow at maturity the sinking fund provision has
been embedded
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6. Debt Financing

BONDS
MAIN BOND TYPES
Callable bond
- Companies issuing these bonds are
protected or have the option to be protected
from paying more interest to the Indeed, selling expensive bonds in low
bondholders than the interest prevailing at interest rates and repurchasing them back
the market and this right is charged with a when interest rates go up and same are
higher repurchase (call option) price than cheaper constitutes a quite common
the one paid at maturity date. The difference practice to materialize gains in shipping
between call price and maturity price is called firms’ involved in bond markets.
call premium and in essence is the
“premium” paid to the bondholders for
indemnification.

[2]
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6. Debt Financing

BONDS
MAIN BOND TYPES
Redeemable bond
- In contrast to callable bonds, redeemable
bonds offer the right to investor to sell (put
option) his bonds back to the issuing - On account of this protection against
company under certain conditions and potential lower rates and/or
during a predefined time frame before unforeseen losses, put price is usually
maturity date. Same to the callable bonds, lower than maturity price.
redeemable bonds have embedded only an
option not an obligation for investors.

[2]
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6. Debt Financing

BONDS
MAIN BOND TYPES
Mortgage bond
- Mortgage bonds offer the same right to investors as mortgage
loans to commercial banks. Both owe the right to seize and sell
the collateral securing the bonds if the likelihood of company’s
default occurs. Particularly, companies owning many assets and
wishing to lend money at a lower cost issue bonds with an asset
embedded as collateral. Thus, investors are secured from losing
their money and on account of lower risk they normally accept a
lower yield. Mortgage bonds and mortgage debt in general are
widely used in shipping owing that to many assets’ possession,
vast capital needs to purchase more assets or to assist the
operation of existing and volatility of freight market. In shipping
the bond’s mortgage is usually either the vessel purchased by the
[2] bonds issuance or firm’s other vessels which solely serve as a
security of bonds.
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6. Debt Financing

BONDS
MAIN BOND TYPES
Debentures
- High-yield bonds without being
secured by collateral and with paying
off at a long-term maturity date are
called debentures.
- Manifestly, it is about a highly risky
investment whose investors shall be - Debentures are usually issued by large
compensated by a high yield and is corporations or well-established companies
addressed mainly to institutional and whose name and fame constitute their
not individual investors. guarantee and in shipping language their “word
is their bond”.

[2]
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6. Debt Financing

BONDS
MAIN BOND TYPES
Bonds with sinking fund provision
- Essentially, sinking funds stipulate an
obligation of the company issuing
such bonds to set aside money in
order to repurchase or redeem some
of its outstanding bonds before
reaching maturity. More clearly, an - Due to less default risk these bonds entail, they
independent corporation, else, a can normally be offered at a lower interest rate.
trustee is appointed to receive and As for accounting treatment, sinking fund is
deposit regularly payments made by deemed as a restricted asset shown in firm’s
the issuing company for future balance sheets just below its current assets, if
bonds’ redemption. method of decreasing liquidity is applied. Sinking
fund provision can be embedded in many types
[2] of bonds like high-yield, debentures etc.
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6. Debt Financing

BONDS
MAIN BOND TYPES
Convertible bonds
- Convertible bonds, as their name
witnesses, may be converted from debt
securities into equity stocks. Bond’s
conversion into equity is carried out
under predetermined conditions and
- Whether this conversion shall only be an option
during certain time spans. Thus, the
by the investor, by the issuer or shall be done
issuing company by converting to equity
mandatorily constitutes an issue agreed
a fraction of bonds can decrease debt
reciprocally but in the majority of cases is up to
and increase equity equivalently.
investor’s own decision.

[2]
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6. Debt Financing

BONDS
MAIN BOND TYPES
Perpetual Bonds
- Unlikely with other bonds, these bonds
pay interest to their holder to
perpetuity, to wit, forever. Before
becoming overenthusiastic with this fixed
income security’s feature, paying forever
- Perpetual bonds have usually embedded redemption
interest means having forever debt
rights so as the company can repurchase them back
outstanding, or more precisely not
repaying in whole the bondholders. Redemption rights
having stated a specific date of
will normally be exercised if interest rates go
redemption.
significantly down or if the issuer wishes to wipe away
the bonds’ debt. In the former case the issuer will be
benefited by issuing a new bond at lower coupon rate
whilst in the latter case by not having to make the
[2]
coupon payments.
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6. Debt Financing

BONDS
MAIN BOND TYPES
Bond with warrants
- Some companies issue bonds with
warrants attached wishing to grip
attention of potential investors. Warrants
grant the investor the right to purchase
the common stock of the company
- At the time of bonds issuance, warrants’ exercise price
issuing the bonds at a specified price
is usually higher than the current market’s price but in
and usually during an also specified time
highly fluctuating stocks, like those of shipping sector
period.
and especially of dry-bulk subsector, the high
possibility of market’s steep upturn add to bonds with
warrants a quite appealing feature. Bonds by
incorporating warrants become a hybrid financial
instrument sharing properties from both debt and
[2]
equity financing.
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6. Debt Financing

BONDS

ADVANTAGES & DRAWBACKS

[2]
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6. Debt Financing

BONDS

ADVANTAGES

Higher amount raised than that of a loan concluded: Normally the


amount of money raised by the companies from debt markets by issuing
bonds is higher due to no capital lend limitation and multiple investors
being about to share the risk. Profoundly, when it comes to loans, there is a
cap in the money that the bank can lend a firm and the level of this cap
differs not only from one bank to another but also regarding each
company’s credit profile. On the other hand, bonds are addressed to the
public from the large institutional investors to the individual bondholder.

[2]
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6. Debt Financing

BONDS

ADVANTAGES

No mortgages prerequisite: Bonds do not have to be secured; companies


can raise money from the debt markets without collaterals embedded but
by paying higher yield (coupon rate) to the bondholders. Once again, the
higher the risk entailed the higher the yield had to be paid. Therefore, the
company after weighing the pros and cons of a financial decision will opt
whether to issue secured or not secured bonds.

[2]
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6. Debt Financing

BONDS

ADVANTAGES

Increased flexibility: Bonds compared with the commercial loans, usually,


offer higher flexibility to the company owning that to the fewer and less
stringent covenants imposed. That is not to say that there are instances
were bonds’ covenant are the same with that of loans.

[2]
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6. Debt Financing

BONDS

ADVANTAGES

Lower interest rate can be achieved: Provided an early redemption right


is incorporated in the indenture, the issuer can achieve lower interest rate
by exercising this right when interest rates go down. In more detail, the
issuer will repurchase back the outstanding bonds and will issue new ones
with lower coupon rate than that of the previous bonds. All panel
companies having raised money through bonds have incorporated this
right in their indenture.

[2]
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6. Debt Financing

BONDS

ADVANTAGES

Capital gains can be acquired: Another advantage the issuer may reap
when the indenture includes an early redemption right is the capital gains
realization. When interest rates go up the outstanding bond is by
definition undervalued, thus the issuing company can realize gains by
repurchasing the bonds with less money than the required at maturity
date.

[2]
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6. Debt Financing

BONDS

DRAWBACKS

Higher cost: Financing through bonds incurs higher cost compared to


financing through commercial lending owning that the coupon rate is
greater than the average interest rate imposed by banking institutions.
Therefore, the comparison is made between the methods of debt
financing, bank lending, and not between the very different mezzanine
and equity financing. Is compared to them, debt financing in general
incurs by definition lower cost.

[2]
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6. Debt Financing

BONDS

DRAWBACKS

Higher cost when interest rates are lower: Provided no


redemption provision is available, when interest rates
go down so as that the bond’s coupon rate is higher
than that of a similar risk level bond, the company is
obliged to pay more due to the fixed character of the
coupon rate. Indeed the firm has locked its financial
position with the coupon rate unless redemption right
granted and exercised.

[2]
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6. Debt Financing

BONDS

PANEL COMPANIES’ FINDINGS

For comprehending and evaluating


the cost of a bond, two different
rates must be found: the bond’s
coupon rate and the yield to maturity
(YTM). The coupon rate as mentioned To make it clear, a high yield to maturity may not
before is the nominal bond’s rate mean an instant firm’s outflow but it does mean
stated in the indenture while the yield that the investors deem the company of higher risk
to maturity is the effective rate of the and, consequently, they require a higher yield in
investment reflecting the investment’s the next bond issuance. Same has been proven in
risk Dryships panel company.

[2]
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6. Debt Financing

BONDS

PANEL COMPANIES’ FINDINGS

The graph depict the YTM of Dryships


several bond securities and

[2]
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6. Debt Financing

BONDS

PANEL COMPANIES’ FINDINGS

the graph illustrates the


corresponding coupon rate whereas
both charts are compared with the
company’s rate of commercial loans
(rLoan).

[2]
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6. Debt Financing

BONDS

PANEL
COMPANIES’
FINDINGS

As it is clearly seen, convertible bonds issued in 2009 at a 5% coupon rate had a yield to maturity jumped
sky high at approximately 20% in 2011 and approched the coupon rate only when maturity date was
close, in 2013.

[2]
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6. Debt Financing

BONDS

CONCLUSIONS
Bonds and debt capital markets constitute an entry into a deep source of funding without
though bearing the high cost of equity.
Corporate notes is an indispensable financing tool for repaying their indebtedness, acquiring
vessels and support their operations and growth plans.
Moreover, when designed properly, notes may incorporate terms that benefits a shipping
company like the early redemption right. In fact, this right contained in all companies’ bonds
functions protectively against interest rates’ drop giving the right to the issuing corporation of
redeeming its notes earlier than maturity.
Therefore, when the interest rates are below the bonds’ coupon rate the firms with this right can
redeem them and issue new ones with lower interest rate. In every case though the financing
cost of bonds are higher than that of commercial lending and their issuance’ requirements block
the path for many firms making the corporate bonds a preferable but usually second in a row
funding solution
[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

Ship financing through leasing constitutes a non-conventional


way of financing having more similarities to debt rather than
equity financing.
Leasing does not entail any firm’s equity dilution, since the
lender, called the lessor, has no ownership of company’s shares
but does have ownership only of the ship or the ships he has
financed.
Apparently, the legal owner of the vessel(s) is the one that has
purchased them, hence the lessor, bestowing the vessel’s
operating and/or management rights to the lessee in return of a
regular payment called lease payment.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

affiliates, ship-yards
affiliates, ship-yards’ affiliates aiming to
facilitate shipping companies to acquire
vessels and, finally, other standalone entities
engaged in providing leasing solutions
As for prerequisites, lessors normally do not
require any lessee’s asset serving as cross
collateral neither any mortgage to secure their
leasing agreement but the vessel(s) leased
stands as the only collateral.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

To be specific there are 1. the financial lease and


two main leasing 2. the operating lease,
schemes, analyzed below.

both typically structured in the form of bareboat charters and rarely in


the form of time charter period.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

1. the financial lease


- The lessor purchases the vessel,
usually as nominated by the lessee,
and offers her to the lessee on a
defined, long-term bareboat charter.
For this period of charter, the lessor
receives defined lease payments,
paid by the lessee.
- The terms governing the bareboat
charter are agreed between the
contractual parties, but in every case
the bareboat charterer, who
identifies with the lessee, has to bear
all the expenses and risks that the
[2] vessel’s operation entails.
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

1. the financial lease


- Ship-lease’s duration is
determined by combining
lessor’s perspective regarding
vessel’s cash flow projection
and lessee’s historical The lessor benefits from the “big ticket” depreciation, while
performance records. the lessee benefits from the off-balance sheet financing, in
- When the financial lease wit, by having assets without these being financed through
agreement ends, the lessee, liabilities. The lessee, by using off-balance sheet financing,
normally after paying a specified employs the vessels currently acquired, but not owned,
capital amount, will gain the without having to either increase the company’s leverage or
vessel’s proprietorship hence is sell shares.
to be the residual risk taker.
[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

2. Operating leasing
- The major differences of operating and financial
leasing are summing up to three critical points: the
duration of the lease agreement, the balance
sheet treatment and the residual risk
- Owning to the operating leasing own nature of
granting the right to the lessor merely for
operational management, such agreements
concern shorter time-periods than that of financial
leasing, normally ranging between 5 and 7-year
contracts.
- As for the operating risk, it normally burdens the lessee, but in order to avoid any
misinterpretation of the costs that a ship or machinery breakdown entails, a separate
[2] contract, which incorporates operating issues, is worth being attached.
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

SHIP-LOAN VERSUS SHIP-LEASING

SHIP
SHIP LOAN VS
LEASING

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING
VS SHIP
SHIP LOAN
LEASING
SHIP-LOAN VERSUS SHIP-LEASING

By comparing these two ship-finance methods,


the advantages and drawbacks of leasing will be Note that loans are amortizing until
adequately presented. Suppose that a shipping reaching their tenor and these amortization
company pursues to acquire a brand new fuel- expenses are the tax-deductible ones not
efficient vessel and has only two ways to achieve it, the principal paid per se. Alternatively, in a
either by concluding a loan or by engaging in a leasing scheme the same company will gain
leasing agreement. a 100 % financing by having the lessor
Generally, commercial banks will charge the paying the whole amount needed for the
shipping company an interest rate for a loan vessel’s acquisition without being obliged to
assignment, probably on a floating basis, secure the lease deed with any cross-
collateral.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

SHIP-LOAN VERSUS SHIP-LEASING

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

SHIP-LOAN VERSUS SHIP-LEASING


Summarizing, financing a vessel through a leasing structure provides flexibility in various ways. Firstly,
by enabling to opt at the expiration whether the vessel will be purchased or not (financial leasing), by
financing 100% of the vessel, by offering freedom of choice in vessel’s chartering strategy, by allowing
the management to operate the vessel and by providing an off-balance sheet financing and tax shield.
Having said that, it seems to be the identical scenario but this is not exactly the case for every company
seeking ship-finance.
The flexibility is restrained by the time the lease deed expires; indeed, in many cases the leasing
termination has coincided with the markets’ downturn, leaving the lessees exposed to higher lease
payments than the average time charter hires received from charterers. That might also be the case
with commercial loans, with the borrower having to pay loan installments greater than the hire
payments received. T

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

SHIP-LOAN VERSUS SHIP-LEASING


- The difference, though, lies on the fact that the borrower, upon negotiations with the lending
bank, will probably achieve to alter the loan terms, like extending the repayment, setting a
balloon payment at maturity etc.
- Bank institutions can more commercially negotiate the terms in harsh market conditions due to the
greater security they enjoy by mortgaging other assets or by concluding senior or recourse loans. On
the other side, a company highly leveraged may not reap benefits from contracting one more loan
but it shall lease a vessel instead and maintain the right to leave her in adverse economic
conditions. Furthermore, in such capital-intensive industries as shipping, tax effects play a key role
on the financing decisions, even though shipping in some countries enjoys tax allowances and in
some others, called tax haven, pays no taxes at all.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

CONCLUSIONS

As long as the commercial banks are narrowing the margins of financing and
imposing more stringent terms on loans, lease financing is going to gain ground
and provide an advantageous financial solution. However, bank’s credit facilities
will continue to be the first choice leaving the leasing to be another financing
option to consider under unfavorable banking conditions or in highly geared
corporations. The advantages though that leasing encompasses shall not be
neglected since they form a financing solution rather preferable under certain
conditions.

[2]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


6. Debt Financing

LEASING

CONCLUSIONS

By leasing vessels, the company would have to make high lease payments taking into account that the
market is bull but concurrently would receive abnormal hire rates without increasing its leverage at
all.
In a first stage, as long as the lease payments are lower than the hire rates, the company generates
profit. Furthermore, when the market plummeted, the company that had leased the vessel will give her
back to the lessor, while if this company had opted to acquire the vessel by concludinag loan it will have
to continue servicing its obligations. In this particular case, if the company defaults to pay its
installments, the bank will not only force it to sell the vessel but will also chase firm’s other assets
since the loan value will be higher than the vessel’s current market price. Having said that, leasing
seems to be a supplementing financial solution, yet advantageous if employed under specific
conditions, rather than a firm’s basic source of funding.
[2]
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Table of Contents

1. DIFFERENT ASSET CLASSES OF FUNDING


2. METHOD
3. DATA SAMPLE
Departement Teknik Sistem Perkapalan ITS

1. Different asset classes of funding PT. MUARA JAYA

7.1 BASEL

Basel can be used as a consideration for a series of central bank policies from
around the world. Before entering the basel discussion, we first know the
significance of capital for banks. The bank is a liaison with people, which can be
interpreted as a channel for bank customers and the money can be used by other
customers. The bank has a very important role for the community in saving,
channeling funds and investing public funds, for which banks must have a high
reputation in terms of capital for the bank itself

Source: Investopedia
Departement Teknik Sistem Perkapalan ITS

Basel 1 PT. MUARA JAYA

Basel 1

The first Basel Accord, Basel I was issued in 1988. Basel I focuses on capital
adequacy of financial institutions. Capital adequacy risk (the risk to be borne by
financial institutions against unexpected losses) is categorized as an asset divided
into five risk categories, namely 0%, 10%, 20%, 50% and 100%.

Source: Finsers transforming


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

In Basel I banks operating internationally are obliged to meet the needs of the Bank's
Minimum Capital Ratio or known as a CAR of 8%.

The 0% risk category consists of cash, the central bank and government debt, and every
organization for economic and development cooperation or the Organization for Economic
Cooperation and Development (OECD).

Public sector debt is placed in the 0%, 10%, 20% or 50% categories, depending on the
debtor.

Bank debt for development, OECD debt securities companies, non-OECD bank debts that
fall below one year, non OECD public sector debt and cash in the 20% category.

The 50% category is housing loans, and the 100% category is represented by private debt,
non-OECD bank debt (maturity of more than one year), real estate, factories and
equipment, and capital instruments placed in other banks.

Banks must maintain capital of at least 8% of weighted assets at risk. For example, if the
bank has a risk-weighted asset of US $ 100 million, then a minimum capital adequacy of US
$ 8 million is needed.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 “COOKE” RATIO
 Named after Peter Cooke (Bank of England), the chairman of the Basel
committee)
 Cooke Ratio=Capital/ Risk Weighted Assets≥8%
 Definition of Capital
 Capital= Core Capital
+ Supplementary Capital
- Deductions

Source: FBF FR
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 DEFINITION OF CAPITAL IN BASEL-I

TIER 1
Paid-up share capital/common stock
Disclosed reserves (legal reserves, surplus and/or retained profits)
TIER 2
 Undisclosed reserves (bank has made a profit but this has not appeared in
normal retained profits or in general reserves of the bank.)
 Asset revaluation reserves (when a company has an asset revalued and an
increase in value is brought to account)
 General Provisions (created when a company is aware that a loss may have
occurred but is not sure of the exact nature of that loss) /General loan-loss
reserves
 Hybrid debt/equity instruments (such as preferred stock)
 Subordinated debt
Departement Teknik Sistem Perkapalan ITS

1996 MODIFICATION: INTERNAL MODEL PT. MUARA JAYA

 Internal Model → Value at Risk Methodology

 Tier III Capital (Only for Market Risk)


i) Long Term subordinated debt
ii) Option not to pay if minimum required capital is <8%

Source: Casual capital


Departement Teknik Sistem Perkapalan ITS

RISK WEIGHT CATEGORIES IN BASEL - I PT. MUARA JAYA

0% Risk Weight:
 Cash,
 Claims on central governments and central banks denominated in national
currency and funded in that currency
 Other claims on OECD countries, central governments and central banks
 Claims collateralized by cash of OECD government securities or guaranteed by
OECD Governments

20% Risk Weight


 Claims on multilateral development banks and claims guaranteed or
collateralized by securities issued by such banks
 Claims on, or guaranteed by, banks incorporated in the OECD
 Claims on, or guaranteed by, banks incorporated in countries outside the OECD
with residual maturity of up to one year
 Claims on non-domestic OECD public-sector entities, excluding central
government, and claims on guaranteed securities issued by such entities
 Cash items in the process of collection
Departement Teknik Sistem Perkapalan ITS

RISK WEIGHT CATEGORIES IN BASEL - I PT. MUARA JAYA

50 % Risk Weight

 Loans fully securitized by mortgage on residential property that is or will be


occupied by the borrower or that is rented.

100% Risk Weight


 Claims on the private sector
 Claims on banks incorporated outside the OECD with residual maturity of over
one year
 Claims on central governments outside the OECD (unless denominated and
funded in national currency)
 Claims on commercial companies owned by the public sector
 Premises, plant and equipment, and other fixed assets
 Real estate and other investments
 Capital instruments issued by other banks (unless deducted from capital)
 All other assets
Departement Teknik Sistem Perkapalan ITS

THE PROBLEM WITH THE RISK WEIGHTS PT. MUARA JAYA

 Risk weights were based on what the parties to the Accord


negotiated rather than on the actual risk of each asset
 Risk weights did not flow from any particular insolvency
probability standard, and were for the most part,
arbitrary
 The requirements did not explicitly account for
operating and other forms of risk that may also be
important
 Except for trading account activities, the capital
standards did not account for hedging, diversification,
and differences in risk management techniques
Departement Teknik Sistem Perkapalan ITS

1993 PROPOSAL: STANDARD MODEL PT. MUARA JAYA

 Total Risk= Credit Risk+ Market Risk


 Market Risk= General Market Risk+ Specific Risk
 General Market Risk= Interest Rate Risk+ Currency Risk+ Equity Price Risk +
Commodity Price Risk
 Specific Risk= Instruments Exposed to Interest Rate Risk and Equity Price Risk

Source: D2K Technolgy


Departement Teknik Sistem Perkapalan ITS

BANKS’ OWN CAPITAL ALLOCATION MODELS PT. MUARA JAYA

 Advances in technology and finance allowed banks to develop their own


capital allocation (internal) models in the 1990s
 This resulted in more accurate calculations of bank capital than possible
under Basel-I
 These models allowed banks to align the amount of risk they undertook on a
loan with the overall goals of the bank

Source: The Heritage Foudation


Departement Teknik Sistem Perkapalan ITS

INTERNAL MODELS AND BASEL I PT. MUARA JAYA

 Internal models allow banks to more finely


differentiate risks of individual loans than is
possible under Basel-I
 Risk can be differentiated within loan categories and
between loan categories
 Allows the application of a “capital charge” to each
loan, rather than each category of loan

Source: Money, Banking and Financial Markets


Departement Teknik Sistem Perkapalan ITS

IVARIATION IN RISK QUALITY PT. MUARA JAYA

 Banks discovered a wide variation in credit quality within risk-weight


categories
 Basel-I lumps all commercial loans into the 8% capital category
 Internal models calculations can lead to capital allocations on
commercial loans that vary from 1% to 30%, depending on the
loan’s estimated risk

Source: Kamakura Corporation


Departement Teknik Sistem Perkapalan ITS

CAPITAL ARBITRAGE PT. MUARA JAYA

 If a loan is calculated to have an internal capital charge that is low compared


to the 8% standard, the bank has a strong incentive to undertake regulatory
capital arbitrage
 Securitization is the main means used especially by U.S. banks to engage in
regulatory capital arbitrage

Source: The Financial Express


Departement Teknik Sistem Perkapalan ITS

Basel 2 PT. MUARA JAYA

 This is an update from Basel I. BCBS announced the Basel II framework in


2004. This regulation focuses on three pillars, namely pillar I minimum capital
requirements, pillar II supervision of regulations and pillar III of market
discipline to encourage sound banking.
 Minimum capital requirements are the most important thing in this regulation
and banks are required to maintain a minimum capital adequacy ratio of 8% or
less

Source: www.alrajhibank.com.sa
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Banking regulations in each country vary before there is a Basel Accord. The
integrated framework of Basel I and then Basel II helped to alleviate the
concerns of member countries about the differences in banking regulations
and capital requirements that differed in each country.

Source: Europa EU
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 In Basel II, the calculation of bank capital is contained in the Minimum Capital
Requirement I Pillar. In various alternatives the above approaches can basically be
grouped into two major groups, namely the standard approach applies to all banks
and models developed internally in accordance with the characteristics of business
activities and the risk profile of individual banks (internal models) so that it is
more sophisticated.

 True improvements to the BCBS market risk framework have been carried out
several times. In 2009 BCBS published improvements to Basel II with the Basel 2.5
concept.

 An assessment of the stability of the financial sector of a country will not be based
on the implementation of Basel but rather based on the fulfillment of the country
towards the 25 Basel Core Principles for Effective Banking Supervision (BCP).
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Minimum Capital Requirement (MCR)


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

PILLAR I: Minimum Capital Requirement

1) Capital Measurement: New Methods


2) Market Risk: In Line with 1993 & 1996
3) Operational Risk: Working on new methods

Pillar I is trying to achieve


 If the bank’s own internal calculations show that
they have extremely risky, loss-prone loans that
generate high internal capital charges, their
formal risk-based capital charges should also be
high
 Likewise, lower risk loans should carry lower risk-
based capital charges
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Credit Risk Measurement


1) Standard Method: Using external rating for
determining risk weights
2) Internal Ratings Method (IRB)
a) Basic IRB: Bank computes only the probability of
default
b) Advanced IRB: Bank computes all risk components
(except effective maturity)
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Operational Risk Measurement

1) Basic Indicator Approach

2) Standard Approach

3) Internal Measurement Approach


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Pillar I also adds a new capital component for operational


risk
 Operational risk covers the risk of loss due to system
breakdowns, employee fraud or misconduct, errors in
models or natural or man-made catastrophes, among
others
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

PILLAR 2: Supervisory Review Process

1) Banks are advised to develop an internal capital


assessment process and set targets for capital to
commensurate with the bank’s risk profile
2) Supervisory authority is responsible for evaluating how
well banks are assessing their capital adequacy
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

PILLAR 3: Market Discipline

Aims to reinforce market discipline through


enhanced disclosure by banks. It is an indirect
approach, that assumes sufficient competition
within the banking sector
Departement Teknik Sistem Perkapalan ITS

ASSESSING BASEL-II PT. MUARA JAYA

 To determine if the proposed rules are likely to yield reasonable risk-based


capital requirements within and between countries for banks with similar
portfolios, four quantitative impact studies (QIS) have been undertaken

 Results of the QIS studies have been troubling


 Wide swings in risk-based capital requirements
 Some individual banks show unreasonably large declines in required capital

 As a result, parts of the Basel II Accord have been


revised

Source: European Banking Authority - Europa EU


Departement Teknik Sistem Perkapalan ITS

IMPLICATIONS OF BASEL-II PT. MUARA JAYA

 The practices in Basel II represent several important


departures from the traditional calculation of bank capital
 The very largest banks will operate under a system that
is different than that used by other banks
 The implications of this for long-term competition
between these banks is uncertain, but merits further
attention
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Basel II’s proposals rely on banks’ own internal risk


estimates to set capital requirements
 This represents a conceptual leap in determining
adequate regulatory capital
 For regulators, evaluating the integrity of bank models is a
significant step beyond the traditional supervisory process
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Despite Basel II’s quantitative basis, much will still depend on the judgment
1) of banks in formulating their estimates
and
2) of supervisors in validating the assumptions used by banks in their models
Departement Teknik Sistem Perkapalan ITS

Basel 3 PT. MUARA JAYA

 In July 2010, an agreement was reached regarding the design of the entire capital
and liquidity reform package known as Basel III.

 This regulatory framework is a continuation of the three pillars in Basel II with


additional requirements and safeguards, including requiring banks to have a
minimum general equity and minimum liquidity ratio.

 Basel III also provides additional requirements for financial institutions that have a
systemic influence on the world banking industry. But in general, the capital
adequacy regulations remain at the level of 8%.

 Basel III implementation has been started in stages since January 2013, and is
expected to be fully implemented on January 1, 2019.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 In addition, the implementation of Basel III will be expected to overcome the


procyclicality of credit growth and improve bank resilience through increased
capital. Which is ultimately expected to reduce excessive credit growth as a
source of systemic risk.

 Banking procyclicality is the behavior of excessive bank lending that


encourages faster economic growth when in conditions of expansion and
accelerates the decline in economic activity when contracted.

 However, another impact is that the implementation of Basel III can also
reduce overall bank credit growth.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Source: Rizky Pratama Putra Perkasa 26110185 - WordPress.com


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Pillar 1
 requires banks to hold a minimum total capital level of 8% as a function of their risk
level, similar to what was proposed in Basel I. What has changed from the initial Basel
accord is the definition of risk-weighted assets and the division of capital. The hallmark
of Basel II is the alteration in the treatment of risk, as well as the explicit incorporation
of operational risk in risk-weighted assets. The bank capital has been divided up into
two tiers: Tier I and Tier II capital. A requirement for the degree of Tier I capital has
also been set. After Basel II, each bank is required to have 4% of Tier I capital, and
common equity of 2 %, known as core Tier I capital.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Pillar 2
 the administration will evaluate the activities and risk profiles of each individual bank
in order to decide whether the organization needs to adjust and consequently hold more
capital than the minimum requirements of Pillar 1. The concept is hence that well-
managed banks should seek to go beyond simple compliance with the minimum capital
requirements, and perform a comprehensive assessment of whether they have sufficient
capital to support their own individual risk profile. These assessments are known as
Internal Capital Adequacy Process (ICAAP)
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Pillar 3
 The Basel accord seeks to complement the framework set forward in Pillar 1 and 2, by
improving transparency of the banking sector. Pillar 3 aims to do this by requiring the
banks to publish details on the scope of their operations, capital, risk exposure, risk
assessment processes, and capital adequacy. These disclosures are required to be made
at least twice a year, except for the qualitative disclosures, which are only needed
annually and provide a summary of the general risk management objectives and
policies. This pillar allows the public to evaluate the individual bank's risk profile,
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Basel III also introduces: additional capital buffers, a minimum


leverage ratio, and two liquidity ratios.

 Capital serves as a buffer to absorb unexpected losses and to fund ongoing


activities
 of the firm.
 Banks are required by their regulators to hold minimum amounts of capital.
Capital
 ratio’s depend on two things; the capital buffer and risk weighted assets.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 To improve the quality, consistency and transparancy of the capital base the
following
 changes are proposed under the new Basel III framework:
 • Increase of requirements on minimum Tier 1 (T1) capital.
 • Increase in the standards for instruments to qualify as T1 capital.
 • Harmonisation of Tier 2 (T2) capital instruments and the elimination of Tier
 3 (T3) capital.
 • Revision of appropriate capital deductions such as minority interests and
deferred
 tax assets.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 The minimum requirement for common equity will be raised from the current
2% level to 4.5%. The T1 capital requirement will increase from 4% to 6%. The
capital conservation buffer above the regulatory minimum requirement must
be calibrated at 2.5% and be met with common equity. A countercyclical
buffer within a range of 0-2.5% of common equity or other fully loss-absorbing
capital is implemented according to national circumstances

Source: White paper bassel 3


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Tier 1 capital is intended to ensure that each bank remains a “going-concern”.


It is the highest quality form of a bank’s capital as it can be used to write off
losses. It is composed of core capital, which consists primarily of common
equity (common stock and retained earnings) and some equity-like debt
instruments, which are both subordinated and discretionary (discretionary
dividends are those paid, not by contractual obligation, but at the discretion
of the issuer of the underlying instruments).
 Tier 2 capital is intended to protect depositors in the event of insolvency, and
is thus re-categorised as a “gone-concern” reserve. Given the Basel III focus
on incentives to redeem only dated subordinated debt remains eligible as T2
capital. As mentioned before, Tier 3 capital is to be completely abolished. T3
capital is short-term subordinated debt and was used under Basel II to support
market risk from trading activities.
Departement Teknik Sistem Perkapalan ITS

Capital leverage ratio PT. MUARA JAYA

 The newly introduced leverage ratio is intended to serve as a simple non-risk


based metric to supplement risk-based requirements. This leverage ratio is
calculated as
Departement Teknik Sistem Perkapalan ITS

Liquidity ratios. PT. MUARA JAYA

 a) The Liquidity Coverage Ratio (LCR) The LCR is implemented to promote the
short-term resilience of a banks' liquidity risk profile. It achieves this by requiring
that a bank holds an adequate stock of high-quality liquid assets that can be
converted into cash immediately in private markets, in order to meet its liquidity
needs for a 30 calendar day liquidity stress scenario. This requirement will
strengthen the banking sector's ability to absorb shocks arising from financial and
economic stress, thus reducing the risk of spillover from the financial sector to the
real economy.
Departement Teknik Sistem Perkapalan ITS

Liquidity ratios. PT. MUARA JAYA

 b) The Net stable funding ratio (NSFR) This ratio aims to ensure banks are able
to survive an extended closure of wholesale funding markets. The Net stable
funding ratio establishes a minimum acceptable amount of stable funding to
exceed the required amount of stable funding over a one-year period of
extended stress. The ratio comes as a response to severe shortage of funding
many banks experienced in the recent crisis, caused by their significant
reliance of short term funding through the interbank market.
Departement Teknik Sistem Perkapalan ITS

1.1.1 CRITICS PT. MUARA JAYA

 Even though it is clear that a further tightening of the financial regulatory


system was needed, critics of the accord have claimed that the greater
regulation is responsible for the slow recovery of the world economy. Tighter
Basel III requirements may further negatively affect the stability of the
financial system, by increasing the incentives of banks to game the regulatory
framework (Taylor, 2012)(Suttle, 2011).
Basel-I accord was criticized
i) for taking a too simplistic approach to setting credit risk weights
and
ii) for ignoring other types of risk
Departement Teknik Sistem Perkapalan ITS

1.1.2 The Basel Accord’s effect on the Banking industry PT. MUARA JAYA

 Following the latest change in the Basel Accord; many banks have been struggling to
fulfill the requirements set forward. As we have discussed, the required quality of the
minimum capital has increased and several additional capital buffers have been
required. This has forced the banks to readjust their balance in order to optimize the use
of equity.
 In addition, this would be a strategy of high risk, as deposits often represent
30-40% of the bank's funding (Gade Greve, 2013). Banks hence rarely turn to
this option in order to increase revenues. Following the fall of the market,
several banks have downsized, and made cuts in less crucial areas. This has
happened either by selling out some of the assets or reducing staff.
Departement Teknik Sistem Perkapalan ITS

1.2 Liquidation of a firm PT. MUARA JAYA

 When a firm cannot meet its debt obligations the firm is in default. The creditors can
then take legal action against the firm to collect the outstanding payments by taking
control over the firm's assets. Hence the control of the firm is transferred from the
equityholders to the debtholders. Since a firm generally has several creditors there exist
bankruptcy codes to ensure fairness and coordination between the creditors. These
codes differ from country to country and so does also the friendliness towards the
creditors and debtors.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Since firms generally have multiple creditors there exists a hierarchy that
states the priority of claims for the different debtholders. This hierarchy is
known as the "Absolute Priority Rule" (APR)

Source: Gestel, Baesnes, 2009


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 The rating agency Moody's has compiled a database of the recovery rates for
debtholders holding different priorities in non-financial US corporations. The
database dates back from 1987 and consists of over 3500 loans and bonds
taken from 720 non-financical coperations. Figure bellow shows the recovery
rate for the different seniorities. The higher the seniority, the more the
creditor will one average recover.

Source: Moody’s Ultimate Recovery Database, n.d.


Departement Teknik Sistem Perkapalan ITS

1.3 Norsk Tillitsmann/ Norwegian Trustee PT. MUARA JAYA

 The Norwegian Trustee is an independent bond trustee


that acts as the link between bondholders and the issuing
firm. In Norway, 95% of the bonds have a trustee
arrangement. During the past five years, the trustee has
seen an increase in high-yield bonds from the oil, offshore
and shipping sector.

Source: OECD.org
Departement Teknik Sistem Perkapalan ITS

1.3 Norsk Tillitsmann/ Norwegian Trustee PT. MUARA JAYA

 Characteristics of the Norwegian economy


• Wealthy, when measured by GDP, but also by UN’s happiness indicator
• Low unemployment rate, in spite of high unemployment benefits or high
labour participation
• Wages are high and the wealth relatively is equally distributed

Source: White paper bassel 3


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Benefits of using a trustee from the issuers’


perspective
 By using a trustee, the issuer will only have one single
point of contact when addressing the bondholders. Should
there be need to make minor changes to the loan
agreement, the trustee has the authority to act on behalf
of the bondholders. In addition, the trustee may act as a
sparring partner for the issuer.

Source: PropTiger
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Benefits from the bondholders' perspective


 Since one of the main tasks of the trustee is to monitor and take
action should the loan agreement be broken, this greatly reduces the
monitoring costs of each bondholder. As mentioned earlier, decisions
require 2/3 majority by the bondholders, this thereby limits the power
of bondholders with special interest, and for the most part secures
equal treatment for all bondholders

Source: Pimco
Departement Teknik Sistem Perkapalan ITS

Success factors for the rapid economic growth PT. MUARA JAYA

Resources
• Climate and geography
– Mountains, rivers and Gulf stream
– Electricity
– The fjords and fertile soil – fish,
timber and livestock
• Oil
– Increasing oil prices in the sixties
and seventies made it possible to
exploit oil from the North Sea.
• Terms of trade
– ”China-effect” → improved terms
of trade.
– Cheap imports and expensive
exports
Source: Norewegian Economy
Prestmo
Departement Teknik Sistem Perkapalan ITS

Success factors for the rapid economic growth PT. MUARA JAYA

Collaboration, trust and equality


• Success by working together
– Centralized wage bargaining (LO – NHO)
– Sharing profits (wage differential, sponsorship, bonus schemes)
– “Protestant work ethic” – it’s expected that individuals will do its
duty
• Equality between gender and individuals
– Same opportunities
– Female labour
Increasing labour force and improving equality
• High degree of trust
– We have great trust in each other
You are expected to keep your promises
Fewer contracts or law suits
Departement Teknik Sistem Perkapalan ITS

Success factors for the rapid economic growth PT. MUARA JAYA

Knowledge and technology


• A public education system
– Primary school to universities
– Roughly 50 % of kindergartens
are private – but publicly financed
• Scholarships to pupils from poor
families and stipends to all
students
• Growth in higher education
– Understanding new technology
– Implement new machines or

Source: Norewegian Economy


Prestmo
Departement Teknik Sistem Perkapalan ITS

Success factors for the rapid economic growth PT. MUARA JAYA

Politics and its influence on growth


Government intervene in most part of the economy
– Large bureaucracy
– Public corporations
Important parts of the economy: Infrastructure, Oil, electricity, telecom,
transport,
New technology: Innovation centres (green tech, export industry)
Important for the equality: Educational system, health care
• Taxes and subsidies
– Tax things you dislike (tobacco, pollution etc)
– Subsidy thing you like (tech, green tech, farming etc)
Departement Teknik Sistem Perkapalan ITS

Success factors for the rapid economic growth PT. MUARA JAYA

Economic trends in Norway


• Decreasing unemployment rate
– 2.6 % in 2014
– Far less than the UK, US,
Sweden and Euro-area
– Large public sector (close to half
of all activity is linked to the
Norwegian State in some sense)
• Rising production
– GNP - Mainland is expected to
rise by 3.3 % in 2011
• Increasing housing prices
• Higher lending rates (4-7 %)
– Expects the NOK to weaken Source: Norewegian Economy
Prestmo
Departement Teknik Sistem Perkapalan ITS

8. Method PT. MUARA JAYA

Hypothesis
Testing
Procedures

Parametric Nonparametric

Wilcoxon Kruskal-Wallis
Rank Sum H-Test
Test
One-Way
Z Test t Test
ANOVA
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Corresponding
Purpose of test Parametric Test
Nonparametric test

Mann-Whitney U test;
Compares two t test for independent
Wilcoxon rank-sum
independent samples samples
test

Examines a set of Wilcoxon matched pairs


Paired t test
differences signed-rank test

Assesses the linear


Spearman rank Pearson correlation
association between
correlation coefficient coefficient
two variables.

Compares three or more Kruskal-Wallis analysis One way analysis of


groups of variance by ranks variance (F test)

Compares groups
classified by two Friedman Two way Two way analysis of
analysis of variance variance
different factors
Departement Teknik Sistem Perkapalan ITS

Types of Data and Analysis PT. MUARA JAYA

Nominal: No numerical value


Ordinal: Order or rank
Discrete: Counts
Continuous: Interval, ratio
Departement Teknik Sistem Perkapalan ITS

Nominal Data PT. MUARA JAYA

- Non numerical value

- Blood grouping: A, B, AB, O

- Grades in PHL 541: A+

- Urates in urine: ++, +++, +


Departement Teknik Sistem Perkapalan ITS

Ordinal Data PT. MUARA JAYA

Items on an ordinal scale are set into some kind of order by their position on the
scale. This may indicate such as temporal position, superiority, etc.

The order of items is often defined by assigning numbers to them to show their
relative position. Letters or other sequential symbols may also be used as
appropriate.

You cannot do arithmetic with ordinal numbers -- they show sequence only.
Example
The first, third and fifth person in a race.
Pay bands in an organization, as denoted by A, B, C and D.
Departement Teknik Sistem Perkapalan ITS

Discrete Data PT. MUARA JAYA

• A type of data is discrete if there are only a finite number of values


possible or if there is a space on
• the number line between each 2 possible values.

• Exmple. A 5 question quiz is given in PHL 541 class. The number of


correct answers on a student's quiz is an example of discrete data. The
number of correct answers would have to be one of the following : 0, 1,
2, 3, 4, or 5. There are not an infinite number of values, therefore this
data is discrete. Also, if we were to draw a number line and place each
possible value on it, we would see a space between each pair of values.

• Exmple. In order to obtain a taxi license in Riyadh, a person must pass a


written exam regarding different locations in the city. How many times it
would take a person to pass this test is also an example of discrete data.
A person could take it once, or twice, or 3 times, or 4 times, or… . So, the
possible values are 1, 2, 3, … . There are infinitely many possible values,
but if we were to put them on a number line, we would see a space
between each pair of values.

• Discrete data usually occurs in a case where there are only a certain
number of values, or when we are counting something (using whole
numbers).
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

1) Discrete: The number of suitcases lost must be a


whole number.

2) Continuous: The height of corn plants can take on


infinitely many values (any decimal is possible).

3) Discrete: The number of ears of corn must be a whole


number.

4) Continuous: The amount of time can take on infinitely


many values (any decimal is possible).

5) Continuous: The weight of the tomatoes can take on


infinitely many values (any decimal is possible).
Departement Teknik Sistem Perkapalan ITS

Nonparametric Test Procedures PT. MUARA JAYA

A nonparametric test is a hypothesis test


that does not require any specific
conditions about the shape of the
populations or the value of any population
parameters.

Tests are often called “distribution free” tests.


Departement Teknik Sistem Perkapalan ITS

Wilcoxon rank sum test (or the Mann-Whitney U test) PT. MUARA JAYA

In statistics, the Mann-Whitney U test (also called the Mann-


Whitney-Wilcoxon (MWW), Wilcoxon rank-sum test, or
Wilcoxon-Mann-Whitney test) is a non-parametric test for
assessing whether two samples of observations come
from the same distribution.

It requires the two samples to be, independent and the


observations to be ordinal or continuous measurements,
i.e. one can at least say, of any two observations, which is
the greater.
.
Departement Teknik Sistem Perkapalan ITS

Wilcoxon rank sum test (or the Mann-Whitney U test) PT. MUARA JAYA

It is one of the best-known non-parametric


significance tests.

It was proposed initially by Wilcoxon (1945), for


equal sample sizes, and extended to arbitrary
sample sizes and in other ways by Mann and
Whitne (1947).

MWW is virtually identical in performing an ordinary


parametric two-sample t test on the data after
ranking over the combined samples.
.
Departement Teknik Sistem Perkapalan ITS

Wilcoxon rank sum test (or the Mann-Whitney U test) PT. MUARA JAYA

It is one of the best-known non-parametric


significance tests.

It was proposed initially by Wilcoxon (1945), for


equal sample sizes, and extended to arbitrary
sample sizes and in other ways by Mann and
Whitne (1947).

MWW is virtually identical in performing an ordinary


parametric two-sample t test on the data after
ranking over the combined samples.
.
Departement Teknik Sistem Perkapalan ITS

8. Method PT. MUARA JAYA

 8.1 T-Test
 The t-test is a statistical test that can be used to determine whether there is
a statistical significant difference between two populations’ means. For our
analysis, we will use the one-tailed t-test to determine if there has been a
decrease or increase of the respective variable from the pre to the post
financial crisis data.

Source: ResearchGate
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 To perform the one-tailed t-test, we have to create two hypotheses:

 H0: There is no difference between the two populations


means, μ1 = μ2.
 H1: The mean of the first group is greater than the
second. μ1 > μ2.
 H1: The mean of the first group is less than the second
group. μ1 < μ2.
Departement Teknik Sistem Perkapalan ITS

2.2 P-Value PT. MUARA JAYA

 The use of the rejection region method has a number of disadvantages. The
most prominent drawback is the yes or no answer the method provides. To
better understand the reasoning for rejecting the null-hypothesis, one can use
the p-value.
 The p-value is defined as “the probability of observing a test statistic at least
as extreme as the one computed given that the null hypothesis is true”
(Keller, 2008). In other words, the p- value measures the statistical support for
the H1 hypothesis.

Source: Fixya
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

This definition is quite a mouthful. Here are some key points:

• The P-value is a probability.


• This probability is calculated assuming that the null
hypothesis is true.
• Beware: The P-value is not the probability that H0
is true, nor is it an error probability!
• To determine the P-value, we must first decide which
values of the test statistic are at least as contradictory to
H0 as the value obtained from our sample.

Source: Fixya
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 The null hypothesis states that the means of the two group are equal, thus the
closer the means are to each other, the larger the p-value will be and vice
versa. The smaller the pvalue is, the more significant the result, hence
leading us to reject the null-hypothesis.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 The degree of statistical significance for p-values:


 P < 0.01 Highly Significant
 0.01<P<0.05 Significant
 P > 0.05 Not Significant
 If the p-value exceeds 0.1, the alternative hypothesis is not true and therefore the null-
hypothesis will be kept. For the analysis of our shipping data, we will use the p-value
instead of the rejection range method to determine if to keep or reject the null-
hypothesis.
Departement Teknik Sistem Perkapalan ITS

2.3 Wilcoxon Ranked Sum/Mann Whitney U Test PT. MUARA JAYA

 When the data points are not normally distributed, one can theoretical not
use the t-test. In this case, one will have to use a non-parametric hypothesis
test, like the Wilcoxon Ranked Sum/Mann Whitney-U test to compare
populations that are non-normally distributed.
Departement Teknik Sistem Perkapalan ITS

2.3 Wilcoxon Ranked Sum/Mann Whitney U Test PT. MUARA JAYA

 When the data points are not normally distributed, one can theoretical not
use the t-test. In this case, one will have to use a non-parametric hypothesis
test, like the Wilcoxon Ranked Sum/Mann Whitney-U test to compare
populations that are non-normally distributed.
Departement Teknik Sistem Perkapalan ITS

2.3 Wilcoxon Ranked Sum/Mann Whitney U Test PT. MUARA JAYA

 When the data points are not normally distributed, one can theoretical not
use the t-test. In this case, one will have to use a non-parametric hypothesis
test, like the Wilcoxon Ranked Sum/Mann Whitney-U test to compare
populations that are non-normally distributed.
Departement Teknik Sistem Perkapalan ITS

2.4 Two sample proportion test PT. MUARA JAYA

 The sampling test can be used to test if two proportion of a population are
statistically different.
 Proportion is defined as: where x is the number of observations and n
is the sample size.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 represents the proportion of sample 1.


 represents the proportion of sample 2.
 represents the pooled proportions of sample 1 and 2.
Departement Teknik Sistem Perkapalan ITS

3. Data Sample PT. MUARA JAYA

 The database consists of numerous type of deals executed within the


maritime industry ranging from 2000 to 2013. Since the Marine Money
database is a live-database where new deals are constantly being added, we
decided to extract all information used from this database at one point of
time in order to avoid the risk of conflicting samples. The data used in this
thesis was collected on the 11th of April. To better assess the change in
financial structure within the shipping industry, we have segmented the
maritime companies into 10 different categories:
Departement Teknik Sistem Perkapalan ITS

3. Data Sample PT. MUARA JAYA

 The database consists of numerous type of deals executed


within the maritime industry ranging from 2000 to 2013.
Since the Marine Money database is a live-database where
new deals are constantly being added, we decided to
extract all information used from this database at one
point of time in order to avoid the risk of conflicting
samples. The data used in this thesis was collected on the
11th of April. To better assess the change in financial
structure within the shipping industry, we have segmented
the maritime companies into 10 different categories:
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Shipping: Consists of companies that transport commodities and merchandise


goods by sea.
 - Offshore: Consists of companies that are directly related to development of
oil and gas fields.
 - Terminals: Companies operating terminals or ports.
 - Containers: Companies that build and lease containers to the shipping
segment.
 - Barge: Companies using barges to transport goods in rivers or canals.
 - Cruise Lines: Includes companies operating ferries and cruises.
 - Maritime Services: Companies that perform services for companies operating
in the maritime sector.
 - Dredging/Tugging: Consists of companies performing dredging and tugging
activities.
 - Financial Providers: Includes companies that provide financial services.
Departement Teknik Sistem Perkapalan ITS

Shipping PT. MUARA JAYA

 Shipping Business is the act of carriage of cargo from point A to point using the
ships which falls under the Maritime industry

Source: FreightWaves
Departement Teknik Sistem Perkapalan ITS

Global Industry PT. MUARA JAYA

 Global industrial activity and manufacturing


improved in 2017. In countries of the Organization for
Economic Cooperation and Development, industrial
production increased by 2.8 per cent, up from 0.2 per
cent in 2016. Industrial activity in developing regions
also picked up. In China, industrial production, at
6.5 per cent, was up, compared with 6 per cent in
2016. In Brazil, industrial production recovered and
rose by 2.4 per cent, following the 6.4 per cent
contraction recorded during the 2016 recession. With
GDP expanding by 3.1 per cent in 2017, up from
2.5 per cent in 2016, the global economy experienced
a broad upswing, generating positive impacts on
seaborne trade (table 1.1). Driven largely by stronger
capital spending and global demand, GDP in
developed countries increased by 2.3 per cent, up
from 1.7 per cent in 2016. While growth accelerated
in all major economies, strong growth in the
European Union (2.4 per cent) was a welcome
development
Departement Teknik Sistem Perkapalan ITS

Growing world seaborne trade PT. MUARA JAYA

International seaborne trade gathered momentum, with volumes expanding by 4 per cent. This
was the fastest growth in five years. Reflecting the world economic recovery and improved global
merchandise trade, UNCTAD estimates world seaborne trade volumes at 10.7 billion tons in 2017
(tables 1.3 and 1.4, figure 1.1). Dry bulk commodities have powered nearly half of the volume
increase.
Major dry bulk commodities – coal, iron ore and grain – accounted for 42.3 per cent of total dry
cargo shipments, which were estimated at 7.6 billion tons in 2017. Containerized trade and minor
bulks represented 24.3 per cent and 25.4 per cent of the total, respectively. Remaining volumes
were made of other dry cargo, including breakbulk shipments.
Departement Teknik Sistem Perkapalan ITS

Improved market fundamentals PT. MUARA JAYA

Global industrial activity and manufacturing improved in 2017. In countries of the Organization for
Economic Cooperation and Development, industrial production increased by 2.8 per cent, up from
0.2 per cent in 2016. Industrial activity in developing regions also picked up. In China, industrial
production, at 6.5 per cent, was up, compared with 6 per cent in 2016. In Brazil, industrial
production recovered and rose by 2.4 per cent, following the 6.4 per cent contraction recorded
during the 2016 recession.
With GDP expanding by 3.1 per cent in 2017, up from 2.5 per cent in 2016, the global economy
experienced a broad upswing, generating positive impacts on seaborne trade (table 1.1)
Departement Teknik Sistem Perkapalan ITS

Factors contributing to more ton-miles PT. MUARA JAYA

Seaborne trade measured in ton-miles to reflect distances travelled and the employment of ship
capacity increased by 5 per cent in 2017, up from 3.41 per cent in 2016. Overall ton-miles
generated by seaborne trade in 2017 amounted to an estimated 58,098 billion tons (figure 1.4).
Much of the growth was driven by crude oil and coal shipments, which have greatly benefited the
shipping industry, given the growth in volumes and distances. Crude oil trade contributed 17.5 per
cent to ton-mile growth while major dry bulks contributed nearly one third. Together, minor bulks
and other dry cargo accounted for 17.7 per cent of ton-mile growth, while containerized
shipments contributed 17.4 per cent. The contributions of gas and petroleum products were much
smaller.
Departement Teknik Sistem Perkapalan ITS

WORLD SEABORNE TRADE BY CARGO TYPE PT. MUARA JAYA

 1. Tanker shipments

The year 2017 witnessed the geographical dispersion of oil trade, as oil trade patterns became less
concentrated on usual suppliers from Western Asia and benefited from increased trade flows from
the Atlantic basin to East Asia. These trends have supported and boosted long-haul tanker trade and
tanker demand. Crude oil seaborne trade expanded at a slower pace – 2.4 per cent in 2017 –
compared with stronger growth – 4 per cent – in 2016 (table 1.5).
UNCTAD estimates world crude oil trade in 2017 at 1.87 billion tons, supported by increasing
exports from the United States, rising global refining activity – especially in Asia – declining oil
inventories and steady crude oil shipments from Western Asia.
Departement Teknik Sistem Perkapalan ITS

WORLD SEABORNE TRADE BY CARGO TYPE PT. MUARA JAYA

 2. Dry-cargo trades: The mainstay of seaborne trade

Dry bulk shipments: Major and minor dry bulks


Following a limited expansion in 2015–2016, global dry bulk trade1 grew by about 4 per cent in
2017, bringing total volumes to 5.1 billion tons (table 1.7). A sharp increase in iron ore
imports to China, a rebound in global coal trade and improved growth in minor bulk trades
supported the expansion. Overall, strong import demand in China remained the main factor
behind growth in global dry bulk trade. An overview of global players in the dry bulk.
Iron ore
Iron ore imports to China increased by 5 per cent in 2017, bringing total volumes to nearly 1.1
billion tons. With a market share of more than 70 per cent, China remains the main source of
global iron ore demand. A rise in steel production and the closure of more than 100 million
tons per annum of outdated steelmaking capacity in 2016–2017 boosted the country’s
demand for imports. Further, the increased use of higher grade imported iron ore displaced
domestic supplies.
Coal
Global coal trade resumed growth in 2017, increasing by 5.8 per cent following a limited
expansion in 2016 and a significant decline in 2015. Higher import demand in China, the
Republic of Korea and a number of South-East Asian countries supported the volume
increase. Coal imports to China continued to provide strong support for dry bulk shipping
demand. China, India, Japan, Malaysia, and the Republic of Korea are major importers of coal,
while Australia and Indonesia are major exporters of the commodity.
Departement Teknik Sistem Perkapalan ITS

WORLD SEABORNE TRADE BY CARGO TYPE PT. MUARA JAYA

 2. Dry-cargo trades: The mainstay of seaborne trade


Grain
Global grain trade, including wheat, coarse grains and soybeans, reached 515.1 million tons in
2017, a 7.1 per cent increase over 2016. Exports are dominated by a few countries, notably
the United States; importers tend to be regionally diverse.
As in other dry bulk trades, Asia was a driving force of growth, albeit not the only one. In 2017,
grain trade was underpinned by a 14.7 per cent increase in soybean imports to China and
growing exports from Brazil and the United States. China dominates the soybean trade and
accounted for nearly two thirds of the global soybean import demand in 2017. Outside Asia
and the European Union, some lesser consuming regions, such as Africa and Western Asia,
also contributed to such growth.
Minor bulks
Growing manufacturing activity and construction demand supported a 2.2 per cent increase in
minor bulks commodity trade. Rising demand for commodities such as bauxite, scrap and
nickel ore pushed volumes to 1.9 billion tons. However, the large drop (less 30.8 per cent) in
exports of steel products from China due to reforms in the country’s steel sector undermined
the expansion to some extent. Bauxite shipments expanded by 19.5 per cent, accounting for
13 per cent of minor dry bulks commodities trade
Departement Teknik Sistem Perkapalan ITS

WORLD SEABORNE TRADE BY CARGO TYPE PT. MUARA JAYA

 2. Dry-cargo trades: The mainstay of seaborne trade


Departement Teknik Sistem Perkapalan ITS

WORLD FLEET STRUCTURE PT. MUARA JAYA

 1. World fleet growth and principal vessel types


Growth in supply
On 1 January 2018, the world commercial fleet consisted of 94,171 vessels, with a combined
tonnage of 1.92 billion dwt. After five years of decelerating growth, in 2017, there was a slight
rebound in the rate of increase (figure 2.1). The dead-weight tonnage of the commercial
shipping fleet grew by 3.31 per cent in the 12 months to 1 January 2017, up from 3.15 per cent
in 2016. Compared with the growth rate of demand, at 4.0 per cent in 2017, the lower level of
growth in supply helped to improve market fundamentals, leading to improved freight rates and
profits for most carriers, with the exception of tankers.
Ship sizes of new deliveries continued to be larger than the existing fleet. With regard to vessel
numbers, the growth rate was therefore lower, at 1 per cent. The estimated market value of the
world fleet, however, increased by 7.8 per cent, in line with improved market fundamentals and
increased investments in ships incorporating the latest technologies and complying with current
and potential future regulations.
Departement Teknik Sistem Perkapalan ITS

WORLD FLEET STRUCTURE PT. MUARA JAYA

 1. World fleet growth and principal vessel types


Departement Teknik Sistem Perkapalan ITS

WORLD FLEET STRUCTURE PT. MUARA JAYA

 1. World fleet growth and principal vessel types


Departement Teknik Sistem Perkapalan ITS

WORLD FLEET STRUCTURE PT. MUARA JAYA

 2. Vessel types

Dry bulk carriers, which carry iron ore, coal, grain and similar cargo, account for the
largest share of the world fleet in dead-weight tonnage and the largest share of total
cargo-carrying capacity, at 42.5 per cent (figure 2.2). They are followed by oil tankers,
which carry crude oil and its products, and account for 29.2 per cent of total dead-
weight tonnage. The third largest fleet is container ships, which account for 13.1 per
cent of the total. As container ships carry goods of higher unit value than dry and liquid
bulk ships and usually travel at higher speeds, they effectively carry more than half of
total seaborne trade by monetary value. In 2017, almost all vessel types recorded
positive growth rates, except for general cargo ships, which continued to show a long-
term decline in their share of the world fleet (table 2.1). In January 2018, general cargo
ships accounted for only 3.9 per cent of total dead-weight tonnage, a further decrease
from their 4 per cent share in 2017. The long-term trend towards the containerization of
general cargo may be illustrated by comparing the general cargo fleet with the container
ship fleet. In 1980, container ships had one tenth the total tonnage of general cargo
ships; at present, container ships have 3.4 times more total dead-weight tonnage. The
order book for general cargo ships is at its lowest level since UNCTAD began to
monitor this indicator and 58.8 per cent of such ships are older than 20 years. Table 2.2
Departement Teknik Sistem Perkapalan ITS

WORLD FLEET STRUCTURE PT. MUARA JAYA

 2. Vessel types
Departement Teknik Sistem Perkapalan ITS

WORLD FLEET STRUCTURE PT. MUARA JAYA

 2. Vessel types
Departement Teknik Sistem Perkapalan ITS

WORLD FLEET STRUCTURE PT. MUARA JAYA

 2. Vessel types
Departement Teknik Sistem Perkapalan ITS

WORLD FLEET STRUCTURE PT. MUARA JAYA

 3. Tonnage and value

UNCTAD analysis mostly focuses on dead-weight tonnage, which is more relevant to


seaborne trade and cargo-carrying capacity. To complement information on the maritime
industry as a business sector, data on the commercial value of fleets are also included,
indicating the capital intensiveness of the shipping industry and the implications for
owning, operating, registering, building and scrapping such assets (figure 2.3). The value
of its main assets also signals the state of the industry during business cycles. In addition,
the value of a ship gives some indication of the level of its sophistication and
technological content. For example, ships emit different amounts of greenhouse gases by
ton-mile, depending on the country of build and vessel type (Right Ship, 2018). In the
longer term, further digital transformation may entail greater investment and higher fixed
costs, against lower operational and variable costs (box 2.1).
The high commercial value of the industry’s main assets highlights the extent of
investment in ships and technology, which shipowners need to recover by improving cost-
efficiency measures, setting rates and surcharges and covering variable costs and fixed
costs with regard to vessel prices. The values of different vessel types vary considerably
(figure 2.3).
Departement Teknik Sistem Perkapalan ITS

WORLD FLEET STRUCTURE PT. MUARA JAYA

 3. Tonnage and value


Departement Teknik Sistem Perkapalan ITS

WORLD FLEET STRUCTURE PT. MUARA JAYA

 3. Tonnage and value


With regard to long-term trends in container ship deployment by country, ship sizes and total
capacity deployed by country have increased over the years and the number of companies has
decreased (figure 2.5). The number of ships and TEU-carrying capacity deployed reflect to some
extent the growth of containerized trade. For example, deployment declined in 2008–2009,
following the economic crisis, when carriers withdrew capacity from the market. The latest
developments are more positive and the average TEU deployment by country increased by almost
10 per cent between May 2017 and May 2018. However, the number of companies providing
services to and from a country, on average, has decreased in most years since 2004. The slight
increase between 2017 and 2018 is an interesting development, as it reflects the fact that despite
global mergers and acquisitions, the remaining carriers have been expanding into new markets,
including as members of global alliances. Each major carrier thereby ensures its own in-house
global network.
The largest ships are deployed on the Far East–Northern Europe route. As at June 2018, there were
18 weekly services on this route, down from 32 services in 2008, when significantly smaller ships
were deployed. Current services are operated by nine different carriers organized into three
alliances and one independent carrier, Hyundai Merchant Marine, and the average capacity of the
total 205 ships employed is 15,000 TEUs; the largest vessel has a capacity of 21,400 TEUs and the
smallest vessel, deployed by the sole independent carrier, has a capacity of 4,100 TEUs (Dynamar
BV, 2018a).
Departement Teknik Sistem Perkapalan ITS

WORLD FLEET STRUCTURE PT. MUARA JAYA

 3. Tonnage and value


Departement Teknik Sistem Perkapalan ITS

WORLD FLEET OWNERSHIP AND OPERATION PT. MUARA JAYA

 1. Shipowning countries

The top five shipowning countries together account for 49.6 per cent of the world fleet in dead-
weight tonnage. Greece has expanded its lead, adding 21 million dwt in 2017; it now has a market
share of 17.3 per cent, followed by Japan at 11.7 per cent, China at 9.6 per cent and Germany at 5.6
per cent. Shipowners from Greece specialize in oil tankers, in which Greece has a market share of
24 per cent, as well as dry bulk carriers. Japan and China have their largest market shares in dry
bulk carriers, with 20 and 16 per cent, respectively. Shipowners from Germany specialize mostly in
container ships, in which Germany has a market share of 20 per cent. Among charter owners, that
is, owners that do not themselves provider liner services but instead charter ships to liner
companies, Germany has a market share of one third, down from two thirds in 2013, and owners
from Canada, China and Greece have expanded their markets. A typical example of this trend is the
sale of six container ships by Commerzbank of Germany to Maersk in March 2018, for around $280
million (Dynamar BV, 2018b).
The largest shipowning country in terms of vessel numbers is China, with 5,512 commercial ships
of 1,000 gross tons and above, many of which are deployed in domestic trades, under the national
flag (table 2.3).
Departement Teknik Sistem Perkapalan ITS

WORLD FLEET OWNERSHIP AND OPERATION PT. MUARA JAYA

 1. Shipowning countries
Departement Teknik Sistem Perkapalan ITS

WORLD FLEET OWNERSHIP AND OPERATION PT. MUARA JAYA

 1. Shipowning countries
Departement Teknik Sistem Perkapalan ITS

WORLD FLEET OWNERSHIP AND OPERATION PT. MUARA JAYA

 1. Shipowning countries
With regard to the commercial value of the world fleet, the largest shipowning country is the United States, followed
by Japan and Greece (figure 2.6). The difference between the ranking by tonnage and by value is due to the vessel
types owned by different countries. For example, shipowners from Greece specialize in dry bulk carriers and oil
tankers, which have a large carrying capacity; shipowners from the United States, by contrast, have greater shares in
cruise ships and other vessels, primarily offshore, which are not used for trade in goods .
Departement Teknik Sistem Perkapalan ITS

WORLD FLEET OWNERSHIP AND OPERATION PT. MUARA JAYA

 2.Container ship ownership and operation

Table 2.4 depicts container ship fleet ownership in TEUs. Germany continues to be the
largest owner, with a market share of 20.22 per cent, a decrease of 1.2 percentage points
from 2017. France, Denmark, Hong Kong (China) and Switzerland own the container
Departement Teknik Sistem Perkapalan ITS

OFFSHORE PT. MUARA JAYA

PRELIMINARY
- First Offshore Activities in 1947
- Exploration & Exploitation of oil and gas fields
- Oil / gas price volatility affects development
BLP technology
- considering that BLP is far more expensive than
structures on land and is more risky,
depends:
- Location of oil / gas fields
- Depth of sea operating area
- Distance to the nearest boundary
- BLP operational costs are about 5 ~ 10 times more Source: Hess Corporation
expensive than buildings on land,
considered necessary:
- Offshore industries only build structures that fulfill
specific functions
- Pre-fabrication is landed and completed in the sea to a
minimum
- Need detailed considerations to avoid the risk of:
- human soul
- unit
- Investation
- Sea pollution
Departement Teknik Sistem Perkapalan ITS

OFFSHORE PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

TERMINALS PT. MUARA JAYA

Container Terminal Operation and Cargo Handling


Container terminals are designated for the handling, storage, and possibly loading or
unloading of cargo into or out of containers, and where containers can be picked up,
dropped off, maintained, stored, or loaded or unloaded from one mode of transport to
another (that is, vessel, truck, barge, or rail). World container terminals are classified into
five categories by their ownerships: public terminals, carrier-leased dedicated terminals,
terminal-operator built and operation terminals, carrier built and operation terminals, and
joint venture of carriers and terminal operators. The operation characteristics of the five
patterns are specified as bellow.

Source: Kalmar Global


Departement Teknik Sistem Perkapalan ITS

TERMINALS PT. MUARA JAYA

Public terminals
All the shipping lines share with each other the facilities of public terminals in
loadinganddischarging,andarechargedattariffrates,generallywitha‘first
come,firstserve’principleandwithoutanypriorityinberthusageexcept paying priority tolls.
Container handling and other charges are calculated at common tariff rates, or paid at
quantity discount rates in case container volume is over the fixed quantity agreed upon in
contracts. Singapore (PSA before 1997), Busan, Keelung are categorized into this operation
pattern.

Source: suara.com
Departement Teknik Sistem Perkapalan ITS

TERMINALS PT. MUARA JAYA

Carrier-leased dedicated terminals


Carriers sign long-term lease contracts with the port authorities for their own exclusive
use. Carriers pay rents and facility charges and the port authorities entitle contract carriers
to right and priority in berth usage. Carrier could be entitled to purchase or install
container handling facilities at his own account to compensate for rents and facility
charges. Owing to the joint services among shipping lines, single user long-term contracts
are transferred to multi-user contracts so that several shipping lines share terminal usage.
Kaohsiung, Keelung (some parts of the port), Kobe, Yokohama, Tokyo are categorized into
this operation pattern.

Source: Osterkamp Transportation Group


Departement Teknik Sistem Perkapalan ITS

TERMINALS PT. MUARA JAYA

Terminal-operator built and operation terminals


By making a deposit and allocating to the port authorities in proportion to the total
handling charges as agreed in the contract, a terminal operator leases container
terminals or invests directly in the construction, operation of container terminals
and handling facilities. Hong Kong (HIT, MTL, CHT), Shanghai (SCT), Tianjin
(CSXOT), Singapore (PSA after 1997) are categorized into this operation pattern.

Source: medium
Departement Teknik Sistem Perkapalan ITS

TERMINALS PT. MUARA JAYA

Carrier built and operation terminals


By making a deposit and allocating to the port authorities in proportion to the total
handling charges as agreed in the contract, a carrier or several carriers lease
container terminals or invest directly in the construction, operation of container
terminals and handling facilities. Except the usage of their fleet, the carriers are
entitled to provide other shipping lines with berthing and container handling
services. Malaysia (PTP), Taipei Port (invested by Yang Ming Line, Evergreen,
Wan-Hai), Qingdao (Zhunguang, Kuaikuei, Tiasing) are categorized into this
operation pattern.

Source: Khaleej Times


Departement Teknik Sistem Perkapalan ITS

TERMINALS PT. MUARA JAYA

Joint venture of carriers and terminal operators


By making a deposit and allocating to the port authorities in proportion to the total
handling charges as agreed in the contract, a joint venture of shipping lines and
terminal operators establishes a company, or makes a joint investment in leasing
container terminals or invest directly in the construction, operation of container

Source: JOC.com
Departement Teknik Sistem Perkapalan ITS

CONTAINER PT. MUARA JAYA

Container shipping is different from conventional shipping because it uses ‘containers’ of


various sizes – 20 foot (6.09 m), 40 foot (12.18 m) , 45 foot (13.7 m), 48 foot (14.6 m), and 53
foot (16.15 m) – to load, transport, and unload goods
Container shipping is a highly efficient method of transporting goods. The container has made
it possible for large ships to be designed to transport huge quantities of material, increasing
global trade dramatically.
Container ports are specially designed to load and unload the containers quickly and
efficiently. This makes the import and export of goods affordable for manufacturers and
traders.
Before the invention of container shipping, goods were unpacked and loaded onto the ships
at the port, taking up much more time, manpower and money.

Source: MFame
Departement Teknik Sistem Perkapalan ITS

CONTAINER PT. MUARA JAYA

Different containers for different cargoes


In addition to standard containers, there are also specialized types of equipment:
• Open tops are used for easy load of cargo such as logs, machinery and odd sized
goods.
•Flat racks can be used for boats, vehicles, machinery or industrial equipment.
•Open sides may be used for vegetables such as onions and potatoes.
• Tank containers transport many types of liquids such as chemicals, wine and vegetable
oil.

Source: MFame
Departement Teknik Sistem Perkapalan ITS

CONTAINER PT. MUARA JAYA

What are the advantages of container shipping?


• It allows us to meet the needs of the world’s
growing population by importing and exporting
goods.

• It provides consumers with more choice.


• It lets us experience goods from entirely different cultures.

• It helps modern industries such as electronics and clothing to flourish.

Source: ptc.mx
Departement Teknik Sistem Perkapalan ITS

BARGE PT. MUARA JAYA

A barge is a long, spacious, flat-bottomed boat that is used to


transport goods on inland waterways such as rivers and canals. Some
barges are not powered and cannot propel on their own; they are
towed or pushed by tow boards. These are usually used to transport
very heavy or bulky items, typically with lower values.

Source: FleetMon
Departement Teknik Sistem Perkapalan ITS

BARGE PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

BARGE PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

BARGE PT. MUARA JAYA

One 15-Barge Tow Equals 216 Rail Cars


or 1,050 Trucks
Departement Teknik Sistem Perkapalan ITS

BARGE PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

Cruise Ship PT. MUARA JAYA

The cruise industry in Europe is a


dynamic source of economic activity
providing economic benefits to
virtually all industries
and countries throughout Europe

Europe, with its 250 ports, is the


second most appealing market
worldwide, despite the currently
uncertain geopolitical conditions

Source: eTurboNews
Departement Teknik Sistem Perkapalan ITS

Cruise Ship PT. MUARA JAYA

 The number of Europeans and


non-Europeans who choose a
cruise holiday has more than
doubled to 5,5 million (*7.6%).

 The Mediterranean is the first


sailing region in Europe

 Low market penetration: 1.3% in


Europe Vs 3.2% in North America

Source: CiteSeerX
 High potential for developments

 Europe is the number one cruise


destination
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Was tolong ambahono kurange iki was. Maritim service,


tugging, financial provider
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Objectives
1. To describe the strategic planning process
2. To explain how organizational resources and opportunities affect the planning
process
3. To understand the role of the mission statement in strategic planning
4. To examine corporate, business-unit, and marketing strategies

Source: coschedule
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Strategic Planning

Source:Brefi Group Limited

The process of establishing an organizational mission and formulating goals, corporate


strategy, marketing objectives, marketing strategy, and a marketing plan
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10. Hypotheses JAYA

When deciding on a topic for our thesis, we decided to combine our interest for
shipping and finance.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10. Hypotheses JAYA

Our final choice of topic was sparked by the many news articles and constant
complaining in the media of the challenging capital conditions shipowners faced in the
aftermath of the Lehman Brother crash.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10. Hypotheses JAYA

We hence wish to put these claims to the test and examine the change in the financial
environment shipping firms have faced the last 8 years.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10. Hypotheses JAYA

We have therefore come up with several hypotheses, which we wish to look further
into.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10. Hypotheses JAYA

We have in this paper divided the different types of funding up into: M&A, Bank Loans,
Bonds (Certified Bonds +Convertible Bonds), Public Equity Offerings (IPOs+ FOs) and
Private Placements.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

For each asset class defined we have tested whether there has been a substantial
change from the pre-crisis period to post-crisis period on the:
The amount raised per issue
The number of issues raised
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Our premise for testing these variables is that the product of multiplying the two
variables gives us the total volume of that asset class.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

We can by examining the different variables multiplying up to the product, hence


define the cause of any potential changes.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Our hypotheses are that we believe both the amount raised per issue and the number
of deals have on average decreased post the crisis for bank loans, private placements
and public equity offerings, while we expect to see an increase in number of bond
deals.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

The development of bonds and M&A deal sizes, in addition to that of M&A activity are,
however, more unsure variables.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Our predications landed on a decline in deal size and number for M&A deals, while we
expect an increase in bond deal sizes.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Our basis for such hypotheses is that after the financial turmoil caused by the crash of
2008, the financial picture changed.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

With most banks severely affected by the crisis, and some having already gone through
restructuring, it is likely that the number of bank loans issued and the average deal size
have decreased.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Such predictions are based on the fact that banks are clearly more risk averse after the
crisis (Von Hagen, Schuknecht, Wolswijk, 2011).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

They are less willing to take on additional risk and interested in reducing their risk per
loan issued.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

This view is also in line with DNB’s future projections for the banking sector (DNB,
2012).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

As for public equity offerings, they are, as described earlier, more common in booming
periods than troughs.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

This is the case as management only wishes to sell shares when the price reflects or
overvalues the underlying assets.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Given the booming pre period, a fall in both amount and numbers of issues were hence
expected in the post period.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Private placements are likely to behave in a similar manner as public equity offerings.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

After a pre period of highly cooperative investors, private placement have likely
struggled to convince its investors to invest in the post period with investors being
more risk averse and more vary of their investments.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

As private equity (PE) does, however, go under this category, and there has been a
significant increase in PE investment in shipping, this could pull up our results.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Our premise for testing these variables is that the product of multiplying the two
variables gives us the total volume of that asset class.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Given the private nature of these transactions, we do, nevertheless, not expect to see a
drastic increase in PP activity.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

With a decline in both equity offerings and bank lending, shipowners need to finance
through alternative sources.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

We believe bonds have overtaken the majority of the financing gap.


Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

The reasoning behind this conclusion is that investors have historically turned to the
bond market in times when the capital market has contracted, and the shipowners
have in the recent crisis had few other options to turn to. .
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Such a switch in financing would hence involve an increase in number of bonds issued.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

When it comes to our projections of bond deal sizes, there are factors dragging in
different directions.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

At one side, if bonds are going to replace the funding gap left by loans and equity, one
would expect an increase in bond sizes, as the funding gap likely is quite severe..
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

On the other side, with freight rates declining steeply in the later years, one would
expect the fleet market value to have declined, hence lightening the financing needed
to undertake new investments.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

Their reasoning was that banks would seek a more simplistic lending relationship,
trending towards a larger degree of bilateral deals.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

The macroeconomic events leading to these conclusions are discussed in more detail
under the “Macroeconomic Events” section for bonds.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Given the discussed fall of shipping market values, a decrease of amount per M&A deal
are also to be expected.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

In regards to numbers of deals, there are also here forces dragging in different
directions.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.4 Bond interest rate and tenor JAYA

This view is based on the theory that as the market steps into a
time of greater uncertainty were the solvency of the borrowers
is questioned; the interest rate demanded is likely to increase.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

At one side, consolidation is fairly normal in poor economic times given the companies’
wish to maximize economy of scale.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Low market values could also lead to an increase in acquisitions, as increasing ones
market share could be done a low cost.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

On the other side, it is hard to finance such deals in the current situation of the capital
market.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

With many operators struggling enough as it is with their own operation; they are
unlikely to take on more capital draining fleet capacity.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

Given the banks seeking to mitigate risk in the post period, we further wish to examine
the change of consortium sizes from the two periods
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Private placements are likely to behave in a similar manner as public equity offerings.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

After a pre period of highly cooperative investors, private placement have likely
struggled to convince its investors to invest in the post period with investors being
more risk averse and more vary of their investments.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

Our hypothesis is that we have seen a significant increase in the syndicate sizes.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

In this test we only consider bank loans, as consortium sizes for equity and public debt
offerings are of little relevance in terms of risk of the issuer.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

We chose to include this hypothesis after reading DNB’s presentation “Navigating


through turbulent times” (DNB, 2012).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

As sovereign bonds are offering historically low yields,


corporate bonds have become increasingly interesting
investment (Deutsche Bank 2013).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

In this presentation, DNB predicted a decline in syndicate sizes.


Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

Their reasoning was that banks would seek a more simplistic lending relationship,
trending towards a larger degree of bilateral deals.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

There are, however, counterarguments of a risk and capital exposure reduction


following an increase of consortium members, we wish to put this argument to the
test.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

By the end of 2003, freight rates had, however, yet again


started to pick up speed (ClarkSea Index) and the shipyards’
orderbook had already started to build up because of the
emerging Chinese economy.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.3 Proportions JAYA

Given the reasoning of section 10.1, with a booming pre


period, indicating an increase in bank loans and equity, and a
trough of a post period, indicating a fall in bank loans and
equity, with bonds filling much of this gap, our hypothesis for
the sample is that there has been a change of proportions.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.3 Proportions JAYA

We expect to see a similar change in proportions as with


issuing activity, hence a significant shift from bank loans and
equity towards bond financing.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.4 Bond interest rate and tenor JAYA

Given the newfound importance of bonds, we wish to further


examine this asset class in more detail.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

The macroeconomic events leading to these conclusions are discussed in more detail
under the “Macroeconomic Events” section for bonds.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.4 Bond interest rate and tenor JAYA

Our hypotheses are that there has been a significant increase


in bond interest rate and a similar significant decline of the
average tenor of bonds.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.4 Bond interest rate and tenor JAYA

This view is based on the theory that as the market steps into a
time of greater uncertainty were the solvency of the borrowers
is questioned; the interest rate demanded is likely to increase.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.4 Bond interest rate and tenor JAYA

. In such markets, lenders are also typically reluctant to offer


lending too far into the future in fear of bankruptcy risk.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

In this test we only consider bank loans, as consortium sizes for equity and public debt
offerings are of little relevance in terms of risk of the issuer.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.4 Bond interest rate and tenor JAYA

From the borrower’s perspective, one wishes, at one hand, to


have a longer tenor in order to reduce refinancing risk, and
secure liquidity for the future.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.4 Bond interest rate and tenor JAYA

On the other hand, one should, however, be careful not to be


bound for too long at unfavourable market conditions (Bodie,
Kane, Marcus, 2011).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.4 Bond interest rate and tenor JAYA

As these are times were the lenders have much power, but also
hold much risk, we expected that we would experience an
increase in interest rate and a drop of the average tenor.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Such a switch in financing would hence involve an increase in number of bonds issued.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

With the funding sources changing drastically from the pre to


post period, we believe given the shift in market proportions
that the origin of the capital also has changed.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

We wish to focus this test on the debt market, as this is the key
source of ship funding.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Our predictions are that Asian and Scandinavian financial


institutions have increased their market share of loans issued
in the second period, whereas the North American, European
and Middle Eastern financial institutions have accounted for a
smaller portion of bank loans issuances in the post period.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Like in section 10.1, it is harder to predict shifts of corporate


bonds issuances than that of bank loans. .
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Our reasoning for such hypothesis is the same as in section 1.1,


namely that it is not common to issue equity in a period of low
market values. Both Pecking and market timing theory further
support such statement.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

This being the case as the reasoning behind the frequency of


an institution’s bond issuances is more complex than just
examining the financial situation of this institution.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Corporate bond issuing activity is rather to a large extent based


upon the demand for capital by shipping companies and
investors’ willingness to invest.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Our predictions for the time period are a significant increase in


the Scandinavian and Asian activity, a significant decrease in
the North American activity, while we saw little reason for any
change in European issuances.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

For total debt issuances, we believe there has been less equity
financing in the aftermath of the crisis.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

In regards to numbers of deals, there are also here forces dragging in different
directions.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Our hypothesis is hence that we expect to see an increase in


debt levels for all regions.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Our basis for doing this test has been that we believe there
have been shifts in sources of financing on the global scale.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

Given the banks seeking to mitigate risk in the post period, we further wish to examine
the change of consortium sizes from the two periods
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

In this test we only consider bank loans, as consortium sizes for equity and public debt
offerings are of little relevance in terms of risk of the issuer.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Since 2005, Asia has experienced an almost continuous growth,


whereas the Euro-zone and the United States has been hit by
one of the worst economic crisis of all times.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Based on this information, one would expect Asian financial


institutions to be in a better financial state in the post period,
compared to institutions from troubled areas such as North
America and Europe.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

One could hence assume that Asian financial institutions have


issued more loans than those of North America and Europe in
aftermath of the Lehman Brother crash.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Markets located in areas that have been fairly untouched by


the surrounding issues, such as Scandinavia and in particular
Norway, a large global ship financier, would also be likely to
carry a larger share of ship financing in the post period.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

For bonds, we have in our macroeconomic section, discussed


the key economic events causing us to predict that there will
be a proportional increase in bond issuance.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Separating the issuance activity for the various regions, we


have based our hypotheses on our perception on the
differences of the demand and supply side of corporate bonds,
and to some extent media coverage that has indicated a
particular trend, which we then have wished to examine the
validity of.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Our hypothesis for Scandinavia is based on the increasing


media coverage concerning the numerous maritime bond
issuances performed here.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

The recent upswing in the Norwegian bond market has also


been one of the major areas of interest for the authors, hence
something we wish to put to the test.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Our prediction of an increase in the Asian market is based on


the growth that Asia has experienced.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Even though the corporate bond and stock markets in Asia


differ widely in size and level of development, they have been
growing at a significant pace the later years, increasing their
activity (Gyntelberg, Ma, Remolona 2005).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Furthermore on the supply side, with Asia starting to take an


increasing larger part in shipping, especially within
shipbuilding, many of these operators are likely to turn to the
corporate bond market for funding.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

While on the demand side, enormous cash reserves have been


building up during the boom, and with investors seeking
investments to place their money; corporate bonds should be
an attractive investment in the search for yield (Frangos, 2013).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the freight rates increased, a huge demand for financing


followed.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Considering the movement in North America, we expect a


decrease in the North American proportion of bond activity.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Furthermore, we also believe the magnitude of bank loans will


supersede the potential negative effect of bonds, leading to an
increase in debt in Asia and Scandinavia and a decrease of debt
in Europe and North America.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

We believe this is the case based on the fact that United States
is the origin of high-yield bond (Grammenos, Papapostolou,
2012), and also the key area of issuance in the pre period
(Lloyd's List, 2010).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

With a significant increase in issuances from Scandinavia, parts


of this market share is likely to have come from the United
States, especially given the low market confidence present in
the American market in the post period.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

By the end of 2003, freight rates had, however, yet again


started to pick up speed (ClarkSea Index) and the shipyards’
orderbook had already started to build up because of the
emerging Chinese economy.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Furthermore, given the findings of Von Hagen, Schuknecht, and


Wolswijk (2011) that investors penalize structural imbalance
more post the Lehman crash.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

One could claim that such change in behaviour could cause


investors’ willingness to invest in North America to decrease in
the start of the financial crisis, as the structural imbalance was
quite severe at this point of time and comparatively larger than
in other markets.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Other factors to consider could also be that institutional


investors in America have to a large extent been sitting on the
fence with large cash reserves after the crisis hit (Moody's,
2013).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

They have had little confidence in the market and the


governing body, a notion being enforced even more with the
recent indecisiveness in regards to the failure of dealing with
the mounting American debt.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Such extraction could cause the demand for bonds to shrink


considerably, taking away much buying power.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

In terms of Europe, we see no reason for any significant change


in the activity level. Our hypothesis is to a large extent based
on Deutsche Bank’s research paper on the overall European
corporate bond movement (Deutsche Bank, 2013). Looking at
Figure 7, we see that by comparing the peaks and troughs, the
market more or less equals out in the post period, with
perhaps a small overall increase.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

We chose to include this hypothesis after reading DNB’s presentation “Navigating


through turbulent times” (DNB, 2012).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

The fundamental drivers behind these swings have mostly


been the macroeconomic factors already discussed.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

However, the main driver for the high issuance volumes seems
to be investors’ search for yield in a low interest rate
environment.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

As sovereign bonds are offering historically low yields,


corporate bonds have become increasingly interesting
investment (Deutsche Bank 2013).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

This being the case as the reasoning behind the frequency of


an institution’s bond issuances is more complex than just
examining the financial situation of this institution.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

We see little reason why shipping bonds issuances should


separate itself substantially from the overall movement, and
hence expect to see a small but insignificant increase.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Lastly for total debt issuances, we believe there has been less
equity financing in the aftermath of the crisis.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Our reasoning for such hypothesis is the same as in section 1.1,


namely that it is not common to issue equity in a period of low
market values. Both Pecking and market timing theory further
support such statement.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Furthermore, we also believe the magnitude of bank loans will


supersede the potential negative effect of bonds, leading to an
increase in debt in Asia and Scandinavia and a decrease of debt
in Europe and North America.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

In this section we will discuss the main macroeconomic events


that led up to and occurred during the sample period.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

We have separated this section from the rest of the analysis, as


many of these happenings have to a large extent dictated the
development of the asset classes examined.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Such investments required additional funding, leading to a rise


not only in bank loans, but in both equity and debt issuance.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Shipowners now had to meet their financing needs at a higher


cost of capital.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Since 2005, Asia has experienced an almost continuous growth,


whereas the Euro-zone and the United States has been hit by
one of the worst economic crisis of all times.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Our predictions for the time period are a significant increase in


the Scandinavian and Asian activity, a significant decrease in
the North American activity, while we saw little reason for any
change in European issuances.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

The analysis would hence be very repetitive if these events


were discussed in detail under each subsection.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

In the start of the 21st century, world trade experienced


typically boom and bust cycles. The world economy
experienced a financial crisis in 1997-99, both in Asia and
Russia.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

The trade then surprisingly recovered and boomed again by


the spring of 2000, before the collapse of internet stocks in
early 2001 triggered a deep recession in the Atlantic and Asian
economies, also known as the Dotcom crisis (Stopford 2009).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As shipping freights are strongly correlated with global trade


activity, freight rates varied greatly in the start of the
millennium before crashing in 2002.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

By the end of 2003, freight rates had, however, yet again


started to pick up speed (ClarkSea Index) and the shipyards’
orderbook had already started to build up because of the
emerging Chinese economy.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Their industry was mostly export oriented, and the country


now entered into a period of considerable infrastructure
development.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

While on the demand side, enormous cash reserves have been


building up during the boom, and with investors seeking
investments to place their money; corporate bonds should be
an attractive investment in the search for yield (Frangos, 2013).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

This development was dependent upon the import of


enormous quantities of raw materials, such as coal and iron.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

A booming China, in other words, meant a steep increase in


demand for the seaborne trade, creating an acute shortage of
ships, resulting in dry bulk and tanker rates propelling to new
heights (Stopford, 2009).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

The fundamental drivers behind these swings have mostly


been the macroeconomic factors already discussed.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

We believe this is the case based on the fact that United States
is the origin of high-yield bond (Grammenos, Papapostolou,
2012), and also the key area of issuance in the pre period
(Lloyd's List, 2010).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the freight rates increased, a huge demand for financing


followed.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

The banks were, however, reluctant to overextend their lending


prior to reassuring themselves that the market was going to
recover fully.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the sustainability of the growth became increasingly clear by


the end of 2003/start of 2004, shipping loans issuances surged
by 2005.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Between 2003/4 and 2008, the shipping market actually


experienced one of the largest booms of all times, having
freight rates reaching astronomically high levels, only
comparable to the rates reached during World War I (Stopford,
2013).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

This led shipping firms to continue to looks for ways to expand


their fleet in these prospering market conditions, this
happening either trough newbuildings or expensive
acquirements of second- hand ships.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Such investments required additional funding, leading to a rise


not only in bank loans, but in both equity and debt issuance.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.1 Trade-off Theory JAYA

We find little support for the trade-off theory in the


shipping industry as a whole, as this theory suggest that
firms should be financed with enough debt to capture
the debt tax shield (DTS) so that the benefit of the DTS is
only marginally higher than the associated costs of
financial distress that arise with high debt ratios.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the peak grew bigger, so did the demand for capital, finally
resulting in the supply of ships far outweigh the demand when
seaborne trade started to decline.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Considering the second part of our sample period, the world


economy gradually went into a deep recession, with the crisis
arguably hitting its peak with the crash of Lehmann Brothers in
mid-September 2008.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1 Capital Structure Theory JAYA

We will in this section relate the financing theories


discussed in chapter 3, to the data we have collected, in
order to see if there is evidence to support these
theories.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

We will not discuss the crisis or its underlying factors in detail,


as our main focus here is the effect the collapse had on the
shipping industry and world trade in general.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Since 2005, Asia has experienced an almost continuous growth,


whereas the Euro-zone and the United States has been hit by
one of the worst economic crisis of all times.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

A bankruptcy of such a large operator like Lehman Brothers


did, however, cause turmoil in the financial market, awakening
counterparty credit concerns, as well as heavily affecting other
financial operators.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

With the bailout of AIG following the next day, counterparty


credit concerns increased even more (Baba, Packer, 2009).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

These were just some of the more renowned firms that were
struggling, and with most of these operators previously being
top ranked by the credit rating companies.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

The trust/credibility in the market disappeared causing short-


term funding costs to spike.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Solvency now became the area of focus.


Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Without knowing whom to trust, the liquidity of the debt


market quickly dried up (Cornett, McNutt, Strahan, Tehranian,
2011). With many banks relying heavily on short term funding
in the interbank market (Ivashina, Scharfstein 2010), the effect
of the spike in short-term funding costs was further
strengthened causing many banks to struggle to roll over their
short term debt, leading much of lending to dry up by 2009.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

The decline in loan issuances was, however, not as steep as


that of publicly traded securities.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

The much steeper decline in traded commercial paper may


reflect an overall lack of trust in securitized debt after the
financial market crashed, regardless of the fact that a
commercial paper is a direct obligation of the borrower
(Asmundson, Dorsey, Khachatryan, Niculcea, Saito 2011).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

In terms of shipping, freight rates plunged by late 2008 as the


global trade experiencing a sharp drop.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

The drop in global trade can, however, not completely be


credited to the crash in the financial market, as, among other
things, a sharp increase in food and fuel prices had unsettled
world trade the previous year (Asmundson, Dorsey,
Khachatryan, Niculcea, Saito 2011).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

With the freights rate at a low, many shipping firms were losing
money, with operating costs exceeding freight rates, even with
slow steaming.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Worst positioned were the shipowners who had overextended


themselves and were expecting delivery of newbuilding
vessels, but had not yet secure financing.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the crisis prolonged, the need for capital became greater.


Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Shipowners now had to meet their financing needs at a higher


cost of capital.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Most exposed were those who were highly geared and had
gambled by operating larger parts of their fleet in the spot
market and therefore were not able to maintain the high
interest rate repayments
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the freight rates came out of the worst trough by the end of
2009 (Clarksea Index), optimism was again to be found in the
market.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

This could therefore affect the choice of funding and give a bias
towards debt financing, as we will discuss further in the debt
section.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Many expected the market to fully recover and a new round of


ordering started. This optimism is illustrated in Figure 8
showing Panamax contracting numbers, with the total
financing needed on the left vertical axis, and average vessel
price in millions US dollars on the right vertical axis.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

A bankruptcy of such a large operator like Lehman Brothers


did, however, cause turmoil in the financial market, awakening
counterparty credit concerns, as well as heavily affecting other
financial operators.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the freight rates increased, a huge demand for financing


followed.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Strong countercyclical macroeconomic policies in most


developed and emerging-market economies helped the global
economy turn the corner in mid-2009.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Robust demand for commodities from the rapidly growing


emerging-market economies, and a stronger recovery than
expected in domestic demand in the US indications of better
times to come (Trade and Development Report, 2010).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

The trade then surprisingly recovered and boomed again by


the spring of 2000, before the collapse of internet stocks in
early 2001 triggered a deep recession in the Atlantic and Asian
economies, also known as the Dotcom crisis (Stopford 2009).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

This growth followed into 2010 with a worldwide GDP growth


of 3.9pp, much of this fueled by the leading developing
countries (China, India, Brazil)(Trade and Development Report,
2011).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

This improved the financial market conditions in the first half of


2010, and many decided to access the debt and to some extent
equity market in order to refinance/restructure/invest.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Such optimism can again be spotted in Figure 8, with Panamax


contracting numbers peaking in mid-2010.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the effect of the stimulus packages started to diminish, with


governments introducing a shift towards fiscal consolidation,
growth slowed down in the second half of 2010, a trend that
followed into 2011 where the global economy lost steam
(Trade and Development Report, 2012).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

By this time, the magnitude of the European sovereign debt


crisis was becoming increasingly clear and can to some extent
explain the decline of growth.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

The stimulus packages, on top of already significant debt levels,


had led many countries in the Euro-zone to build up
unsustainable levels of debt in the years following the market
crash of 2008.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

This rise in debt levels had caused a wave of downgrades of


government debt, which resulted in several countries’ solvency
being questioned.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

The countries worst affected were Greece, Portugal, Italy, and


Spain, often referred to as the PIGS countries.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

With the numerous downgrades and the uncertainty gradually


increasing from the end of 2009, the term spread of the
respective governments bonds rose steeply, making refinancing
of current debt close to impossible in the long run.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

In order to avoid a collapse of these countries and ultimately


the Euro-zone, the European Central Bank (ECB) followed
through on a series of measurements, among other things a
bond purchase plan in order to secure sustainable short term
financing.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Regardless of ECB’s actions, uncertainty in the


market remained high, causing the market
confidence to tumble and ultimately dragged
parts of the world economy back into a
recession again (Lane, 2012).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

In addition to the emergence of the European


sovereign debt crisis, with Greece and Portugal’s
term spread spiking from the second half of 2010
to the start of 2012, global financial risks, as well
as, political and social unrest in North Africa and
Western Asia have also affected world trade
negatively in 2010/11(Trade and Development
Report, 2012).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the market turned, investors realized that much


of the growth in the previous years had been
brought forward by the stimulus packages, while
little had been done to fix the underlying
problems.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

This caused the optimism to fall and liquidity in the


capital market disappeared again. By introducing
the stimulus packages, the governments had in
fact enforced the already emerging sovereign debt
crisis, bringing the Euro-zone even deeper into
troubled waters.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

With market confidence again at a low, the banks’


patience had now been strained, suggesting a
change in the financial market, where the usual
flexibility of the banks now was gone.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

After years of being understanding, accepting heavy short-term


losses, many banks can no longer wait for their customers to
recover, causing them to pull the plug on some of the worst
affected firms.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Notorious private equity legend Wilburn Ross phrases this change


of attitude pretty clearly. “What’s happening this time is the
lending banks are really starting to pull triggers. Whereas in older
times, they would try to play along with the owners, now they’re
being much more prompt and saying “Enough is enough, we need
to pull out”” (LaRocco, 2012).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the freight rates increased, a huge demand for financing


followed.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12. Results JAYA

In this chapter we will discuss and analyze the results


from our hypothesis testing.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1 Capital Structure Theory JAYA

We will in this section relate the financing theories


discussed in chapter 3, to the data we have collected, in
order to see if there is evidence to support these
theories.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the freight rates came out of the worst trough by the end of
2009 (Clarksea Index), optimism was again to be found in the
market.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the peak grew bigger, so did the demand for capital, finally
resulting in the supply of ships far outweigh the demand when
seaborne trade started to decline.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.1 Trade-off Theory JAYA

We find little support for the trade-off theory in the


shipping industry as a whole, as this theory suggest that
firms should be financed with enough debt to capture
the debt tax shield (DTS) so that the benefit of the DTS is
only marginally higher than the associated costs of
financial distress that arise with high debt ratios.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Many expected the market to fully recover and a new round of


ordering started. This optimism is illustrated in Figure 8
showing Panamax contracting numbers, with the total
financing needed on the left vertical axis, and average vessel
price in millions US dollars on the right vertical axis.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.1 Trade-off Theory JAYA

The taxation of shipping firms is especially lenient as


previously discussed in section 2.4, thereby eliminating
the lucrative DTS created by the use of debt.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.1 Trade-off Theory JAYA

According to the theory, this should leave the shipping


firms with only the costs of financial distress, thereby
discouraging them from using debt.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.1 Trade-off Theory JAYA

Despite this, our data shows that debt has made up


approximately 70- 80% of the total financing for the
period analyzed.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.1 Trade-off Theory JAYA

We therefore conclude that the trade-off theory is not


applicable to explain the pattern of financing for the
shipping industry
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

The pecking order theory, describes the preferred order


of how a firm finances its new investments.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

If we look at the ClarkSea Index in Figure 9, which shows


the weekly earnings for main commercial vessel types,
weighted according to the number of vessels in each
fleet sector, we see that earnings drastically improved
during the shipping boom from 2003-2008. This boom
made it easy for shipping firms to attain credit from
banks for new investments.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

Our numbers show that the use of equity both in the


form of public equity and private placements in the pre-
crisis period, made up an average of 26.3%, while only
14.7% in the post-crisis period.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

Our numbers show that the use of equity both in the


form of public equity and private placements in the pre-
crisis period, made up an average of 26.3%, while only
14.7% in the post-crisis period.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

One would therefore expect that shipping firms would


have utilized more debt relative to equity during the pre-
period, as credit was easily attainable.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

In the post period, we know banks cut back on credit,


leading to increased use of the bond market for
financing. The use of FOs peaked in the crisis year of
2009, possibly suggesting that firms who could not attain
financing from banks or the bond market were forced to
use equity instead, which is also the last resort according
to the pecking order theory.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

Despite this, the evidence is too weak to suggest that the


pecking order theory can explain the financing choices of
the shipping firms due to considerable use of equity in
the pre period.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

The market timing theory seems to be the theory that


best fits the observed behaviour of shipping firms.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

To quickly recap, the market timing theory implies that the firm
does not choose between equity or debt, but rather tries to
find the source of capital that is most beneficial to the firm. It
is, however, important to remember that the financial crisis
created havoc, thus limiting the supply of financing sources
available.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

This could therefore affect the choice of funding and give a bias
towards debt financing, as we will discuss further in the debt
section.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1 Capital Structure Theory JAYA

We will in this section relate the financing theories


discussed in chapter 3, to the data we have collected, in
order to see if there is evidence to support these
theories.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

In our dataset, we see an increased number of IPOs leading up


to the crisis, suggesting that shipping firms used the financing
option that was most beneficial for the firm.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

The pre period was characterized by high earnings and great


market sentiment both in shipping and the rest of the financial
markets.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

This upswing created a viable market for IPOs, which the PWC's
Global IPO Report (2012) confirms. The post period was
characterized by bleak market sentiment, forcing shipping firms
to utilize the bond market, private equity and FOs as the credit
from banks dried up.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

Grammenos and Papapostolou (2012) also find support for this


in their paper, describing the shift from pecking order theory
for the period of 80s and 90s, towards the market timing
theory for the last decade.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

When studying the development of M&A transactions in Figure


10, it is important to have in mind that the number of deals in
the chart contains all the deals executed in the period, even
those listed with zero value in the database.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.3 Equity JAYA

Figure 11 and 12 illustrate the use of IPOs and


FOs for our period of analysis. The left axis
shows the total amount raised, while the right
axis shows the number of deals.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

The reason for zero values could be that details of the deal
have not been made public, thereby listing it as zero. The total
amount is therefore not as interesting as before. Thus one
cannot look at the graph and say that the average M&A deal
has decline in the post period.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

Pre Post
Mean deal size* 465.802 329.359
Observations 184 49

T-value 1.005

Critical T-value 1.666


P-value 0.159

In our test we have excluded the zero values for comparing the
average amount; however, on the overall number of M&A
deals we have included the deals with zero value.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
Results JAYA

From the results, we can see that there has been a significant
drop in the number of deals executed in the post period.
Declining from an average of 61.75 in the pre period to only
16.2 in the post period.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
Results JAYA

This is in line with our hypothesis, as well as, with the DVB
report (2012), where they find that M&A activity has
significantly dropped in the aftermath of the crisis.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
Results JAYA

The results furthermore showed no significant drop in average


deal size between the two periods. This is opposite to our
initial hypothesis, and hence needs further analyzing. Looking
at the average deal size, we see that the drop is quite severe,
decreasing from
$465.8 to $329 million.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
Results JAYA

One would hence think that this would be statistical significant.


Due to the many outliers of the sample, we, however, suspect
that these outliers might affect the result. We hence believe
that the deal size has gone significantly down.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
Results JAYA

We are, nevertheless, unable to prove this statistically. Such


decrease would also be in line with the drop in vessel value.
Thus, the fall in the deal size could partly be accredited to the
lower implied valuation of ships and shipping firms.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
Results JAYA

Another important point, and probably the most prominent


reason, is the contraction of the funding market.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Notorious private equity legend Wilburn Ross phrases this change


of attitude pretty clearly. “What’s happening this time is the
lending banks are really starting to pull triggers. Whereas in older
times, they would try to play along with the owners, now they’re
being much more prompt and saying “Enough is enough, we need
to pull out”” (LaRocco, 2012).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
Results JAYA

In addition to this, in these harsh market conditions, most


shipping firms will have enough with just staying "afloat"
themselves, thus having no desire to expose themselves
towards the extra risk.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
Results JAYA

The DVB Bank report (2012) predicts the shipping M&A activity
in 2013 and onwards will be driven by the aim to reduce costs,
maintain market positions and negotiation powers.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.1.2 Pecking Order Theory and Market Timing Theory JAYA

The pecking order theory, describes the preferred order


of how a firm finances its new investments.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
Results JAYA

They also note that the volatility of the equity and debt
markets will continue to make it hard to secure funding for
deals. However, there is a large amount of money on the
sideline, waiting to be placed by both strategic and financial
investors.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
Results JAYA

Globally, general M&A activity has been suppressed by the


slow recovery of the world economy. The 2012 global M&A
activity represents a 41 % fall from the pre-crisis level according
to Clifford Chance (2013.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.3 Equity JAYA

The premise for the increase of IPOs and FOs came mainly after
the down turn of the Dotcom crisis from the good investment
sentiment from the period between 2004 and 2007.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.3 Equity JAYA

In addition, the shipping market was experiencing a boom,


needing to fund the expansion of the fleet as the growth of the
Chinese economy drove the demand for seaborne trade
(Grammenos, Papostolou, 2012) (Merikas et al. (2009).
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.3 Equity JAYA

Figure 11 and 12 illustrate the use of IPOs and


FOs for our period of analysis. The left axis
shows the total amount raised, while the right
axis shows the number of deals.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.3 Equity JAYA

Together with an upbeat stock market and


tremendously high freight rates, equity as a
financing source peaked in 2007 with $20.429
billion raised, making up an astonishing 38% of
the total financing that year.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.3 Equity JAYA

Looking at IPO activity alone, we see that it


peaked in 2005 and 2007, while seeing a dip in
2006.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.3 Equity JAYA

Interestingly, number of transactions actually


increased from 2005 to 2006, possibly
suggesting the listing of smaller firms.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.3 Equity JAYA

With the increasing IPO activity, FO activity


also flourished, having an almost linear
growth from 2005 until 2009, with the only
exception coming in 2008, where there was a
drop in both amount and numbers of deals.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
12.3 Equity JAYA

As the financial crisis hit in the fall of 2008,


and both the stock market and freight rates
collapsed, there was a major dip in the use of
equity.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
JAYA

Our final choice of topic was sparked by the many news articles and constant
complaining in the media of the challenging capital conditions shipowners faced in the
aftermath of the Lehman Brother crash.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

The banks were, however, reluctant to overextend their lending


prior to reassuring themselves that the market was going to
recover fully.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Worst positioned were the shipowners who had overextended


themselves and were expecting delivery of newbuilding
vessels, but had not yet secure financing.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

These were just some of the more renowned firms that were
struggling, and with most of these operators previously being
top ranked by the credit rating companies.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As shipping freights are strongly correlated with global trade


activity, freight rates varied greatly in the start of the
millennium before crashing in 2002.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Separating the issuance activity for the various regions, we


have based our hypotheses on our perception on the
differences of the demand and supply side of corporate bonds,
and to some extent media coverage that has indicated a
particular trend, which we then have wished to examine the
validity of.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

Like in section 10.1, it is harder to predict shifts of corporate


bonds issuances than that of bank loans. .
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

As private equity (PE) does, however, go under this category, and there has been a
significant increase in PE investment in shipping, this could pull up our results.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

A bankruptcy of such a large operator like Lehman Brothers


did, however, cause turmoil in the financial market, awakening
counterparty credit concerns, as well as heavily affecting other
financial operators.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

For each asset class defined we have tested whether there has been a substantial
change from the pre-crisis period to post-crisis period on the:
The amount raised per issue
The number of issues raised
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

As the freight rates came out of the worst trough by the end of
2009 (Clarksea Index), optimism was again to be found in the
market.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

In this presentation, DNB predicted a decline in syndicate sizes.


Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

With most banks severely affected by the crisis, and some having already gone through
restructuring, it is likely that the number of bank loans issued and the average deal size
have decreased.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
11. Macroeconomic Development JAYA

Worst positioned were the shipowners who had overextended


themselves and were expecting delivery of newbuilding
vessels, but had not yet secure financing.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Our premise for testing these variables is that the product of multiplying the two
variables gives us the total volume of that asset class.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.5 Location of debt funding JAYA

One could hence assume that Asian financial institutions have


issued more loans than those of North America and Europe in
aftermath of the Lehman Brother crash.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10..1 Amount per issue/ number of deals JAYA

Low market values could also lead to an increase in acquisitions, as increasing ones
market share could be done a low cost.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.2 Size of consortium JAYA

Our hypothesis is that we have seen a significant increase in the syndicate sizes.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.4 Bond interest rate and tenor JAYA

Given the newfound importance of bonds, we wish to further


examine this asset class in more detail.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
10.3 Proportions JAYA

We expect to see a similar change in proportions as with


issuing activity, hence a significant shift from bank loans and
equity towards bond financing.
Departement Teknik Sistem Perkapalan ITS
PT. MUARA
JAYA

On the other hand, one should, however, be careful not to be


bound for too long at unfavourable market conditions (Bodie,
Kane, Marcus, 2011).
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

The Ship Finance Cycle

High returns in
shipping

Current position in the Higher margins for Non-shipping


cycle but with the counter cyclical banks enter the
unique difference that lending market
the financial crisis has
limited the lending Non-shipping
capacity of traditional banks leave Ship Increased
Lending competition
shipping banks. the industry
Cycle

Market Reduced
Collapses margins

Cheap debt leads to


Excess supply of
accelerated
tonnage
borrowing
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Traditional Sources of Capital for Shipping

 Bank Loans have traditionally satisfied


approx. 75% of capital requirements

 A severe shortage of bank debt is currently  Bilateral Lending


constraining the shipping industry, an  Internal equity finance
industry that is heavily dependent on the  Shipyard finance
banking market  Government
 Other  Syndicated Loans
 Markets currently closed or extremely
limited activity.
36.2% 40.2%
Limited activity

Closed

2.5% 2% 6.0% 5.0% 8.0%


Equity funds Tax Lease KG / KS Bond & Non ship
investors markets Public Equity mortgage loans
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Funding demand remains high…

Expected need for ship financing May ’09 (60% leverage)

250

200
155
USD bln

150 125
97
100

50 103 37
64 83
25
0
2009 2010 2011 2012

Equity Debt

Source: Clarksons
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Credit tightness since mid 2008…..

 In 2007 approximately Global shipping loans by volume in USD bln


USD 100 bln was lent
to the shipping industry 100
in the syndicated and
non syndicated loan
market 75

 2008 showed a decline 50


with a further sharp
decrease in 2009
25

0
2001 2002 2003 2004 2005 2006 2007 2008 2009

Q1 Q2 Q3 Q4

Source: Dealogic, syndicated and significant bilateral transactions


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

….and shipping finance continued to decrease

 The high volume in Global shipping loans: quarterly volume/number of deals


1Q09 was mainly
driven by AP Moller 35 120
Maersk’s USD 6.5 bln USD bln
debt restructuring 30 96 96
91 100

25 77 74
80
20
60
15
34 34 33 40
30
10 24

5 20

0 0
3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Source: Dealogic, syndicated and significant bilateral transactions


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Basically coming to a standstill in 2009

Global syndicated shipping volume

refinancings / restructerings new money

30.000
USD mln
25.000

20.000

15.000
24.257

17.521

21.486

22.778

14.181

26.079

25.351
17.726

10.351

20.443

10.848
21.113
11.901
16.311

3.610
5.473
4.408

4.739
10.000

2.382
2.503

2.963

1.436

2.005

1.068

1.584

3.610

1.315

2.730
3.036
1.018

2.201

7.641
5.000
635

680
360

889

0 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09
Source: Dealogic
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Trends in bank debt

Strict conditions Less Liquidity


 Refocus on core clients & quality  Many big players in ship finance have
names significantly reduced activity due to:
 Smaller facilities • pressure from governments to act
more domestically,
 Little syndicated loan activity, bi-lateral
and club deals • credit related problems due to
aggressive lending during shipping
 Pricing increase boom ,
 Tighter covenants • concentration risk resulting from
 Declined appetite for LT debt; recent mergers
increased premium for LT funding • reduction of bank’s balance sheets

So today it’s all about:


 Core clients  Core regions  Core sectors – is this still shipping?
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Conclusion: Major Shift in Ship finance has occurred


Financing shortfall is significant Trends in Ship Finance
US$ Bn
80
 Many big players in ship finance
Annual Shortfall have significantly reduced activity
70 68.0 c. $13-30Bn

60  This takes at least 50% of the


50
50.7 lending capacity out of the market.

40 38.0  Demand for capital is very high


30
Assuming due to high new building order
70%
Order book. There is a big gap with the
20
book expected capacity in the banking
Delivery
10
market.
0
Est. Annual New Building Est. Annual Lending
Financing Need ‘09 – ‘11 Availability
Source: Marine Money, May 2009
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Table of Contents

1. Ship finance today


2. How to deal with it - alternatives
3. Fortis Bank Nederland - committed to shipping
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Imbalance in capital supply and demand

Europe:
Clients
North
Asia:
America:
Funding
Funding
Clients

Middle East:
Funding

Demand for and availability


of capital are not necessarily
at the same part of the
hemisphere
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Alternative sources of debt increase in relevance

 New funds need to be sourced – from pension & insurance


funds, sovereign wealth funds, Islamic funds, bond and
equity market, commodity producers and traders, etc.

 Part of the gap will be filled by DCM/ECM and private


deals with institutional investors.

 Public equity & high yield bond markets open up again,


also for Shipping
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Investors looking for alternatives

Instead of traditional investments… …investors are looking for


 Institutional investors are reducing  Long-term assets with a preference
exposure to traditional asset classes in for higher yielding
particular equity  Inflation protected
 Very low yields on government bonds  Low correlated risk
and recent sovereign concerns reduce
their attractiveness • Corporate bonds
• Infrastructure investments
• Other long-term and low-correlated
investments
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

High yield bonds attractive substitute for loan debt

Structural benefits: Interest rates is the next ‘Big Worry’


 More recession-resistant capital structure after this recession
 Longest-tenor debt in capital structure  Borrowers looking to lock-in low fixed-
and ‘junior’ layer of debt rate coupons via bond transactions
 Diversify investor base and create trading
liquidity for benchmarking and repeat Allows larger / more conservative
issuance
borrowers to raise acquisition currency
 minimize or avoid expensive equity
 Bond market is increasingly re-opening
issuance and dilution
for acquisition related financings
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Fortis’ role in the new market (1/2)

Establishing (Shipping) Funds


 Investors will benefit from:
• carefully selected and diversified portfolio of new shipping loans
• attractive risk - return profile.
• Limited risk exposure; financing of assets < 10 year historic average
values; conservative leverage position of 0 – 45% of current market
values.
• FBN’s expertise in the global ship finance, its existing client base
and its 200+ years of history in this sector.

 Direct participation in Fortis deals is also a possibility.

 FBN and Qatari Investment bank QInvest created a mezzanine fund


aiming to fill the gap between what is available in the banking market
and equity portion.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Fortis’ role in the new market (2/2)

Regional imbalance Capital Markets & Traditional banking


 Asian surplus in liquidity and looking for  FBN has access to the Debt and Equity
investment opportunities. Capital Markets through a co-operation
 95% of all vessel ship yards are in Asia, with Sunrise Securities Corp. in New
looking for: York.

 investment vehicles,  FBN will continue to find innovative


 co-sponsors solutions for Shipping Sector
 experienced ship finance
structuring parties
 Asian investors start entering alternative
investments
 Asian yield requirements < US/EU yield
requirements
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Table of Contents

1. Ship finance today


2. How to deal with it - alternatives
3. Fortis Bank Nederland
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Fortis has a long track record the ECT Industries

Energy Commodities Transportation Principal Finance


Clients active from Clients active in: Clients active in:  Direct investments
upstream to  Agri  Deep sea shipping activities in ECT
distribution: industry industries
 Metals
 Offshore Oil (field)  Intermodal  Portfolio of assets
 Energy
and Gas services  Aviation in projects related
 Power & Utilities to and companies
 Carbon Banking active in these
 Renewables Top 5 Top 3 Top 5 assets
Shipping Oil field Commodity
syndicated services bank
loan markets industry worldwide
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

We have come a long way since last year…

Some of our Transportation Group Milestones 2009


 25 deals over US$ 800 mln
 Announcement of new strategy (May)
 T joins up with Forum of the Future (July)
 T together with Capital Link organises first ever Shipping Webinar
(23 september)
 Opening Singapore office + booked our first deals (16 October)
 Q-Invest – 12 November
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

…and we are moving forward fast

One bank with  Market leader in the Netherlands


in wholesale banking
AMBITIONS
without
 International network with
PRETENTIONS activities in 25 countries

In the year ahead we will


work together to create  A leading position in specific
a new, strong Dutch bank sectors/services, such as Energy,
Commodities & Transportation
under the brand name
and Brokerage, Clearing &
ABN AMRO
Custody
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Strategic fit of Fortis Bank Nederland & ABN AMRO

Conventional Bank
Fortis Bank Nederland
(like ABN AMRO in NL)

Sold to
Merchant Banking RBS

Commercial
Banking

Private Banking

Retail Banking
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

ECT and the new organisation

How will this affect you ?


 Business as usual is top priority
 Client remains central
 ECT minimal affected by integration plan
 ECT is acknowledged as one of the growth pillars
within the new bank
 New combination allows us to:
• Offer sufficient product capabilities to cater for
our clients
• Leverage on the combined International
Network
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

ECT presence - Where our clients lead us

Oslo
London Amsterdam
Rotterdam

New York
* Athens

Dubai Hong Kong

Singapore

Sao Paolo

* Representative office scheduled to open soon


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Conclusion - What ECT can offer you

Our capabilities:
 Strong Origination network
 Strong Structuring and execution capabilities
 Operational excellence in our Commodities and Shipping
mid and back office
 Adequate capital resources to meet (some of) your
funding requirements
 Innovative approach to breach the funding gap (if any)
Departement Teknik Sistem Perkapalan ITS

SHIP FINANCING IN KOREA PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

KEXIM at a Glance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


KEXIM at a Glance

Key Point Specially Mandated Institution

Establishment 1976

Governing Ministry of Strategy and


Authority Finance
Republic of Korea
Equity U$10bn
100% Ownership
100% Government-owned
- Korean Government (73.9%)
Ownership
An Export Credit Agency - The Bank of Korea (13.1%)
- Korea Development Bank (13%)
mandated by Korean Government
to promote
export competitiveness of Par with Sovereign Ratings
Korean goods and services

Aa2 (Stable) AA- (stable) AA- (Stable)

5
6
9
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Financial Highlights
Summary of Financial Statements
(U$ Bn) 2011 2012 2013 2014 2015

Total Assets 47.8 51.3 58.2 66.9 70.5


Solid Asset Base
with Strong
(Total Loans) (40) (42.8) (48.7) (55.8) (57.1) Asset Quality

Total Equity 6.5 8.5 8.8 9 10


Conservative
Net Income 0.1 0.4 0.1 0.1 0.1 Consistent Credit and Risk
Profitability Management
* Funding (’15) : U$13Billion

Loan by Geography and by Product


Africa Oceania
1% 4%
Import Export Loans 64%
Middle East Loans 12%
16% Shipbuilding 14%
Overseas Industrial Plants 14%
Asia
44% Investment
Loan 24% Petrochemicals 8%
Metal 5%
Europe Automobiles 5%
19%
Textile 4%
Americas
16% Others 14%

Source: KEXIM, Dec 2015


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

KEXIM’s Ship Financing

2015 Shipping Portfolio League Table(Commitment)

30.0

(U$ Bn)
25.0 25.0
25.0

19.7
20.0 18.8
17.3
16.0 15.5 15.5 15.3
15.0 13.6 13.3 13.1
12.2

10.0

5.0

0.0
DNB HSH Nordea KfW IPEX Bank of China Credit DVB KEXIM SuMi BNP NORD/LB ABN Amro
Nordbank China EXIM Agricole TRUST Paribas
CIB

(Source: KEXIM, Marine Money)

5
7
1
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Maritime Finance Center (MFC) at KEXIM


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Maritime Finance Center(MFC) at KEXIM


Key Point
History Organization

 (’14. 9. 29) Located in BIFC*


Maritime Finance Center(MFC)
* Busan International Finance Center

 (’14. 11. 10) Opening Ceremony of MFC

Purpose of Establishment
Maritime Finance
Group

Maritime Project Maritime Corporate


Finance Department Finance Department

Team1 Shipping Finance


Maritime Finance Center(MFC) (Ship Finance) Team
- To facilitate the development of
the maritime financing Team 2 Marine Finance
(Ship Finance) Services Team
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

KEXIM Maritime Financing Program


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Overview of KEXIM Maritime Financing Program

Shipbuilding Shipbuilding Steel Keel After


contracts Launching Delivery delivery
Process Cutting Laying

Export-Related Performance Guarantee


Financial (Refund Guarantee, Contract-Related
Support for Performance Guarantee, etc)
Shipbuilding
Companies Export Project Loan

Financial
Support for DirectLo
Shipping an & Fin
Companies ancial G
uarante
e/Bond
KEXIM Provides Customized
G u a rFinance
ant Support that Shipbuilding &
Shipping companies needeaccording
e to the Shipbuilding Stage
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Senior Facility

Direct Loan  Structured Ship Financing

}
Non-Recourse

 Based on Project Finance

Limited Recourse

Full Recourse  Based on Corporate Finance

Guarantee

Financial Guarantee  KEXIM covered Loan for Commercial


Banks

Bond Guarantee  KEXIM covered Bond for Investors


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

As an ECA, our export credit for ship financing generally follows the rules
under the OECD Arrangement for its terms and conditions.

Direct Loans Financial Guarantee Bond Guarantee

Applicant Borrower Borrower Issuer

Beneficiary Borrower Commercial Banks Capital Market Investors

Tenor 12 years from a starting point of credit

Maximum
Within the amount regulated in OECD guideline(Up to 80% of contract price)
Amount

Premium Quarterly or semi-annual


Upfront Upfront
Payment equal installments

Repayment Quarterly or semi-annual equal installments

Security
Mortgage, Assignment of Earnings, Pledge over Earning Accounts, etc.
Package
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Transition from Financial Guarantee to Bond Guarantee

Loan Guarantee  Growth of ECA-Guaranteed Bonds

Banks
6.5bn
ECA (37)
2.6bn 4.2bn
Guarantee Repayment Loan 965m (19) (25)
79m (14) 291m
(2) (2) (in $)

Buyer ’00 ’01~’09 ’10 ’11 ’12 ‘13. 3 ‘13. 6


US-EXIM US-EXIM ECGD COFACE,
Launching Increasing Launching KEXIM
Launching
Bank Loan Market
* Source : JP Morgan

 Strength of ECA-Guaranteed Bond


Bond Guarantee

Investor
①Diversifies funding sources to the capital market
ECA Bond
Guarantee Repayment proceeds
②Direct access to broader investor bases
Buyer
③Stable and long term financing/investment
Capital Market
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Ship Owner
Corporate Guarantee

Equity Injection

Shipbuilding
Loan Agreement Contract
Lenders Borrower Korean
(KEXIM, CB) (SPC) Shipbuilders

Repayment BBC/BBCHP

Escrow
Charterer
Account Charter Rate
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Structure of Bond Guarantee

KEXIM Financial KEXIM


Builder Investor Guarantee Bond Guarantee

Bond Commercial
Contract Payment Proceeds P+I Beneficiary Bond Investors
Banks
Bond
Contract Proceed
Buyer Note Tenor Up to 12 years
Charterer
(Issuer) Trustee
Hire P+I

Premium Upfront

Guarantee
Repayment Amortization

KEXIM
Mortgage, Lease Contract, Earning
Security
Assignment, etc.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Case Study I (Direct Loan)

Project Outline

Financing
Structured Finance
Type

Project Size USD 174 Million (Contract Price)


Loan Agreement

Vessels 2 container vessels

Loan Tenor 10 years from delivery

Shipbuilder Korean shipyard

USD 87M (KEXIM, 50%)


Financing - USD 77M (KEXIM Direct Loan)
Strucutre - USD 10M (KEXIM Guarantee)
USD 43M (Commercial, 25%)
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Case Study II (Bond Guarantee)

Direct Loan + Covered Bond Direct Loan + Guarantee + Covered Bond

Bonds Bonds
Proceeds Proceeds

Investors A Tanker Co. Investors B Tanker Co,


Repayments
Repayments

Guarantee
Guarantee Loans Repayments
Loans Repayments
Option
to
Guarantee Direct Loans
convert Loans Covered
Bond
Guarantee
Kexim changes to
KEXIM KEXIM CB
Direct Loan Commercial KEXIM
Bank
(U$1억)
Kexim KEXIM
Covered Loan covered
Bond

<2 4 1
> 7
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

KEXIM ECO-SHIP Fund Program Overview

Program KEXIM ECO-SHIP FUND PROGRAM

Fund Size KRW 1 Trillion (USD 1 Billion)

KEXIM
KRW 250 Billion (25%)
Investment

Program
Pension Funds, Insurance Companies, Commercial Banks, Investment Banks
Co-Investors

Investment Junior debt or equity of Eco-ships purchased by shipping companies


Target * International shipping projects can be considered where Korean contents are involved.

Currency &
Each project fund enters into currency and/or interest swap agreements
Interest Swap
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

KEXIM ECO-SHIP Fund Program Structure

KEXIM ECO-SHIP FUND PROGRAM


• KEXIM anchors transactions, making
(Portion : 25%) approvals first.

② Institutional • Participation subject to own discretion.


Investors
(Participants: 75%)

Investment

Manage
Project Funds Funds for
Project Manager Fund 1 Fund 2 Fund 3 Fund 4 Each Project
(KRW/USD)

*After review and due-diligence

①Proposal made to KEXIM first SIC SIC SIC SIC


(SPC) (SPC) (SPC) (SPC)
②Proposal made to other
participants after KEXIM approval

Shipping Shipping Shipping Shipping


Company Company Company Company
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

KEXIM ECO-SHIP Fund Program


KEXIM ECO-SHIP FUND PROGRAM

Institutional
Investors
(25%) (75%)

Investment/Withdrawal

Eco-ship Program Fund Project Manager


Fund
Management
Junior
Financing Repayments

Senior Financing
Eco-Ship Order
Senior Lender SPC Ship Builder
Repayments
*KEXIM and other
ship financing Institutions

Guarantee BBC-HP
L/T Cargo
Contract Shipping
Shipper
Companies
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

KEXIM Financing in Greece


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

KEXIM’s Ship Financing in Greece

Danaos Corporation 4 TSAKOS Energy Nav.


Containers 4 Tankers
263mil 127mil

Dynagas

Dynagas LTD. 4
Thenamaris LNG Holding INC.
LNG Carriers
3 LNG Carriers, 196mil
246mil

Ocean Rig 1
Drillship OCEANUS Container Carriers LLC 4
300mil LNG Carriers, 348mil

Oceanbulk Container Carriers LLC 8 Angelicoussis Shipping Group 3


Containers, 167mil VLCCs, 155mil

Source: KEXIM’s previous deals

22
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Recent Track Records


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Structured Financing (2014~2015)

Oceanbulk Dorian LPG OceanRig BW LPG ICBC Leasing

USD 167,000,000 USD 408,000,000 USD 300,000,000 USD 267,400,000 USD 260,000,000
Eight container ships Nineteen LPG Carriers One Drillship Seven LPG Carrier T w o LNG C a r r i e r s

Joint Arranger with Joint Arranger with Joint Arranger with Joint Arranger with
Joint Arranger with
C A -CIB DNB Bank, DVD Bank, DNB Bank, SEB Bank C A -CIB
ABN-AMRO, ING Bank
Credit Sussie

GasLog Subsea7 Gener8 Maritime Hapag-Lloyd Navig8 Product


Tankers

USD 407,200,000 USD 327,600,000 USD 167,600,000 USD 193,000,000


USD 342,300,000
1 Diving Support
Eight LNG Ca rrie rs T h i r t e e n VLCCs Five container Eight Ta n k e r s
Vessel,
Joint Arranger with sh ip s
H e a v y Cons truc tion Joint Arranger with Joint Arranger with
Vessel
CITI, NORDEA Joint Arranger with CITI, NORDEA C A -CIB
Joint Arranger with
CITI CITI, HSBC
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Eco-Ship Fund

Eco-Ship Fund 1 Eco-Ship Fund 2 Eco-Ship Fund 3

KRW 30,400,000,000 KRW 18,000,000,000 USD 38,800,000


(KEXIM KRW 7,600,000,000) (KEXIM KRW 4,500,000,000) (KEXIM USD 9,700,000)
Fo u r bulk Ca rrie rs Tw o bulk Ca rrie rs F o u r Ta n k e r s
Arranger : KSF & Arranger : KSF & Arranger : KSF &
HI Investment Management HI Investment Management HI Investment Management

Eco-Ship Fund 4 Eco-Ship Fund 5

USD 17,900,000 USD 18,000,000


(KEXIM USD 4,500,000) (KEXIM USD 4,500,000)
Tw o Ta n k e r s In t h e pipeline
Arranger : KOMARF & Arranger : KSF &
Korea Investment Management HI Investment Management
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIP FINANCING IN CHINA

0
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

1. Standard Chartered Bank in China


• Standard Chartered Bank is the oldest foreign bank in China. We opened our first branch in
Shanghai in 1858, and are one of the first foreign banks to be locally incorporated in China.

• We have one of the largest foreign bank networks in China, with around 7,000 employees,
spanning 29 cities with 27 branches, 78 sub-branches and 1 village bank, 106 outlets in total.
We have strategic partnership with China Bohai Bank (19.9% shareholding) and the
Agricultural Bank of China (~5% shareholding).

• Standard Chartered Bank is dedicated to building a sustainable business with consistent


client-focus strategy. Corporate & Institutional Banking segment provides a wide range of
innovative solutions to help corporate and institutional clients facilitate commerce and finance
across some most dynamic markets in today‟s global economy.

• Our full suite of comprehensive capabilities across Transaction Banking, Financial markets
and Corporate Finance fundamentally allow us to deliver tailor-made well-rounded solutions,
in particularly, to support Chinese firms going global and multi-national corporate expanding
in China.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

2. SCB Shipping Finance


Specialised Global Team
 Clear focus on servicing our existing client
franchise within the Standard Chartered Bank
footprint of Asia, Africa and the Middle East.
London
4
 Strong commitment to support existing client
relationships throughout shipping cycles.
 Extensive product offering, including both debt Tokyo
and leasing products. 1

 Leveraging our excellent knowledge of regional BJ


NY 1
trade and commodity flows, for e.g., India- SEA-
3
China, Australia-North Asia, SEA-Middle East, HK
China-Africa, etc. 12
Singapore
 Utilising Standard Chartered Bank’s cross- 12
border access to regional and local poolsof
liquidity to support our clients’ ship financing
needs for both newbuild and second hand
Supported by a pool of 33 Shipping Finance Bankers
vessels.
based in Singapore, Hong Kong, Beijing, Tokyo, New
 Part of Standard Chartered Bank’s Corporate & York, and London
Institutional Banking Business.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

2. SCB Shipping Finance


Debt & Operating Lease Structures
Debt Operating Lease
• Finance of existing tonnage • Sale and leaseback of vessels to clients
Refinancing • Retention of ownership and residual value Sale and • Allowing for long term use without
1 1 ownership and residual risks
of vessel • Release of cash and structured leaseback
repayment profile • Release of cash / equity for clients

• Finance of new-build on clients‟ order • Acquiring asset from 3rd Party and lease
book or new contract. Third party onward to clients on long term
2
Newbuild • Construction period loan converting to 2 purchase • Provides flexibility for clients in event
financing term facility on delivery. when capacity required in short term
and lease
• Client retains supervisory and • Limited / zero upfront investment
management role during construction
• Standard Chartered Saadiq offers • Financing new-builds on clients‟ order-
financing that are Shariah compliant book or new contract, providing pre-
3
Islamic Newbuild
products 3 delivery loans and converting into a sale
Financing financing and leaseback at delivery
• In accordance with the rules known as
„Fiqh al-Muamalat‟ (Islamic rules of • Provides alternate financing solution for
transaction) clients‟ new-builds
Debt Terms
Lease Terms
• Credit Facility
• Loan period 3-10yrs, balloon payments, structured amortisation profiles • Bareboat Charter

• Age of vessel to be less than 10yrs at inception of credit facility and • Lease Tenors of 7 – 12 years
vessel to be less than 18yrs upon maturity of facility • Age of vessels to be less than 10 years old at inception of lease. Age
• Fixed/floating rate (bilateral or syndicated) of vessels to be less than 18 years old at the expiry of lease

• Repayment and prepayment options, extension options • Fixed rate lease payments preferred
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

3. Sources of Ship Finance


•The most popular
Debt •Global business
•Cover all vessel types

•Smaller business
Operating Lease •Residual Value appetite
•May not cover all vessel types

•Typically Chinese Bank lead


Finance Lease •All vessel types
•No Residual risk

•South Korea, China, Japan, European (GIEK, ATRADIUS, COFACE,


ECA HERMES)
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

3. Sources of Ship Finance


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

4. Standard Ship Finance Structure – Debt


Refund
Guarantor
Refund Guarantee
Security package:

-Assignment of Shipbuilding
Contract
Pre delivery instalments -Assignment of Refund
Pre delivery loan
Borrower/ Shipyard Guarantee (from Refund
Vessel Owner Guarantor acceptable to
Lender)
Pre delivery - Corporate Guarantee

Corporate Guarantee
– Pre delivery and
Post delivery
Bank Corporate
Guarantor

Security package:

- Mortgage over Vessel


Post delivery
Post delivery loan -Assignment of Charter
Charter contract
Borrower/ Charterer Contract
Vessel Owner -Assignment of vessel
earnings, insurances and
requisition compensation
- Charge over bank account
- Pledge of shares of Borrower
- Corporate Guarantee
Note: In some cases, Corporate Guarantee is replaced by Standby Charter
- Ship Manager‟s undertaking
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

4. Standard Ship Finance Structure – Finance Lease


Possible Recourse

Standby Letter of
Senior Credit for P+I 100% Owner Leasing
Bank
Lender Company

100% Owner
70% Asset
Backed Loan
Lease Agreement

Lessor/SPV Lessee/Client
Lease Payments

Purchase of vessel

Sales Proceed
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

4. Standard Ship Finance Structure – Operating Lease


Possible Recourse

Standby Letter of
Senior Credit for P+I 100% Owner Leasing
Bank
Lender Company

100% Owner
70% Asset
Backed Loan
Bareboat charter, plus call
option (1)
Lessor/SPV Lessee/Client
Bareboat charter hire

Call option

Purchase of vessel

Sales Proceed

Note:
(1) Profit sharing between Leasing and Client Company upon sale of vessel (for any amount above call option)
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

4. Standard Ship Finance Structure – ECA


Overview of Contractual Structure

3
Lender(s) ECA(s)
Commercial and Political risk 1. Supply Contract signed between Borrower
Guarantee
and Shipyard
2. Lender(s) signs Loan Agreement with
2 ECA Loan Borrower
Agreement
3. ECA issues guarantee in favour of Lender(s)

Borrower 1
Shipyard
(Shipping Company) Export Contract for USD 100m

Overview of Cash flows

1. Lender(s) provides a loan to Borrower, which


Lender(s) ECA Premium ECA(s)
could be disbursed:
Debt Repayment

a) Directly to the Shipyard; and/or


Reimbursement

1a b) Reimbursed to Borrower for payments


1b 2 Direct already made to the Shipyard
Payment
2. Borrower services the loan by paying
interest/ principal to Lender(s)
Borrower
Shipyard
(Shipping Company)
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

5. Case Study

Chinese Leasing
USD 1 Billion To the Lessor: Sole Advisor and Company
Sole Advisor andSecurity Security Intermediary
Intermediary 100% Owner
Advised on Financing the
Sale and Leaseback ofOne
FPU Lease Agreement

March 2016 Lessor / SPV / Lease Payment Lessee / Seller


Buyer
To the Lessee: Sole Arranger/Advisor;
Security Intermediary

Purchase of vessel
Sales Proceed

Transaction highlights

 Scalable Opportunity. This transaction demonstrates SCB’s ability to deliver high quality clients and products. SCB is well positioned to arrange and advise on
further finance lease and operating lease transactions for other major clients of the Bank. This adds a new business line beyond SCB’s lending and operating
leasing businesses.

 Seamless Execution & Cross Sell. SCB introduced the transaction to the Chinese leasing company (lessor) and structured the transaction to meet the
requirements of both the Chinese leasing company (lessor) and the seller / lessor. SCB also engaged Transaction Banking to provide the required escrow services.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

6.Market Updates – the good, the bad & the ugly

TANKERS CONTAINERS
$k/day Clarksons Average Tanker Earnings $k/day Clarksons Average Containership Earnings
45 12
40 11
35 10
30
9
25
8
20
15 7
10 6
5 5
0 4
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

BULKERS
$k/day Clarksons Average Bulker Earnings
20
18
16
14
12
10
8
6
4
2
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Tanker Market – will the good times last


1. Yes, as long as oil market remains
oversupplied
Oil Demand
Oil Supply

2.A structural overcapacity of oil keeps Source: IEA


oil prices low. Cheap oil prices boost
refining margins, encouraging
refineries to increase crude intake,
boosting crude imports and product
exports.
3.However, surge in tanker supply in
2016 and 2017 could dampen earnings.
As such, we expect tanker earnings to
fall, but the sector will remain
profitable through 2017. Source:
Fearnleys
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Containers – midsize players to suffer


1. Weaker container vessel demand
growth relative to GDP. Container
vessel demand growth used to grow
at 10% per annum, with GDP growing
at 4-5% per annum (1996-2010).
Since 2011, container vessel demand
growth has fallen to 5% per annum
with GDP growing at a similar rate.

2. Supply growth has shrunk, but Source:


not fast enough. Supply growth for BraemarACM
2016 and 2017 is still expected at 3%,
driven by orders of very large
container vessels by the big players.

3. Charter rates are forecasted to


remain at low levels for at least
another year. Large operator liners
will focus on growing market share
and consolidation, while liners in the
niche feeder business can still operate Source:
profitably. Clarksons
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Dry Bulk – Green shoots of recovery


Bulk Carrier Fleet Demolitions
1. Record demolition in Q1 2016. 15 (Mn DWT)
Mn DWT (2% of today‟s current fleet)
was sent to the torches in Q1, the
highest on record.

2. Newbuild ordering has also


fallen. No dry bulk orders were placed
in Q3 2015, the first time on record.
Similarly, only a handful of vessels
were ordered in Q1 2016. Source:
BraemarACM
3. However, dry bulk demand Bulk Carrier Fleet Contracting
growth is too weak to eliminate the (Mn DWT)
structural overcapacity of vessels.
Delivery schedule for 2016 remains
high and even more demolitions,
cancellations and conversions need to
occur first before freight rates can
recover. This is unlikely to occur
before the 2H 2017, but there is
reason to be optimistic for 2018. Source:
BraemarACM
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Chinese Shipbuilding – tough times ahead


1. In 2010, China had more than 3,000 shipbuilding
enterprises, mostly speculative yards. This number has
drastically dwindled to only around 300 today, and only
a little more than 100 yards have active day-to-day
operations.

2. In the first 11 months of 2015, China Association of


the National Shipbuilding Industry (CANSI) reported that
54 of the country‟s leading shipyards received 92.5% Tough Times
market share the country‟s newbuilding tonnage,
meaning that easily a few hundred other yards from
among the estimated 300 have gotten zero new
orders for the entire year.

3. Only 20-30 Chinese shipbuilding companies could


be left standing in a few years following this period of
consolidation.
Departement Teknik Sistem Perkapalan ITS

DANISH SHIP FINANCE PT. MUARA JAYA

SHIPPING MARKETS AT A GLANCE


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

SHIPPING MARKETS AT A GLANCE


IN PREVIOUS REPORTS, WE HAVE HIGHLIGHTED THE heightened probability of a sharp growth slowdown in China at
STRUCTURAL HEADWINDS THAT ARE CHALLENGING THE some point in the future, with adverse international repercussions,
OUTLOOK FOR VARIOUS SHIPPING SEGMENTS. IN THIS EDITION, especially for seaborne trade. Following a period of abundant
WE INITIATE A DISCUSSION ON HOW TO UNLOCK ADDITIONAL credit supply, a sudden tightening of global financial conditions
VALUE BEYOND THE ACTUAL SHIPS. (and an associated US dollar appreciation) could expose financial
fragilities in some emerging markets, imposing strains on
WORLD DEMAND INDICATORS
economies with US dollar pegs, high leverage, and balance sheet
SEABORNE TRADE VOLUMES HAVE INCREASED mismatches. These risks are closely interconnected and could be
EXPECTED DURING 2017. STILL, GLOBAL CONTINUE mutually reinforcing.
TO WEIGH ON THE LONG-TERM OUTLOOK.
SHORT-TERM RECOVERY, LONG-TERM CHALLENGES
TRADE IS REBOUNDING STRONGLY The rapid pace of trade growth in 2017 is unlikely to be sustained
Seaborne trade volumes increased much more strongly during the next year (and beyond), for several reasons. First, trade growth
first half of 2017 than we expected. The WTO has issued a marked in 2018 will not be measured against a weak base year, as is the
upward revision to its forecast for 2017 following a sharp case this year. Second, monetary policy is expected to tighten in
acceleration in global trade growth in the first half of the year, and developed countries as the Federal Reserve gradually raises
now estimates growth in trade volumes of 3.6% for 2017 interest rates in the United States and the European Central Bank
compared with 1.3% in 2016. The Dry Bulk industries powered considers how to phase out quantitative easing in the euro area.
almost half of the increase in seaborne trade volumes, of which Third, fiscal expansion and easy credit in China are likely to be
Chinese imports generated close to 60%. reined in to prevent the economy from overheating. These factors
should contribute to a moderation of trade growth in 2018 and
SOLID GROWTH IN INVESTMENTS
beyond.
Stronger economic growth, particularly in China and the US, has
boosted demand for imports, which has spurred intra-Asia trade, LITTLE GROWTH IN SEABORNE TRADE VOLUMES UP TO 2030
as demand has been transmitted through regional supply chains. To our understanding, 2017 has been a deviation from the ongoing
In both countries, demand has been driven by solid growth in rebalancing of global GDP towards services. We argue that the
investments. The import content of investments tends to be higher relationship between seaborne trade volumes and world GDP will
than other components of GDP, so a recovery of expenditure in continue to weaken. We expect that seaborne trade will grow by
this area has a disproportionate impact on import demand. an annual average of 1% per year up to 2030. We discuss the
underlying mechanisms that determine our outlook for the global
CHINA’S REBALANCING EFFORTS WERE ALMOST PAUSED
economy and the shipping industry in the ‘General Review and
China’s growth reflects a slowdown in its efforts to rebalance
Outlook’ chapter of this report.
activity toward services and consumption, a higher projected debt
trajectory, and diminished fiscal space. These factors imply a
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

FREIGHT RATES MAY STAY LOW FOR LONGER, SINCE SUPPLY Freight rates remain low in most segments
CONTINUES TO INCREASE WHILE ECONOMIC GROWTH IS But the ClarkSea Index has increased 27% during 2017
60,000 115%
DEMANDING FEWER UNITS SHIPPED PER DOLLAR GROWTH.
FREIGHT RATES REMAIN LOW BUT ARE INCREASING
The shipping markets continue to struggle with overcapacity. 45,000 105%

Implied fleetutilisation
% of the worldfleet
Freight rates remain low across the board, indicating that

ClarkSea Index
USD per day
utilisation is poor in most ship segments. The ClarkSea Index
30,000 95%
stood at USD 13,000 per day in October 2017, up approximately
USD 5,500 per day from its all-time low in August 2016 (fig. 1).
The leading freight rate indices for Crude and Product Tankers, 15,000 85%
USD 23,000
LPG Carriers and Container vessels are only USD 3-7,000 per day per day
above their all-time lows. Offshore-related vessels are likewise USD 12,000 per day
facing very difficult times. The Dry Bulk segment has regained 0 75%
2001 2003 2005 2007 2009 2011 2013 2015
some lost ground during the past 18 months and is now 2017

approximately USD 10,000 per day above the all-time low from ClarkSea Index
Sources: Clarksons, Danish Ship Finance
February 2016.

SECONDHAND PRICES HAVE GAINED 21% IN 2017


Secondhand prices remain low in all segments, but the average Average secondhand prices are up 21% in 2017 year-to-
secondhand price index has increased 21% since it bottomed out date, driven by continued positive market sentiment
in November 2016 (fig. 2). The increase has primarily been driven 170 170

by the Dry Bulk and Container segments. This may signal that
some investors are afraid of missing the bottom of the cycle and

Secondhand Price Index


Secondhand Price Index
140 140
strongly believe that a market recovery is imminent.

HIGHER MARKET ACTIVITY

Index
Index
110 110
The growing optimism facilitated an increase in sale and purchase
activity of almost 30% during the first nine months of 2017
compared with the same period last year, with 1,300 vessels 80 80
traded. The appetite for ordering new vessels has also increased
in 2017, although it remains at a low level. The number of vessels
ordered during the first nine months increased by approximately 50 50
2010 2011 2012 2013 2014 2015 2016
30% year-on-year. Crude and Product Tankers together with Dry 201
7
Bulk drove most of the increase (fig. 3).
Sources: Clarksons, Danish Ship Finance Secondhand Price Index Annual average
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

MANY SHIPYARDS ARE RUNNING OUT OF ORDERS


The orderbook has shrunk significantly compared with past years,
Increased appetite for Tankers and Dry Bulk vessels is
but there are still 3,000 vessels on order globally. More than 1,200 driving the increased contracting activity
vessels were delivered during the first nine months of 2017, while 180 180

fewer than 600 vessels were ordered. Global active yard capacity
has remained relatively stable in 2017 at around 45 million cgt,
135 135
distributed among around 600 yards. However, approximately
360 yards, representing around one-quarter of active capacity,

Contracting

Contracting
Milliondwt

Milliondwt
have not received any new orders during the last 18 months. We 90 90

label these yards second-tier. These yards are running out of


orders in less than 12 months. The first-tier yards have order 45 45
cover of 2.2 years.

PREMATURE SCRAPPING WILL CONTINUE 0 0


The orderbook represents just below 10% of the global fleet. The 2013 2014 2015 2016 2017

challenge is that most ship segments are struggling to handle Bulk Container Crude Tanker Product Tanker Gas Chemical Tanker Offshore Others
surplus capacity in an environment with low demand growth and
Sources: Clarksons, Danish Ship Finance
few obvious scrapping candidates. It is hard to tell which segments
will order new vessels and hence continue to employ some of the
global yard capacity. Only 9% of the fleet is currently 20 years or
65% of the world fleet is younger than 10 years
older, which means that surplus capacity will most likely persist Only 9% of the world fleet is 20 years or older
for some time unless young vessels are scrapped prematurely (fig. 700 40%

4). Percentageof fleet >>

33%
32%
SECONDHAND PRICES ARE DECLINING AMID PREMATURE SCRAPPING 525 30%

Percentage offleet
The average age of vessels scrapped has been declining since
Million dwt

2012, when the average scrapping candidate was 30 years old.


350 20%
Today, most old vessels have already been scrapped in the main
16%
ship segments, and consequently the average age of vessels
scrapped has come down to 24 years (fig. 5). This means that in 175
9% 10%10%
many ship segments older vessels’ secondhand values are facing
5%
some structural headwind from a shortening of their economic 4%

lifetimes. In most of the main ship segments, the average age of 0 0%


0-5 5-10 10-15 15- 20-25 25+ Orderbook
vessels scrapped is between 20 and 25 years, meaning that their 20
Bulk Tanker Gas Offshore Others
secondhand prices are reduced by an amount that equals the net Containe
Sources: Clarksons,
r Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

present value of up to five years of cash flow. In the Container


segment, for ships between 3,000 and 6,000 teu in size, the
average age of vessels scrapped has come down to just 15 years. The average age of vessels scrapped continues to
decline
80 36
FREIGHT RATES MAY STAY LOW FOR LONGER Average scrapping age>>
The outlook for most ship segments is currently dominated by the 30

Average age of scrappedvessels


29
2 28
fact that demand is not expected to be strong enough to employ 60 9
26 24
the front-loaded orderbook and that the age distribution of the
27
fleet is such that surplus capacity will not be balanced by scrapping

Million dwt
of older vessels. We therefore expect freight rates to stay low for 40 18

longer, although some spikes may be seen. In some segments,


we may begin to see equity being exchanged for cash through the
20 9
scrapping of younger vessels. This may provide some respite for
freight rates, but it may not be enough to maintain current freight
rates in all ship segments. Large Container ships, larger Product 0 0
2012 2013 2014 2015 2017
Tankers and LNG Carriers appear to be most exposed (fig. 6). ▪ 201 Jan-Sep
Below 20 years old 20-25 years 6 30+ years old
old Sources: Clarksons, Danish Ship Finance
25-30 years old

Not all segments are equally exposed to


future overcapacity

4 Crude Tanker

Orderbook / fleet (20 yr+) dwt


3 Container
Fleet renewal

LNG

2 Product
Tanker

Dry Bulk
1 Chemical
Tanker
Offshore
0
LPG
0% 5% 10% 15% 20% 25% 30%
Orderbook / fleet
Sources: Clarksons, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

SHIPBUILDING
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

SHIPBUILDING
THE NEXT GENERATION OF SHIPS WILL LIKELY BE SIGNIFI- Figure SB.1
CANTLY MORE ADVANCED THAN THOSE CURRENTLY BEING The order covers of the three major Asian shipbuilding
BUILT. FEW YARDS ARE EXPECTED TO BE CAPABLE OF BUILDING nations continue to decline
THESE VESSELS AT PRESENT. CONSEQUENTLY, MANY YARDS 4 2,800
MAY HAVE TO EXIT THE MARKET, WHILE OTHERS WORK TO UP-
GRADE THEIR CAPABILITIES. THE CURRENT ORDERBOOK IS

Average newbuilding price


3-month moving average
RUNNING OUT QUICKLY, BUT IT REMAINS TO BE SEEN HOW 3 2,100

Years of order cover


FAST THE NEXT GENERATION OF SHIPS WILL BE INTRODUCED.

USD per cgt


THE SHIPBUILDING MARKET AT A GLANCE 2 1,400

SURPLUS CAPACITY CONTINUES TO BURDEN THE GLOBAL SHIP-


BUILDING INDUSTRY. MORE THAN HALF OF ACTIVE YARDS HAVE
1 700
NOT RECEIVED ANY NEW ORDERS IN THE PAST 18 MONTHS.
THESE YARDS, REPRESENTING 24% OF GLOBAL YARD CAPACITY,
ARE RUNNING OUT OF ORDERS SHORTLY. 0 0
2012 2013 2014 2015 2016 2017
Despite an increase in new ordering in the first three quarters of South Korea Japan Europe Weighted average newbuilding price*
China
2017, the global orderbook continues to decline. Order covers in Sources: Clarksons, Danish Ship Finance *Excluding Offshore newbuilding prices

all regions but Europe are falling fast, and South Korea in partic- Figure SB.2
ular has struggled to attract enough new orders to employ its
Around one-quarter of global yard capacity has not
domestic yard capacity (fig. 1). More yards have been closed, or received any new orders during the last 18 months
idled, and more workers have been laid off. 150%

0.7 0.0 1.2 0.5 1.1 0.8


THE SHARE OF CAPACITY NOT ATTRACTING NEW ORDERS IS GROWING Active yard capacity (cgt)
Global active yard capacity has remained relatively stable in 2017
at around 45 million cgt, distributed among close to 600 yards. 100%

Years of order cover


10%

Second-tier yards
24%
However, approximately 360 yards, representing one-quarter of 26% 33% 32% 39%
active capacity, have not received any new orders during the last
18 months. We label these yards second-tier. The average order 50%
90%
cover at these yards has dropped to only 0.8 years (fig. 2), 74% 67% 68% 61%
76%

whereas the first-tier yards have order cover of 2.2 years.


0%
THE ORDERBOOK DECLINED BY 15% IN THE FIRST THREE QUARTERS China South Korea Japan Europe Rest of the Global
The global orderbook declined by 15% during the first three quar- world capacity

ters of 2017, and by the start of October was down to 76 million Second-tier (no new orders in the last 18 months)
First-tier (new orders in the last 18 months)
cgt, or approximately 3,000 vessels - the lowest number of ves- Sources: Clarksons, Danish Ship Finance Order cover for second-tier yards
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

sels on order since 2003. In this period, contracting amounted to


16 million cgt, a small increase from the very low levels con-
The orderbook dropped 15% during the first three
tracted in 2016, while 28 million cgt was delivered. The orderbook quarters of 2017
thus experienced a net outflow of 12 million cgt (fig. 3). 80
Every time a contract was placed 1.7 vessel were delivered
160
<< Contracting Orderbook >>
TANKER ORDERING SUPPORTED SOME SOUTH KOREAN YARDS

Contracting
Tanker vessels were accountable for much of the increase in con- 40 120
tracting. One-third of new orders in the first three quarters of
2017 were for Tankers, while the Cruise and Bulk segments also

Million cgt
Million cgt

Orderboo
0 80
represented a sizeable share (fig. 4). South Korean yards in par-

vs.
ticular benefited from the uptick in Tanker ordering, but the coun-

k
Deliveries
try’s orderbook still fell by 20% during the period. As of October, -40 40
the South Korean orderbook was only slightly larger than Japan’s,
which would have been unheard of just a year ago. Hence, even << Deliveries
-80 0
though all shipbuilding regions except Europe are struggling in 2012 2013 2014 2015 2016 2017
the low demand environment, South Korea has experienced the Jan-Sep

China South Korea Japan Europe Rest of the world Orderbook


most dramatic decline from its former levels.
Sources: Clarksons, Danish Ship Finance
THE AVERAGE NEWBUILDING PRICE HAS GONE UP BY 2%
After a couple of years of the average weighted newbuilding price
steadily declining, newbuilding prices in some segments seemed
to reach the bottom in the first quarter of 2017. Since the second During the first three quarters of 2017, the yard industry
restocked just under half of annual active capacity
quarter, the average weighted newbuilding price has trended up- 8
wards slightly (fig. 1), driven by small increases in Bulk, Tanker 41% 52% 23% 127% 41%

and Container newbuilding prices. Gas Carrier prices have contin-


Share of annual active capacity
ued to decline. 6
Contracting in2017

FEWER YARDS ARE SETTING PRICES


Million cgt

The higher prices indicate that with fewer and fewer yards at- 4
tracting new orders, these yards have gained more bargaining
power when setting prices. The 16 million cgt contracted in the
first three quarters of 2017 was placed at 160 different yards, 2

which on aggregate account for 65% of global active yard capac-


ity. In 2016, contracting amounted to 13 million cgt and was split
0
between 240 yards. Moreover, in 2017, ten yards representing China South Korea Japan Europe Rest of the world

one-fifth of global capacity have received a little more than half Bulk Container Gas Offshore Others ex. Cruise Cruise Tanker

of all orders placed. Sources: Clarksons, Danish Ship Finance


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

OUTLOOK

THE ORDERBOOK IS RUNNING OUT RAPIDLY AT MANY YARDS. Scheduled orders for 2018 are not enough to employ
THERE IS LITTLE TO INDICATE THAT FUTURE ORDERING WILL annual active yard capacity of around 45 million cgt
60 80%
BE SUFFICIENT TO EMPLOY MORE THAN ONLY THE MOST COM-
PETITIVE YARDS. NEW DIGITAL SHIPS OR NEW BUSINESS MOD-
<< Global annual activeyard capacity
ELS MAY SHAPE THE SHIPBUILDING INDUSTRY IN THE NEXT FIVE

Share of orderbook(%)
45 60%
TO TEN YEARS, BUT FEW SHIPYARDS ARE CURRENTLY EQUIPPED

Total orderbook
TO BUILD THE NEXT GENERATION OF SHIPS.

Millioncgt
2 42%
30 40%
Despite some minor market improvements, such as the small rise 3
7
in newbuilding prices and higher contracting, the global Shipbuild-
2 25%
7
ing industry is still facing major challenges. Some yards have re- 15 2
3 2
21% 20%
4
ported better results during 2017, but large parts of the industry 4
4
13 7%
are still struggling to stay afloat. We expect the industry to con- 8 5 2
2 2% 2% 0%
0
tinue to be challenged in the coming years. The next upswing for 2017 Q4 2018 2019 2020 2021 2022

the industry might be sparked by the introduction of new stand- Scheduled deliveryyear
China South Korea Europe Rest of the world Share of orderbook
ards for digital ships (e.g. smart or autonomous ships). The ques-
Japan Sources:
tion is, though, if such an upswing would be inclusive or simply Clarksons, Danish Ship Finance
accelerate the consolidation of the industry.

250 YARDS HAVE LESS THAN ONE YEAR OF ORDER COVER


26% of active yard capacity has less than one year of
The overcapacity in many major shipping segments persists, and order cover
is still exerting a drag on demand for shipbuilding capacity. Con- 28
270
280

sequently, the share of yards with less than one year of order 250

cover continues to increase. By October, 250 yards, representing


21 210
26% of global yard capacity, had less than one year of order cover Active yard capacity

No. of activeyards
(fig. 6) – 90% of these were second-tier yards. There are only Millioncgt

around 30 yards left with more than three years of order cover. 14 140

This number includes a significant share of European yards that


have received many new (cruise) orders over the past year. How-
7 70
ever, it also includes some yards building Offshore vessels that
40
have not received any new orders since 2013. The poor conditions 30

in the Offshore market have caused orders to be continuously 0 0


0-1 1-2 2- 3+
postponed at these yards, keeping their order cover artificially 3
high. China South Korea
Years of ordercover
Europe Rest of the world No. of active yards
Japan Sources:
Clarksons, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

MORE ORDERS ARE BEING DELIVERED ON TIME


A year ago, the number of orders being postponed constituted a
significant share of the orderbook, primarily owing to poor market The active capacity at second-tier yards continues to
decline while it remains stable at first-tier yards
conditions in Bulk, Container and Offshore. This helped slow down 80 1,400
the run-off rate of the orderbook but also hurt yards’ financial
1,1601,170
1,120
liquidity. The number of postponements has begun to drop, and 1,030 1,06
60 1,050
a larger share of orders are being delivered on schedule today. In 950 0 960

No. of activeyards
890
860
the first three quarters of 2017, 66% of scheduled orders were

Million cgt
740
delivered, up from 61% in the same period in 2016. From a li- 40
650
600 700
quidity standpoint, this is good for the shipyards, but from an
employment perspective it means that the need to attract new 340
20 350
orders is becoming more urgent.

MANY YARDS ARE RUNNING OUT OF ORDERS IN 2017…


0 0
In the May 2017 edition of this report, we highlighted that more 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
than 200 yards were scheduled to deliver their last orders in First-tier yard capacity Second-tier yard capacity Scheduled
2017. Taking stock of the situation as we approach the end of the Actual deliveries deliveries
No. of active yards
Sources: Clarksons, Danish Ship Finance
year, it is clear that the majority of these yards have not been
able to turn the situation around. The number has actually risen
to 250 yards. Of these, 130 yards have already delivered their
last orders and the remaining 120 are due to deliver their last The first-tier yards account for 76% of active capacity
but just 38% of the number of active yards
orders in the fourth quarter of 2017. 18 20

…WHICH COULD LOWER THE NUMBER OF ACTIVE YARDS DRAMATICALLY 4M cgt


Consequently, if orders are delivered on schedule and no new or- 14
(90 yards)
1M cgt
15
Active yard capacity

Active yard capacity


ders are placed at these yards, there will only be 340 active new- (10 yards)

building yards left by the start of 2018 (fig. 7). These yards have
Millioncgt

Millioncgt
estimated active capacity of around 41 million cgt, which would 9 10
3M cgt
imply a reduction of 10% in global active yard capacity compared 12M cgt 12M cgt (30 yards)
(65 yards) (10 yards)
with the 2017 level. Hence, the consolidation seems to be pro-
5 6M cgt 5
gressing, and we continue to expect the number of active new- (40 yards) 1M cgt 2M cgt
(80 yards) (160 yards)
building yards to be drastically reduced in the coming years. 2M cgt 2M cgt
(60 yards) (55 yards)
- -
THERE ARE STILL AROUND 600 ACTIVE YARDS IN THE INDUSTRY China South Korea Japan Europe Rest of
the
Experience has taught us, however, that the number of active world
First-tier Second-tier capacity
yards drops much more slowly than the numbers indicate. In the capacity
NB: The numbers might not add up due to rounding
Sources: Clarksons, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

last couple of reports, we stated that the number of active new- sition, trying to navigate its way through the myriad of new tech-
building yards could fall below 400 yards by 2017. In October nologies and business models being introduced across the indus-
2017, the status is that there are still around 600 active new- try. The characteristics of future vessels play an important role in
building yards in the industry (fig. 7). this transition. Will the next generation of vessels become even
more standardised, will they be fuelled by LNG, will they be au-
ORDERBOOK BLIPS ARE HOLDING UP THE NUMBER OF ACTIVE YARDS…
tonomous, and will vessel components to a greater extent be sold
Let us briefly run through our methodology for assessing whether
as service contracts rather than actual components? The jury is
a yard is active or not: a yard is considered active when it has an
still out, but when it becomes clear which technologies and busi-
orderbook or has delivered newbuildings within the current year.
ness models will prevail, it could have a major impact on the Ship-
Hence, our forecasts are based on orderbook developments, and
building industry.
if orders are postponed, the number of active yards stays higher
for longer. This mechanism can be seen when looking at the num- THE RACE TO DEVELOP THE VESSELS OF TOMORROW
ber of different yards with orders at a given point over the last Many industry players, from shipyards and shipowners to compo-
five years, which has remained relatively stable. However, the nent suppliers and third-party players, are entering into partner-
number of different yards that have received new orders each ships with the aim of developing the vessels of tomorrow. We ex-
year has dropped from around 600 yards in 2012 to 160 in 2017. pect these partnerships to start to bear fruit within the next five
to ten years. Not only do we expect new vessel standards to
…AS ARE ORDERS ABANDONED BY SHIPOWNERS emerge, we also believe that the new forces driving seaborne de-
On top of the order postponements that have characterised the
mand could call for more smaller-sized vessels to be built (please
industry over the last couple of years, there could still be a size-
see the General Review and Outlook section for more details).
able share of ‘abandoned’ orders keeping up the number of active
yards. There continues to be some uncertainty over how many of NOT ALL YARDS WILL HAVE THE NECESSARY EXPERTISE IN THE FUTURE
the orders in the orderbook still exist and how many have been Not all yards active today will have the expertise required to
‘abandoned’ by shipowners, either because of poor market condi- build the next generation of vessels. Thus, it could be that yards
tions or because they were contracted at high prices compared with a certain minimum size and high technical standards will be
with current market levels. Some of these orders may still be reg- better- equipped to meet future newbuilding demand than less
istered in the orderbook, blurring the overall picture. This is pri- sophisti- cated yards. Some will argue that shipowners just want
marily a concern for the Chinese orderbook. These temporary fac- vessels at the cheapest possible price – and few currently seem
tors holding up the number of active yards are bound to subside willing to pay for technology if it does not contribute to a vessel’s
at some point, and if ordering stays at its current low, we expect cash flow. But this might change if, five or ten years down the
to see a permanent correction in the number of active yards in road, a ship’s connectivity and the real-time data it generates
the short to medium term. becomes a vital component of value creation.

A WAVE OF NEW TECHNOLOGIES COULD RESHAPE THE INDUSTRY YARDS WITH THE RIGHT CAPABILITIES WILL CONTROL FUTURE DEMAND
The next upswing in newbuilding demand could still be some Not only does the low contracting environment indicate a smaller
years away. The shipping industry is undergoing a period of tran- Shipbuilding industry in the future, the emergence of digital ships
will add to this development.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

CONTAINER
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

CONTAINER
THE CONTAINER SEGMENT IS OVERSUPPLIED. LINERS ARE CON-
SOLIDATING THEIR CAPACITY, WHILE TONNAGE PROVIDERS The average box rate out of China is still low, even
ARE FINDING IT INCREASINGLY DIFFICULT TO FIND ATTRACTIVE though it has improved significantly in 2017
EMPLOYMENT. MANUFACTURING MAY BECOME REGIONALISED, 1,500 1,500

WHICH MAY LOWER THE LONG-TERM OUTLOOK FOR LARGER


VESSELS. A NEW VALUE PROPOSITION IS EMERGING, BUT IT
1,250 1,250
MIGHT NOT BE FOR EVERYONE.

Index

Index
THE CONTAINER MARKET AT A GLANCE
1,000 1,000
A SIGNIFICANT NUMBER OF LARGE SHIPS (+12,000 TEU) CON- Annual average

TINUES TO FLOOD THE MARKET. HOWEVER, BOX RATES HAVE


IMPROVED, SINCE SUPPLY GROWTH HAS BEEN ABSORBED BY 750
03-11-2017
750
779
RISING DEMAND. CHARTERED-IN VESSELS ARE BEING RE-
TURNED TO THEIR OWNERS.
500 500
2012 2013 2014 2015 2016 2017
The Container market remains oversupplied, but fundamentals
Sources: Clarksons, Danish Ship Finance
are improving, albeit from a low base. The Container fleet ex- CCFI Composite Index

panded by less than 1% in the first three quarters of 2017, while


demand grew by close to 5%, almost twice as much as in 2016.
However, these numbers fail to reflect the lopsided nature of the Profitability Index for the Panama-transitable segments
current fleet. The fleet of smaller vessels (i.e. below 8,000 teu) (Timecharter rate per teu less opex per teu)

declined by 2% in the period, whereas the fleet of larger vessels 400 400

(i.e. above 8,000 teu) grew by 4%, measured in teu. Within these
structures, we distinguish between liner operators, which have 300 300

direct access to cargo, and tonnage providers, which charter out


(2004 = Index1,000)

(2004 = Index1,000)
Profitability Index

Profitability Index
vessels. Liners are reducing their operational oversupply by en- 200 200

gaging in alliances that enable each of them to return excess ca-


pacity. 100 100

THE AVERAGE BOX RATE IN 2017 UP BY AROUND 17% ON 2016


0 0
Box rates have increased, as demand has continued to improve
and liner companies have returned excess vessels to the tonnage
-100 -100
providers. Hence, the average box rate out of China in 2017 is up 2012 2013 2014 2015 2016 2017

by 17% on the 2016 average (fig. 1). Sources: Clarksons, Drewry, Danish Ship Finance Profitability Index Annual Average
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

TIMECHARTER RATES STARTED TO RECOVER IN MARCH 2017


The return of vessels to the tonnage providers has not lowered
The average secondhand price increased 48% during the first
timecharter rates, since the fleets have contracted in many of the three quarters of 2017
smaller segments. Timecharter rates have generally improved 100 100

during 2017, although levels are still low (fig. 2).


75 75
THE SALE AND PURCHASE MARKET IS STILL LIQUID
The sale and purchase market has been more active in 2017 than

Million USD
Million USD
last year. Approximately 4% of the fleet below 8,000 teu was 50 50

traded during the first nine months of 2017, while only 2% of the
fleet in the larger segments was traded. 25 25

SCRAPPING ACTIVITY REMAINS HIGH AND SCRAPPING AGES LOW


Scrapping activity remains high, even though it has softened dur- 0 0
2012 2013 2015 2016
ing 2017. More than 110 vessels, or close to 300,000 teu, were 2014 201
1,650-1,850 teu newbuilding price 7
1,650-1,750 teu 5-year-old secondhand price
scrapped during the first nine months of 2017. This is a reduction 6,600-6,800 teu newbuilding price 6,600-6,800 teu 5-year-old secondhand price
of approximately 30% compared with the same period last year. 8,500-9,100 teu newbuilding price 8,500-9,100 teu 5-year-old secondhand price

Only vessels smaller than 8,000 teu were scrapped. The average Sources: Clarksons, Danish Ship Finance

age of vessels scrapped remained at 20 years, which means that


smaller vessels’ secondhand prices continue to be structurally re-
duced by the equivalent value of five years of cash flow. 1,600 teu ship prices
Ship prices remain at low levels despite recent increases
50 50
SECONDHAND PRICES FOR SMALLER VESSELS HAVE INCREASED
Secondhand prices remain low across the board, although Output range, January 2000 to November 2017
40 Highest 10 percent 40
secondhand prices of vessels smaller than 8,000 teu rose signifi- 1,600 teu ship prices

1,600 teu ship prices


cantly during the first nine months of 2017 (fig. 3). Larger vessels
continued to experience declining prices. The valuations of larger 30 30
Million USD

Million USD
vessels continue to be anchored to their newbuilding prices. The
23
earnings potential of these vessels may, however, be significantly 20 20

below current values. Few new orders have been placed during
the year, and most orders have been for vessels smaller than 10
12
10
Lowest 10 percent 9
8,000 teu. Some of the larger liner companies did, however, start
4 5
to place sizable orders for super-large vessels towards the end of
0 0
the third quarter. NB 5YR 10YR 15YR Scrap

Sources: Clarksons, Danish Ship Finance Median Current


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

OUTLOOK

CONTAINER TRANSPORT IS INCREASINGLY BECOMING A COM- The Container fleet is young with few obvious scrapping
MODITY, WHICH AMPLIFIES PRICE COMPETITION, EVEN IN A candidates in the larger segments
The orderbook amounts to 14% of the fleet
MARKET WITH BALANCED SUPPLY AND DEMAND. THIS ENTAILS 8 40%

PERMANENTLY LOW BOX RATES AND PUTS PRESSURE ON LONG- 37% Percentageof fleet
>>
TERM ASSET VALUES. THE NEED FOR NEW REVENUE STREAMS 32%
6 30%
AND COST CUTTING IS BECOMING INCREASINGLY IMPORTANT

Container fleet
FOR THE LINERS, WHICH IN TURN IS PUTTING DOWNWARD

% of fleet
Millionteu
PRESSURE ON CHARTER RATES. 4 20%
19%
Container transportation is increasingly becoming a commodity,
14%
with limited product differentiation. Box rates are structurally ex-
2 10%
pected to be driven down closer to the marginal cost per moved 8%
unit, and the industry is expected to continue its consolidation
3%
push to maximise economies of scale. The successful liners will 0 1% 0%
be those that are best at driving down costs and finding new 0-5 5-10 10-15 15-20 20- 25+ Orderbook
15,000+ teu containership 25 8-11,999 teu containership
sources of revenue. The tonnage providers will continue to find it 6-7,999 teu containership 12-14,999 teu containership
3-5,999 teu Old Panamax
difficult to secure long-term employment for their vessels that containership Sources: Clarksons, Danish Ship Finance

ensures adequate returns on invested capital throughout the life-


time of the vessels. All market participants are exposed to the transitioning towards fewer units shipped per dollar growth.
potential changes in trading routes and vessel sizes in the event ZERO-LABOUR FACTORIES ARE ENABLING REGIONALISATION
that the global manufacturing network becomes more regional- The introduction of zero-labour factories in multiple industries in-
ised. dicates that manufacturing may become more regionalised in the
years to come. Many of these factories are currently located in
ENTERING UNCHARTED TERRITORY
India and China, but they could easily be relocated closer to con-
The Container industry is entering uncharted territory rapidly, and
sumers. The advances we are seeing within robotics, artificial in-
there are few exit strategies available. The age profile of the fleet
telligence, 3D printing and material science all point towards a fu-
of larger vessels leaves no room for premature scrapping to bal-
ture in which regionalised manufacturing seems likely.
ance the market at a reasonable cost. Still, liner companies con-
tinue to favour the economies of scale from their super-large TAKE THE TEXTILE INDUSTRY AS AN EXAMPLE
ships. However, the global demographic profile is telling us that A prime example is the textile industry. For decades, it has been
the global buy side – consumers in North America, Europe, Japan argued that the textile industry will not be automated, because
and China – are about to retire. These consumers will continue to the variations and movements in garments during the production
spend in their old age, but their spending behaviour will trend process are too difficult for robots to handle. Today, however, pro-
towards services that are not transported by sea. Container im- totype robots have recently sewn the first pairs of jeans, and au-
port volumes could begin to plateau or even decline within the tomated production lines for T-shirts are being built in North
next five to ten years. We argue that future Container demand is America.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

THE LABOUR MARKET OUTLOOK IS DETERIORATING vessels’ trading routes, but that does not improve utilisation (not
The implications of these recent developments are massive for to mention the effect on port facilities and inland infrastructure,
future job creation in Asia and Africa. Some of the sectors on the which would have to be upgraded).
frontline of the next wave of automation (such as textiles, or call
centres using AI and voice recognition software) have been im- BOX RATES MAY STAY LOW FOR LONGER
We envisage a scenario where box rates could stay low for a pro-
portant for job creation and expanding economic growth in China
longed period and secondhand prices of larger vessels stay under
and India in past decades. Thus, for all the countries in Asia and
pressure. To prosper, liner companies need to identify and grow
Africa with burgeoning cohorts of young people entering the
additional lines of revenue. This process has already begun and
workforce, the prospect of not being able to capitalise on low-cost
several liner companies seem to be working on multiple frontiers:
labour to attract manufacturing investment is a particular concern
from platforms to blockchain to trade financing. In the future,
and may lower the medium to long-term outlook for economic
owning and trading vessels could go from being the core
growth in these countries.
business to just one of several prerequisites for value creation.
THE CONTAINER INDUSTRY IS IN TRANSITION The liners that are best at identifying and extracting value from
The demand outlook for the Container industry is being shaped their entire ecosystem will be the ones that drive the
by forces that point towards more regionalised trading networks, consolidation process. ▪
while the supply side continues to focus on larger ships with low
marginal costs. This could turn out to be a toxic cocktail, since it
may lower not just head-haul volumes but also back-haul vol-
umes. The extensive networks of component trades (often pow-
ering volumes on the back-haul routes) may be shortened and
simplified by the new technologies.

LARGER VESSELS MAY BECOME INEFFICIENT


The strategy of introducing super-large container vessels is es-
sentially a long-term bet on a centralised manufacturing base.
The super-large ships are at risk of becoming inefficient if manu-
facturing becomes more regionalised within the next five to ten
years.

THE FUTURE MAY LOOK BRIGHTER FOR SMALLER VESSELS


We expect the need for super-large container vessels to decrease
in the medium to long term. On the contrary, demand for smaller
vessels (up to 8,000 teu) could begin to increase. It is true that
liner operators could continue to use larger vessels on
smaller
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

DRY BULK
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

DRY BULK
THE DRY BULK MARKET HAS COME A LONG WAY SINCE HITTING
THE BOTTOM IN 2016. THE MARKET COULD CONTINUE TO IM- The Baltic Dry Index is on average up by 60% in 2017
compared to 2016
PROVE IF THE DILIGENT APPROACH TO ORDERING IS UPHELD. IF
NOT, WE COULD SEE THE START OF ANOTHER DOWNTURN, SINCE 4,000 4,000

THE RISK OF PROLONGED PERIODS WITH UNSTABLE DEMAND IS


MATERIAL DUE TO THE RELIANCE ON CHINA.
3,000 3,000
THE DRY BULK MARKET AT A GLANCE

Baltic DryIndex

Baltic DryIndex
AFTER A SIGNIFICANT MARKET UPSWING DURING THE FIRST
QUARTER OF 2017, MOMENTUM WEAKENED SOMEWHAT. HOW- 2,000 2,000

EVER, THE MARKET HAS CONTINUED TO IMPROVE ON THE BACK


OF STRONG CHINESE DEMAND.
1,000 1,000
The Dry fleet grew strongly in the first three quarters of 2017, by
close to 3%, due to weaker scrapping activity. Fortunately, demand
growth also showed strength, primarily driven by strong Chinese 0 0
2012 2013 2014 2015 2016 2017
demand. The market has come a long way since hitting the bottom
in 2016, but despite a significant improvement, we have yet to see Sources: Clarksons, Danish Ship Finance Capesize Panamax Supramax Handysize
a reduction in the underlying oversupply and many owners are still
struggling to return to profit in the current freight rate environment.
The average 1-year timecharter rate is up by more
than 40% since the start of 2017
DESPITE FLUCTUATIONS, FREIGHT RATES HAVE GROWN STRONGER
36,000 36,000
By the end of March 2017, stronger Capesize and Panamax activity
drove the Baltic Dry Index to the highest level for almost three
years. Going into the summer months, activity started to wind 27,000 27,000
1-year timecharter rate

1-year timecharter rate


down and market sentiment weakened. However, Chinese demand
for coal and iron ore continued to show strength, which quickly
USD per day

USD per day


pulled the market out of its summer slumber. The timecharter 18,000 18,000
15,700
market followed the same pattern, and by October, the territory 13,544
11,250
lost during the summer had been regained. In October, the 1-year 9,438
9,000 9,000
timecharter rate stood at USD 15,700 per day for a Capesize ves-
sel, USD 13,544 per day for a Panamax, USD 11,250 per day for
a Supramax and USD 9,438 per day for a Handysize (fig. 2). 0 0
2012 2013 2014 2015 2016 2017
PANAMAX ORDERS HIKED UP ACTIVITY IN THE NEWBUILDING MARKET
The more positive market sentiment led to increased activity in the Sources: Clarksons, Danish Ship Finance Capesize Panamax Supramax Handysize
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

newbuilding market and a marginal rise in newbuilding prices. In


the first three quarters of 2017, 12 million dwt was contracted,
The average secondhand price of a Dry Bulk
only 2 million dwt less than contracting in the whole of 2016. The vessel stabilised from the second quarter
main driver was an uptick in Panamax ordering (65,000-99,999 onwards
60 60
dwt), or more specifically Kamsarmax ordering (80,000-89,999
dwt), which has become the preferred Panamax vessel size, be-

5-year-old secondhand price


5-year-old secondhand price
cause of growing parcel sizes and high expectations for coal trade. 45 45

In 2016, total contracting for Panamax vessels amounted to only

MillionUSD
Million USD
0.24 million dwt, while it reached 5.5 million dwt during the first 34
30 30
three quarters of 2017.

THE SECONDHAND MARKET COOLED DOWN AS SENTIMENT WEAKENED 18.5


Sales activity in the secondhand market picked up significantly to- 15
14 1
7 15
wards the end of the first quarter, which sparked a much larger
increase in secondhand prices than freight rates suggested. Activ-
0 0
ity slowed down during the second quarter, causing secondhand 2012 2013 2014 2015 2016 2017

prices to plateau. By October, the price of an average five-year-


Sources: Clarksons, Danish Ship Finance Capesize Panamax Handymax Handysize
old Dry Bulk vessel was up 30% compared with at the start of the
year. The average price for a five-year-old vessel stood at USD 34
million for a Capesize, up from USD 25 million at the start of the
Prices for Capesize vessels are up by 22% on average in
year, and USD 14 million for a Handysize, up from USD 12 million 2017
(fig. 3). 160 160

SCRAPPING AND ORDER DEFERRALS HAVE SLOWED DOWN


Scrapping activity decreased markedly in the first three quarters 120 Output range, Jan 2000 to Oct 2017
of 2017, with only 10.5 million dwt scrapped during the period – 120

less than half the tonnage scrapped in the same period in 2016.

MillionUSD
MillionUSD

Shipprice
Shipprice

Highest 10 percent
This led to an increase in the average scrapping age from around 80 80

23 years in 2016 to 24 years. The slowdown was primarily caused


by general expectations of an increasingly strong market, and to a
40 43
lesser extent by the IMO's decision to delay the implementation of
40
the ballast water regulations by two years. The more optimistic Lowest 10 percent34
13
market outlook could also be discerned in the delivery performance 21
10 8
0 0
in the period. Around 65% of scheduled orders were delivered, up NB 5YR 10YR 15YR 20YR Scrap

from 50% in the same period in 2016.


Sources: Clarksons, Danish Ship Finance Median Current
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

OUTLOOK materials somewhat. Moreover, the gradual push to reduce the role
TWO IMPORTANT FACTORS ARE EXPECTED TO SHAPE THE OUT- of fossil fuels in the energy mix is expected to erode some of the
LOOK FOR THE DRY BULK MARKET: FUTURE ORDERING AND CHI- demand for transporting coal over time.
NESE DEMAND. THE ORDERBOOK HAS DECLINED SUBSTANTIALLY …BUT CLEAN ENERGY TECHNOLOGIES SHOULD SUPPORT THE MARKET
AND IF CONTRACTING IS KEPT LOW, IT COULD SUPPORT A MAR- At the other end of the spectrum, the fight against climate change
KET RECOVERY OVER THE NEXT COUPLE OF YEARS. HOWEVER, and pollution is driving a push towards clean energy technologies
CHINESE DEMAND IS EXPECTED TO BE UNSTABLE OVER THE which could create additional Dry Bulk demand. At present, these
NEXT FIVE YEARS, AND THE RISK OF EXTENDED PERIODS OF are mostly related to wind turbines, solar panels and batteries,
LOWER DEMAND IS MATERIAL. which all require large amounts of different metals (e.g. copper,
The Dry Bulk market continues to move in the right direction with aluminium, lithium and steel). Imagine a future where the majority
strong support from Chinese imports. Nonetheless, at current of the car fleet is battery-driven and most homes have a solar panel
freight rate levels, many owners are still struggling to make a on the roof and a home battery in the garage. During the build-up
profit. This indicates that the market oversupply is still significant phase, this would boost the consumption of metals significantly,
and that a cautious approach to new ordering should be main- whereafter consumption would begin to decline as the market ma-
tained in the coming years. tured and a larger share of materials were recycled. These trends
indicate that Dry Bulk could be one of the most resilient shipping
MACROECONOMIC DRIVERS LAY THE FOUNDATION FOR OUR ANALYSIS segments in the transition towards a new and less resource-
We have had a cautious long-term outlook for the Dry Bulk market
intensive energy regime.
since 2007, primarily due to our concerns over the market’s de-
pendence on the Chinese economy. In our outlook, we strive to CHINESE DELEVERAGING COULD CAUSE CORRECTION IN VOLUMES
Even though we are relatively optimistic about the long-term out-
identify fundamental trends and changes that may affect medium
look for Dry Bulk, we believe the market could see a correction in
to long-term market behaviour, an approach that sometimes fails
transported volumes in the medium term. Our stance on the sus-
to predict the shorter-term market opportunities that may arise.
tainability of Chinese Dry Bulk demand is unchanged: the country
Despite our caution, our long-term demand outlook for the Dry
is in dire need of reforms related to its industrial overcapacity,
Bulk segment is one of the most promising across the major ship-
state-owned enterprises, banking system, social security system,
ping segments. The future need for transporting building materi-
etc. We expect China to continue to play a vital role for the Dry
als, food and feedstocks of different kinds is expected to remain
Bulk market in the future, but the deleveraging cycle that might
robust over the coming decades, which will keep Dry Bulk demand
be about to commence could cause extended periods of lower
relatively strong.
demand.
EMERGING TRENDS COULD REDUCE DRY BULK DEMAND SOMEWHAT…
CHINESE LEADERSHIP CHANGE CREATES DRY BULK UNCERTAINTY
That said, there are forces that have the potential to impact de-
In late October, the 19th National Congress of the Communist Party
mand for raw materials negatively going forward. Emerging trends
of China took place and President Xi revealed his new leadership
related to the circular economy, whereby materials are increas-
team of the Politburo Standing Committee for his second five-year
ingly recycled and remanufactured, could curb demand for raw
term. It has been said to be one of the last steps in the process of
establishing himself as one of the most powerful leaders in Chinese
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

history. Consequently, 2018 could mark the beginning of a delev-


eraging cycle in the Chinese economy with the focus on imple-
The Dry Bulk orderbook has dropped to only 8% of
menting tough but necessary reforms. The process will be long and
the fleet
complex and it will go back and forth. One of the consequences 360 44%
could be periods of lower Dry Bulk imports. 42%
Percentageof fleet >>

BELT AND ROAD INITIATIVE A DRIVER OF DRY BULK DEMAND? 270 34% 33%

Percentage offleet
It is essential for the Chinese government that the deleveraging

Million dwt
efforts do not result in massive job losses and social unrest. How-
ever, lowering the country’s industrial overcapacity will require 180 22%

many blue-collar workers to be reskilled and moved into the ser-


vice sector where most new jobs are expected to be created going 90 11% 11%
forward. In an attempt to minimise this effect, the government is 7% 8%
introducing different initiatives, one of them being the Belt and 4%
2
Road Initiative (BRI) – formerly called ‘One Belt One Road’. The 0 % 0%
0-5 5-10 10-15 15-20 20-25 25+ Orderbook
objectives of the BRI are manifold, ranging from increasing China’s
Capesize Panamax Handymax Handysize Share of
global influence to securing an outlet for Chinese goods and utilis- fleet
Sources: Clarksons, Danish Ship Finance
ing its expertise and capacity within infrastructure development.
The ambitions are high and the amount of capital being allocated
to the initiative is enormous. It can in many ways be compared
If new ordering remains limited, fleet growth could be
with the Marshall Plan launched in the aftermath of the Second
kept low for the next two years
World War, though on a much grander scale. 120

GREAT POTENTIAL BUT HIGH EXECUTION RISK


The BRI has the potential to trigger economic growth, create jobs 80
11%

Deliveries
in China and abroad, and support Dry Bulk demand in the medium Annual fleet growth
term, counterbalancing some of the effects of the expected reform
Million dwt

6%
efforts. However, for BRI to be a success, many obstacles must be 40
4% 4%
overcome. Several of China’s neighbouring countries are very re- 3%
2% 2% 2%
luctant to give it more influence in the region, and many projects
1%
0
are being implemented in countries with high geopolitical risk and

Scrapping
low credit ratings. Some argue that these risks will not hamper the
execution of the initiative, since China is primarily concerned with
-40
domestic job creation. That might be true, but if too many projects 2012 2013 2014 2016 2017 2018 2020
2015 2019
fail or turn out to be underutilised, they will end up adding to Orderbook
Capesize Panamax Handymax Handysize
Sources: Clarksons, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

China’s already fast-growing debt burden, not to mention its share


of non-performing loans in the banking sector.
For every vessel older than 20 years in the Capesize
fleet, 1.9 vessels are scheduled to be delivered
NEXT 24 MONTHS WILL DETERMINE THE OUTLOOK FOR THE INDUSTRY
2 2
We expect the medium-term Dry Bulk outlook to be characterised
by opposing forces, and we see a material risk of longer periods Capesize

Orderbook / fleet (+20 yr) dwt

Orderbook / fleet (+20 yr) dwt


with lower Chinese demand. Hence, the next 24 months will be 1.5 1.5
paramount in determining the outlook for the Dry Bulk industry. Panamax

Fleet renewal

Fleet renewal
A MARKET RECOVERY IS WITHIN REACH FOR MOST SEGMENTS 1 1
Handymax
If the industry refrains from a new round of excessive ordering,
freight rates and secondhand prices could increase to much more Handysize
sustainable levels within the next two years. The orderbook has 0.5 0.5

dropped to just 64 million dwt, equal to 8% of the fleet – the lowest


level since early 2004. Hence, fleet growth could approach zero
0 0
over the next couple of years, even if scrapping activity remains 0% 6% 12%
3 9
moderate (fig. 5 and 6). The balance is fragile, though, and if con- % %
tracting activity starts to pick up, the industry could find itself back Sources: Clarksons, Danish Ship Finance
Orderbook / fleet

where it was 15 months ago. The current market improvement has


primarily been driven by stronger Chinese demand; hence, the un-
The pressure on secondhand prices stemming from a
derlying oversupply still exists and could resurface if Chinese de- shorter operating life could be about to ease in all
mand falls away. segments but Capesize
40 40
DOWNWARD PRESSURE ON SECONDHAND PRICES COULD START TO EASE
The Capesize segment is especially vulnerable to additional con- Average scrappingage 35 35

Average scrappingage
tracting, as it has the fewest natural scrapping candidates in the 34

fleet and the highest orderbook-to-fleet ratio of the four major 30 30


segments (fig. 7). In contrast, the other segments have reached a
Years

Years
point where their orderbooks can be absorbed into their fleets by 25
means of scrapping alone, without putting further pressure on av- 25
25
erage scrapping ages. This means that the downward pressure on 20 20
23
20
secondhand prices stemming from a shorter operating life could
begin to ease. Assuming orderbooks are delivered on schedule, no 15 15
new orders are placed and that every time a vessel is delivered the 2013 2014 2015 2016 2017e 2018e 2019e
2020e
Capesize Panamax
oldest vessel in the fleet is scrapped, all segments except for Handymax
e: the estimated average Handysize
scrapping age if each time a vessel
Capesize would have higher average scrapping ages when the last Sources: Clarksons, Danish Ship Finance is delivered, the oldest vessel in the fleet is scrapped.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

orders are delivered in 2020 than they have today (fig. 8). The Capesize segment, on the other hand,
would see the average scrapping age approach 20 years again by 2020, illustrating how sensitive this
segment is to higher contracting or periods with low demand.

THE ORDERBOOK AND FLEET ARE BETTER BALANCED THAN TWO YEARS AGO
It should be stressed that such a scenario will never play out, since many older vessels serve a specific
purpose, such as cabotage trading, but it does illustrate that the fleet in its current form is more capable
of absorbing the orderbook than previously. Going back to the start of 2015, applying the same approach
would have resulted in average scrapping ages of no more than 16 years for Capesize and Handymax,
20 years for Panamax and 27 years for Handysize.

ORDERING MAKES SENSE FOR SOME BUT NOT FOR ALL


Despite our concerns about future ordering and demand, we rec- ognise that some shipowners need to
order new vessels from a replacement point of view, and that it is currently cheap to place new orders.
However, we have learnt from experience that when some shipowners start ordering new vessels, large
parts of the in- dustry follow suit, creating the foundations for overcapacity. The big difference this time
around could be that there are fewer play- ers with the required resources for placing orders today than
three years ago, and financing has become harder to obtain. We hope this will ensure a more organic
fleet development going forward. ▪
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

OFFSHORE SUPPLY VESSELS


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

OFFSHORE SUPPLY VESSELS


THE MARKET FOR OFFSHORE SUPPLY VESSELS (OSV) IS STRUG-
GLING WITH SEVERE OVERCAPACITY, WITH IDLED VESSELS BE- The Offshore Supply Vessel Index has dropped by 56%
since its peak in June 2014
ING LAID UP BUT NOT SCRAPPED. THERE IS LITTLE TO INDICATE
THAT DEMAND WILL RETURN TO SUFFICIENT LEVELS TO EMPLOY 200 50%

LARGER PARTS OF THE FLEET IN THE SHORT TO MEDIUM TERM. 164


SECONDHAND PRICES ARE DECLINING BUT MAY NOT YET HAVE 28%
150 25%

Offshore E&P spending


Offshore SupplyVessel
COME DOWN FAR ENOUGH TO REFLECT THE VESSELS’ CURRENT 14%
17%

Freight rate index


12% 11%

Annual change
EARNINGS POTENTIAL.
3%
100 0%
THE OFFSHORE SUPPLY MARKET AT A GLANCE
-6%
THE FLEET IS BEING POORLY UTILISED, MANY VESSELS ARE IN -13% -14% 75
-10%

SOME DEGREE OF LAY-UP, FEW VESSELS ARE BEING SCRAPPED 50 -25%


AND CHARTER RATES AND SECONDHAND PRICES ARE LOW. -26%

In our previous report, we discussed how technological advances << Offshore Supply Vessel, freight rate index, annual average

0 -50%
in renewable energy have lowered the long-term outlook for 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e
global oil demand. Offshore oil production remains a significant
contributor to the global oil supply, but the short- to medium-term Sources: IHS Energy, Clarksons, Danish Ship Finance E&P spending, Offshore
outlook for offshore oil exploration seems significantly reduced
following the low oil price and the advances made within oil drilling
techniques and alternative energy sources. Secondhand prices and timecharter rates continue to
decline
SECONDHAND PRICES CONTINUE TO DECLINE 100 80,000
The market for offshore supply vessels is in dire straits: the fleet
AHTS > 16,000 BHP ( << Secondhand price; 1YR T/C >>)
is being poorly utilised, many vessels are in some degree of lay-
5-year-old secondhand price

up, few vessels are being scrapped and charter rates are low. 75 60,000

Secondhand prices are low but may not yet have come down far

Timecharter rate
enough to reflect the vessels’ current earnings potential (fig. 2).

USD per day


Million USD

Bid-ask spreads remain wide, which explains the relatively illiquid 50 40,000

sale and purchase market.

ONLY SHORT-TERM MARKET IMPROVEMENTS 25 20,000


Market activity improved over the summer months, but most new
contracts were for the maintenance of existing fields or tie-backs PSV > 4,000 DWT ( << Secondhand price; 1YR T/C >>)
to existing fields rather than entirely new projects. Tie-back pro- 0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
jects are typically short-term, requiring only a couple of wells to
Sources: Clarksons, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

be drilled. This has significant implications for the entire offshore


market: from drilling rigs and construction vessels all the way to Vessels older than 10 years old are at risk of not
returning to the active fleet
supply vessels. Demand for these assets has become short-term 160 80%
by design. In this market, most vessels are traded spot or are on AHTS PSV

short-term contracts, since the oversupply of vessels and the

Percent of age group in lay-up


Number of vessels in lay-up
Percentage of fleet in lay-up >>
types of new projects coming online give oil companies little in- 120 61% 60%

centive to pay premiums for longer-term contracts.


43%
SOME VESSELS HAVE FOUND NEW EMPLOYMENT 80 40%

Still, the increased activity has supported spot rates and pulled 33%
29%
some vessels out of lay-up, but not enough to lift charter rates
22%
significantly. Charter rates have plateaued, however, since the 40
16%
20%

start of 2017. We expect that many of the vessels that won short-
term contracts during the summer period will go back into lay-up 0 0%
when their contracts expire. Approximately one-quarter of the 0-10 10-20 20+ 0-10 10- 20+
20
PSV 3-4,000 dwt
fleet of larger supply vessels (PSVs larger than 3,000 dwt and AHTS >16,000 bhp
bhp
AHTS 12-16,000
PSV >4,000 dwt
AHTSs larger than 12,000 bhp) remain in lay-up. Younger vessels Sources: Clarksons, Danish Ship Finance

are less exposed than older ones (fig. 3).

SOME OWNERS MAY FIND IT DIFFICULT TO SECURE EMPLOYMENT


More than one-third of the OSV fleet is in lay-up
The fleet of larger PSV vessels grew by approximately 2% during Only one-quarter of large vessels are in lay-up
the first nine months of 2017, while the fleet of larger AHTS ves- 4,000 4,000

sels remained more or less stable. Still, the availability of vessels


480
may not have matched the nominal size of the fleets, since many
3,000 3,000
market participants are struggling with debt restructuring and an

Large vessel fleet


Number of vessels

Number of vessels
ongoing consolidation process. Oil majors tend to prefer to do OSV fleet

business with the shipowners that have the strongest balance 2,000 2,000

sheets. Shipowners that have not yet restructured their financials 3,090 1,030
may find it more difficult to employ their vessels on contracts with
1,000 30 1,000
the oil majors.
950 1,000
91
A REDUCTION IN SUPPLY IS REQUIRED FOR THE MARKET TO BALANCE 270
0 0
When E&P spending was at its peak in late 2013 the OSV market In service Laid up In service Laid
up
was seeing signs of an oversupply. Therefore, the road to a more OSV
OSV fleet
fleet Large vessels*
Large vessels*
balanced market will require many vessels to be scrapped and Active class certificate No active class
certificate
exploration activity to resume. There are currently almost 2,500 *Large vessels: AHTS >12,000 bhp and PSV >3,000 dwt
Sources: Clarksons, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

OUTLOOK

THE OUTLOOK FOR OFFSHORE SUPPLY VESSELS IS HIGHLY UN- Limited offshore E&P spending in the years to come
CERTAIN. NEW ONSHORE OIL PRODUCTION APPEARS MORE AT- 250 600

TRACTIVE THAN GREENFIELD OFFSHORE PROJECTS. THE FLEET Onshore E&Pspending

OF OFFSHORE SUPPLY VESSELS IS SEVERELY UNDERUTILISED 475


125
AND MORE VESSELS ARE GOING INTO LAY-UP. THERE IS LITTLE
SIGN OF DEMAND STRENGTHENING ENOUGH TO EMPLOY THE

E&P spending

E&P spending
350

Billion USD

Billion USD
VAST MAJORITY OF THE FLEET IN THE SHORT TO MEDIUM TERM.
0

The global energy landscape is changing. The outlook for the oil 225
and gas industry is shrouded in uncertainty. New sources of en-
ergy supply are being added to the global energy mix and existing -125
100
production methodologies are being upgraded by new technolo- Offshore E&P spending

gies that increase the recovery potential of existing resources.


-250 -25
2014 2015 2016 2017 2018 2019 2020 2021
RESILIENT OIL SUPPLY
Onshore, conventional Onshore, unconventional Offshore
Global oil supply seems to have surprised on the upside in recent
Sources: IHS Energy, Danish Ship Finance
years and continues to be running ahead of demand. OPEC is
holding back production in order to stabilise the market and main-
tain an oil price in the region of USD 50 per barrel. This is clearly
a short-term strategy, though it may be extended, but it is im-
Global oil supply to increase by 1% per year until 2021
portant to understand that it is currently supporting US shale pro- Unconventional onshore oil supply is expected to increase
duction. By acting as the global swing producer, OPEC, or at least 90 90

Saudi Arabia, is not only supporting US shale production but per-


haps more importantly protecting the value of Saudi Aramco prior
Global crude oil production

Global crude oil production


68 24.9 24.9 25.3 25.1 68
to the public listing. The speculative but relevant perspective to Millionbarrels per day
24.7 24.5

Millionbarrels per day


consider is what will happen to global oil supply after Saudi Ar- 5.9 6.4 6.9
4.1 4.7 5.4
amco is listed? Could global oil supply continue to grow ahead of 45 45

global oil demand in the years to come? Maybe not, based on


current developed oil fields, but there is no shortage of oil re-
23 48.0 47.8 48.2 48.3 48.0 48.0 23
serves in the world that could be drilled.

PEAK OIL DEMAND WITHIN TEN TO 15 YEARS


The long-term demand outlook for oil is being shaped by the 0 0
2016 2017 2019 2021
global economy’s transition towards a less fossil fuel-intensive 2018 202
Onshore, conventional Onshore, 0unconventional Offshore
growth model and gains in energy efficiency. This is a long-term Sources: IHS Energy, Danish Ship Finance
play, structural by design and irreversible when new technologies
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

(e.g. solar PV, wind or electric vehicles) break the price parity with
existing technologies. The penetration period for new technologies
Global oil production up by 3.1 million barrels, 2018-21
is highly uncertain. Estimates vary greatly, but it appears that Offshore crude oil production up by 600,000 barrels per day
most industry players are expecting earlier adoption than previ- 2.4 2.4

Annual change in global crude oil production

Annual change in global crude oil production


ously. Today, many experts are warning that global oil demand
could peak within the next ten to 15 years. 1.8 1.8

SHORT-CYCLE BROWNFIELD OPPORTUNITIES ARE IN FAVOUR 1.2 1.2

Million barrels per day

Million barrels per day


In the oil and gas industry, we are continuing to see interest in
0.6 0.6
large investments in greenfield mega-projects both onshore and
offshore, but the trend appears to be cooling somewhat, with
- 0
more investments going into shorter-cycle brownfield opportuni-
ties. This includes investments in various techniques for improv- -0.6 -0.6
ing the recovery rates of existing oil fields. McKinsey argues that
there are significant opportunities in subsurface optimisation. It -1.2 -1.2
2014 2015 2016 2017 2018 2019 2020
estimates that an analytical approach to production could improve 2021
Offshore
the global average underground recovery factor by up to 10%, Onshore conventional Onshore

equivalent to unlocking an additional 1 trillion barrels of oil equiv- unconventional Sources: IHS Energy, Danish Ship Finance

alents from existing fields. While it may not currently be econom-


ically viable to realise all reservoirs, it is clear that the potential is
More than 2,000 vessels are up for class renewal during
significant. the next three years
4,000 4,000
THREE-QUARTERS OF EACH DOLLAR INVESTED GOES TO ONSHORE
Global E&P spending currently favours onshore oil projects. Low
break-even rates and short-cycle projects are giving both conven- 3,000
No
class 3,000
tional and unconventional onshore oil production a competitive
Number of vessels

Number of vessels
2021+
advantage over offshore projects in the current market. The un-
conventional onshore oil sector in the US has proved very respon- 2,000 2,000
2020
sive and resilient in recent years. It is currently expected that for No
every dollar invested in global E&P up to 2021, onshore projects 2019
class
1,000 1,000
will receive approximately three-quarters (fig. 5). 2021+ 2021+
2020 2020
2018 2019 2019
OFFSHORE OIL PRODUCTION EXPECTED TO INCREASE UNTIL 2021 2018 2018
0 0
Global oil production is expected to continue to increase. Onshore In service Laid up In service Laid
up
oil production, both conventional and unconventional, has added OSV fleet Large vessels*
2018 2019 2020 2021+ No Class
strongly to the global oil supply in 2016 and 2017 and is currently Sources: Clarksons, Danish Ship Finance
dwt
Large vessels: AHTS >12,000 bhp and PSV >4,000
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

expected to continue to grow until at least 2021. Offshore oil pro-


duction is projected to increase by approximately 400,000 barrels
In the larger segments there is substantial overcapacity
per day (+1.6%) in 2018 and by the same amount in 2020 but is The OSV fleet is set for growth with a substantial orderbook and a young fleet

expected to decline marginally in 2019 and by 200,000 barrels 800 80%


AHTS 75%
per day (-0.8%) in 2021 (fig. 7). PSV

600 59% 60%


OFFSHORE DEPLETION IS NOT BEING REPLACED…

Number of vessels

% of the fleet
The offshore oil industry accounts for almost one-third of global
oil supply. Oil markets looks well supplied until 2020, but this is 400 40%

mainly because of projects that received FID prior the oil price 29%
collapse. This means that offshore FIDs need to pick up signifi- 200 21% 20%
cantly to offset depletion rates in the future. Offshore projects 12%
15%

typically need three to five years to reach material production and 8%


4%
0 0%
seven to eight years to reach peak production. Offshore oil supply 0-10 10- 20+ Order- 0-10 10- 20+ Order-
could begin to decline in the medium term unless new large-scale 20 20
book
book
Age distribution of fleet
projects are sanctioned.
AHTS >16,000 bhp AHTS 12-16,000 bhp PSV >4,000 PSV 3-4,000 dwt % of fleet
dwt
…BUT OFFSHORE PRODUCTION COULD START RAMPING UP Sources: Clarksons, Danish Ship Finance
While offshore sanctioning remains well below the replacement
level, the trend has turned in 2017. Capex commitments directed level. It may be too early to conclude that deepwater activity is
towards new offshore developments indicate that the offshore out of the woods, but there is reason to believe the worst could
market might have passed the bottom. Deepwater sanctioning be over. Still, it should be kept in mind that many of the sanc-
has increased from the low volumes seen in 2016, when only tioned projects (outside Brazil) are brownfield projects that con-
150,000 barrels per day were approved, to around 350,000 bar- nect to existing infrastructure and therefore create little long-term
rels per day in September 2017. Moreover, indications are that demand for OSV vessels.
two additional projects will be sanctioned in Brazil during the
IMPROVING SHORT TO MEDIUM-TERM OUTLOOK
fourth quarter of 2017 (i.e. Vito and the pilot phase of Libra) which
The short to medium-term outlook (2017-21) for the offshore
could bring this year’s total sanctioned deepwater projects up to
supply vessel industry is better than in the past two years. Still,
600,000 barrels per day (+2.5% of current production). These
shallow water drilling is expected to return more quickly than
new projects are not expected to begin producing before 2021.
deepwater drilling due to the lower breakeven level and shorter-
VESSEL DEMAND COULD SLOWLY BEGIN TO RECOVER cycle investment environment. The shorter times between discov-
The rise in spending commitments reflects the fact that more than ery and sanctioning of two recently approved deepwater projects
half of offshore oil resources that have been discovered but not underline the importance of compressing cycle times to stay com
developed now break even at an oil price below USD 50 per barrel. petitive. We expect Brazil to be the main driver for increased
In this environment, offshore supply vessel activity could begin to deepwater drilling activity (and large AHTS demand) in the short
recover as early as the second half of 2018, albeit from a very low to medium term.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

MANY VESSELS WILL NOT BE REACTIVATED there is still a considerable way to go. For a more balanced market
Still, there needs to be a significant reduction in the future supply to be achieved, older and smaller vessels will have to be scrapped
of vessels for charter rates and secondhand prices to improve in and exploration activity will need to resume.
the current market. Currently, there are more than 2,500 vessels
(44% of the OSV fleet) either in lay-up or without active class A LONG-TERM RECOVERY REMAINS DISTANT

certificates (28%, or fewer than 400 vessels in the larger seg- The long-term outlook for the offshore supply vessel industry is
ments) (fig. 4). For many of these vessels, significant reactivation subject to significant uncertainty, due to potential factors ranging
costs would be required before they were ready for new short- from significant increases in the onshore oil supply to the timing
term employment. This number could increase in the next three of peak oil demand. In general, the OSV industry prospers when
years, as an additional 2,000 vessels are due for class renewal new fields and infrastructures are being built and maintained. Oil
(680 vessels in the larger segments) between 2018 and 2020. majors have more than 120 projects that are being recycled or
postponed in their portfolios. Many of these projects received final
SUPPLY NEEDS TO SHRINK investment decisions in the period from 2012 to 2014. Several
It is uncertain how many of these vessels will stay active in the major projects are in Brazil. And if the current drilling campaign
market, but to us it seems clear that the supply side will need to in the Barents Sea proves successful, this could also create sig-
shrink significantly before charter rates and secondhand prices nificant demand for large OSV vessels. If these projects are sanc-
can start to recover. There are more vessels on order still, alt- tioned and oil demand continues to increase, our hopes for a bet-
hough it remains to be seen how many of these will be delivered ter OSV long-term outlook would be bolstered. ▪
(fig. 9). In other shipping segments, many of the out-of-work and
elderly vessels would be prime candidates to be sold for scrap.
But OSVs tend to fetch relatively low scrap prices: the largest
AHTS would struggle to command a scrap price over USD 1 mil-
lion, which might not even be enough to cover the cost of trans-
porting the vessel to a breaking location. Still, many of the older
laid-up vessels appear to have been effectively written off by own-
ers via a lack of investment in maintenance. More action will still
be required to reduce vessel supply to address the current imbal-
ance in the market.

THE LARGER SEGMENTS ARE BETTER POSITIONED


The larger segments may be less exposed to the overcapacity, but
it is yet to be seen whether the market will recover sufficiently
to carry a yield on these assets. We expect the larger vessels to
remain under pressure in the short to medium term. Although we
could see the start of a rebalancing between supply and demand,
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


SHIPPING MARKETS AT A GLANCE

SUBSEA VESSELS
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

SUBSEA VESSELS
THE MARKET FOR SUBSEA VESSELS IS SUFFERING FROM OVER-
CAPACITY. SECONDHAND PRICES AND CHARTER RATES REMAIN Subsea charter rates have halved since the peak in 2014
LOW. A CONSOLIDATION PROCESS HAS STARTED, AND MANY but the market seems to have found the bottom
Charter rates are up 5% since November2016
SHIPOWNERS HAVE EXITED THE INDUSTRY, WITH MORE EX- 250,000 250,000
PECTED TO FOLLOW SUIT. A SLOW RECOVERY IS EXPECTED FROM June 2014
LATE 2018 ONWARDS, BUT IT MAY NOT BE FOR EVERYONE. 200,000
GBP 195,000 perday
200,000

Subsea DSV charter rates

Subsea DSV charter rates


THE SUBSEA MARKET AT A GLANCE

GBP per day

GBP per day


150,000 150,000
THE SUBSEA MARKET IS STILL OVERSUPPLIED. SECONDHAND
PRICES AND CHARTER RATES REMAIN LOW BUT HAVE SEEN MAR-
100,000 100,000
GINAL IMPROVEMENTS SINCE NOVEMBER 2016.
October 2017
GBP 97,500 perday
The low offshore E&P spending that is lowering demand for off-
50,000 50,000
shore supply vessels is likewise reducing demand for Subsea ves-
sels. Market activity is low and new projects are primarily related 0
DSV = Diving Support vessel
0
to (smaller) tie-back projects and seasonal maintenance. The low 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

market activity has caused competition to intensify and forced


larger companies to bid for smaller contracts (i.e. below USD 100 Sources: Clarksons, Danish Ship Finance Subsea DSV day rates, North Sea specifications

million), leaving smaller vessel owners in a very difficult position.


Many have been forced to exit the market. Subsea tree contracts have declined by 80% since the
top in 2013
MARKET FUNDAMENTALS REMAIN CHALLENGING Installations have outpaced awards, and companies have run down their backlogs
Charter rates have more than halved, from GBP 195,000 per day 900 900

in 2014 to GBP 97,500 per day in August 2017 (fig.1). This drop
clearly reflects the poor utilisation of the fleet. The low demand for
Number of subsea trees

Number of subsea trees


Subsea vessels is clearly visible if we use the number of new sub- 600 600
sea tree contracts as a proxy for Subsea vessel demand. These
declined by 16% in 2017 compared with 2016 and are now 80%
below their peak in 2013. Installations of subsea trees are also
300 300
down, by approximately one-third compared with last year (fig. 2).

FEW VESSELS HAVE BEEN LAID UP


Contrary to what we have seen in the market for offshore supply
0 0
vessels, few Subsea vessels have been laid up despite the weak 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
demand. Only 6% of the fleet is in lay-up and few vessels (six) Awards - subsea trees Installations - subsea trees
have been scrapped in 2017. The fleet continues to increase with Sources: Clarksons, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

28 vessels (4% of fleet) delivered in the first ten months of 2017. The orderbook is
heavily front-loaded and stands at 11% of the fleet. The fleet generally has a
significant share of older vessels that could be scrapped to absorb the delivery of
new vessels with- out putting too much downward pressure on charter rates and
secondhand prices. Subsea vessels are typically larger than OSVs and therefore
have a marginally higher steel value. Few new ves- sels have been ordered in
2017.

THE SALE AND PURCHASE MARKET REMAINS ILLIQUID


Secondhand prices are clearly under significant pressure. There
are relatively few owners that have the financial capacity to buy and few owners
that are willing to sell their vessels in the current market. The price mechanism is
therefore characterised by illiquidity and many sales are considered distressed. This
makes it harder to assess the actual market value of vessels, but the young and
modern vessels are holding up the best.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

OUTLOOK

THE MARKET OUTLOOK FOR SUBSEA VESSELS REMAINS CHAL-


Many of the older multi-purpose vessels are scrapping
LENGING, BUT LARGER OWNERS SEEM BETTER-POSITIONED TO candidates
BENEFIT FROM THE EXPECTED DEMAND RECOVERY. STILL, THERE 500
49%

Number of vessels in selected age group

Number of vessels in selected age group


Cable layers (1) Multi-purpose (2)

SEEMS TO BE LITTLE TO INDICATE THAT THE SITUATION WILL - Cable layer (fibre optic) cable -Diving support
- Umbilicals & fp/flowline lay -Multi-functionalsupport
-Rov/submersible support
BEGIN TO IMPROVE BEFORE THE END OF 2018.
- Derrick/lay vessel
400
- Pipelayer
Well stimulation (4)
33%
Global E&P spending currently seems to favour onshore oil pro-
Heavy lift (3) -Extendedwell testvessel
- Heavy lift/crane ship -Well stimulation
300
jects. Low break-even rates and short-cycle projects are giving
both conventional and unconventional onshore oil production a 19%
200
competitive advantage over new large-scale offshore projects. This 10%
development is clearly sensitive to the oil price. If the oil price
100
stays at current levels for a prolonged period, the demand outlook
for both Offshore Supply vessels and Subsea vessels will be struc- 0
turally reduced. In the event of this, smaller players would likely 0-10 10-20 20+ Orderbook

continue to be forced out of the market. Cable layer (1) Multi-purpose (2) Heavy lift (3) Well stimulation (4) Percentage of fleet

A RECOVERY MAY NOT BE FOR EVERYONE Sources: Clarksons, Danish Ship Finance
These forces are driving a transition process in the subsea industry
whereby larger vessel owners are entering into strategic alliances
with oil companies to lower costs and enhance their capabilities. Merged backlog for the three largest SURF companies is
However, strategic alliances with oil companies may not be for recovering
Backlogs have increased 13% since June 2016
everyone. Smaller vessel owners are at risk of becoming tonnage 45 120
providers to an oversupplied market. Still, national oil companies Merged backlog for the three
(NOCs) have a history of awarding contracts to smaller shipown- largest SURF companies

ers, partially due to national interests, but also to keep their supply

Brent crude oil price


30 80
chains competitive.

USD per barrel


Billion USD

THE LARGEST PLAYERS SEEM BEST-POSITIONED


The combined backlog of the three largest Subsea players seem to 15 40
have bottomed out (fig. 4). The smaller players may find it harder
to secure employment, and therefore their order backlogs may "The big three*"
-Subsea7
stay low for longer. -Saipem
-Technip(FMC)
0 0
2011 2012 2013 2014 2015 2016 2017
SHORT TO MEDIUM-TERM DEMAND IS GROWING
Merged backlog "The big three*" U.K. Brent spot average oil price
Demand for Subsea vessels could be on its way out of the bottom
Sources: Clarksons, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

of the current cycle. Spending on subsea production systems has


already increased this year, albeit from a very low level, and is
Spending on subsea production systems is forecast to
expected to continue to grow up to 2021 (fig. 5). Statoil alone is grow significantly
expected to award more subsea trees in the next 12-18 months
20
than were awarded globally in 2016. Several projects are awaiting 45%

Subsea production systems spending


36% 37%
18% 27%
final investment decisions (FIDs) at the end of 2017 or at the be-
16
ginning of 2018. These include Snorre 2040, the Yme redevelop- -18% Annual percentage growth
ment and Pil & Bue, which are all projects on the Norwegian Con- -55% -42%
12

Billion USD
tinental Shelf. However, the vast majority of new projects are tie-
back projects which mean less vessel employment than new
8
projects that require installation of new production infrastructure.

THE LONG-TERM DEMAND OUTLOOK IS IMPROVING 4

Conventional projects awaiting FIDs are dominated by large deep


and ultra-deep water projects in Brazil which will probably start 0
2014 2015 2016 2017 2018 2019 2020 2021
production in the early 2020s if sanctioned. Companies are also
Subsea production systems spending
experiencing an upsurge in front-end engineering design (FEED) Annual growth
Sources: IHS Energy, Danish Ship Finance
studies this year (fig. 6). This is not a guarantee of future projects
but a good indicator of long-term demand. Opportunities outside
Figure SS.6
the oil and gas sector are also increasing. Offshore wind is becom-
ing increasingly attractive to Subsea companies, since they can FEED studies are higher in number than spending levels
indicate due to cost deflation
leverage on their knowledge and experience. 5
37%

FEW OWNERS WILL BENEFIT FROM THE RECOVERY 10% 11% 9% 6%


4%
The Subsea market is heading for a recovery, but it may take some FEED studies spending 4

years and it may not be for everyone. We recognise that this is a -11% Annual percentage growth

good time for owners to acquire vessels at discounted prices, but 3 -40%
Billion USD

few players have the financial capacity to do so. Some smaller


players are expected to exit the market and more vessels need to
2
be scrapped. Those in a position to acquire attractive assets now
will likely reap the benefit in a couple of years. ▪
1

0
2014 2015 2016 2017 2018 2019 2020 2021
FEED (Front End Engineering Design) spending Annual growth

Sources: IHS Energy, Danish Ship Finance


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

CRUDE TANKER
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

CRUDE TANKER
TOO MANY NEW DELIVERIES HAVE EXACERBATED THE OVERCA- Figure T.1
PACITY IN THE CRUDE TANKER MARKET IN 2017. ALTHOUGH FU- The Crude Tanker spot market has experienced strong
TURE OIL DEMAND IS EXPECTED TO BE HEALTHY, THIS WILL NOT downward pressure on freight rates in 2017
Average spot earnings are down 49% year-to-date, and VLCC earnings are worst
BE ENOUGH TO EASE THE PRESSURE ON FREIGHT RATES AND hit with a 60% decline year-to-date

SECONDHAND PRICES IN THE NEXT TWO YEARS, AS THE FLEET 120,000 120,000

IS SCHEDULED TO GROW FURTHER.


THE CRUDE TANKER MARKET AT A GLANCE 90,000 90,000

Average earnings

Average earnings
THE CRUDE TANKER MARKET HAS DETERIORATED SIGNIFI-

USD per day


USD per day
CANTLY IN 2017 AS THE NEGATIVE FREIGHT RATE TREND HAS 60,000 60,000

BECOME FIRMLY ENTRENCHED.


Market fundamentals in the Crude Tanker segment have wors- 30,000 30,000
ened during the course of 2017. Excessive fleet growth (+5%)
continues to weigh down the already oversupplied market and
0 0
postpone the recovery despite relatively strong demand growth. 2012 2013 2014 2015 2016 2017

ACUTE OVERSUPPLY RENDERS GOOD DEMAND CONDITIONS IRRELEVANT


Sources: Clarksons, Danish Ship Finance VLCC Suezmax Aframax
A number of factors appear to have kept Crude Tanker demand
Figure T.2
healthy in 2017, despite the OPEC production cut. Overall, global
demand for crude oil continues to grow. Increased trading activity Timecharter rates continue to trend downwards and
have declined by 17% year-to-date
on new long-haul trading routes has extended average travel dis- 60,000 60,000
tances. Spot VLCC liftings from the Middle East have been largely
unchanged in 2017 compared with 2016, and drawdowns from
global oil stocks are still scant, indicating that Crude Tanker de-
1-year timecharter rate

1-year timecharter rate


45,000 45,000

mand has not been adversely impacted by OPEC’s production cut.

USD per day


USD per day

But in spite of this, freight rates have continued to decline, simply


30,000 30,000
because too many new vessels are being delivered too quickly to 26,700
be employed. As a result, the oversupply continues to build, in-
17,800
creasing the pressure on freight rates. 15,000 15,000
15,000
DESPITE SEASONALITY SPOT EARNINGS TREND DOWNWARDS
Spot earnings have declined rapidly this year, and are so far down
0 0
49% from their most recent peak in December 2016. At the end 2012 2013 2014 2015 2016 2017

of August, average earnings sank to USD 8,400 per day – the


lowest level seen since September 2012 (fig. 1). The VLCC market Sources: Clarksons, Danish Ship Finance VLCC Suezmax Aframax
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

experienced the steepest downturn, largely due to the delivery of


41 new VLCCs and only nine demolitions in the first nine months
of 2017. By the end of October, the 1-year timecharter rate stood The average secondhand price of a 5-year-old Crude
Tanker has declined by 12% in 2017 compared to 2016
at USD 26,700 per day for a VLCC, USD 17,800 per day for a But year-to-date the average price of a 5-year-old vessel has increased by 3%

Suezmax and USD 15,000 per day for an Aframax – an average 100 100

decline of 17% from the December 2016 level (fig. 2). VLCC and

5-year-old secondhand price

5-year-old secondhand price


Suezmax rates have been kept afloat by increased long-haul ex- 75 75
ports out of the US, Brazil and West Africa bound for Asia. Further,
63
Suezmax rates have been helped by a doubling of US imports

Million USD

Million USD
50 50
from Brazil, counterbalancing falling imports from Venezuela.
40
INCREASED DEMOLITION BUT FLEET GROWTH REMAINS HIGH 30
Higher scrap prices (fig. 4) seem to have led owners to increase 25 25

demolition in 2017. Scrapping in the first nine months of 2017


reached 6.2 million dwt – nearly three times the amount in all of 0 0
2016. Still, new vessels have continued to pour into the fleet with 2012 2013 2014 2015 2016 2017

26.3 million dwt delivered so far in 2017, compared with 25.6 mil-
lion dwt in the whole of 2016. Sources: Clarksons, Danish Ship Finance VLCC Suezmax Aframax

ACTIVITY IN THE NEWBUILDING MARKET HAS INCREASED IN 2017


The newbuilding and secondhand markets have rebounded in
2017 after a slow 2016. In the newbuilding market, new vessels The prices of older VLCC vessels are some of the lowest
observed since 2000
with a capacity of 17.5 million dwt were ordered in the nine 180 180
months of 2017, compared with 7.9 million dwt in all of 2016. In Output range, January 2000 to October 2017
Highest 10 percent
the secondhand market, 14.2 million dwt, or about 4% of the
fleet, changed hands during the first nine months of 2017, com- 135 135

pared with 8.9 million dwt sold in the whole of 2016.

VLCC ship prices


VLCC ship prices

Million USD
Million USD

THE SECONDHAND MARKET INCREASINGLY FAVOURS YOUNG VESSELS 90 90


81
Poor market fundamentals are keeping secondhand prices low.
63
Secondhand prices have risen 3% for five-year-old vessels and
Lowest 10 percent
dropped 3% for ten-year-old vessels year-to-date. Increased in- 45
38
45

terest in buying modern tonnage and a lack of sales candidates 22


16
have helped stabilise the price development in 2017 (fig. 3). The
0 0
interest in younger vessels has pushed prices of older tonnage NB 5YR 10YR 15YR Scrap

down to some of the lowest levels since 2000 (fig. 4), perhaps
reflecting a shortening of economic life as pointed out previously. Sources: Clarksons, Danish Ship Finance Median Current
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

OUTLOOK

HIGH FLEET GROWTH DAMPENS THE OUTLOOK FOR THE CRUDE


The Crude Tanker fleet is young with few obvious
TANKER MARKET IN THE COMING YEARS, DESPITE POSTIVE EX- scrapping candidates left
PECTATIONS FOR OIL DEMAND GROWTH. NEW LONG-HAUL Currently the orderbook represents 13% of the fleet
140 36%
TRADES ARE SPARKING OPTIMISM IN THE INDUSTRY, BUT WE
33%
ARE CAUTIOUS ABOUT THE EFFECT AND SUSTAINABILITY OF
THESE. THE MAIN THREAT TO THE LONG-TERM OUTLOOK IS THE 105
26%
27%

Percentageof fleet
Fleet distribution
EXPECTATION THAT ‘PEAK OIL DEMAND’ IS LURKING. 24%

Milliondwt
OPEC’s decision to lower production is currently supporting the 70 18%
Crude Tanker market by increasing travel distances and reducing 14%
13%
fleet availability due to inadequate US export facilities. Still, the
35
Crude Tanker market is oversupplied. Freight rates and 9
%
secondhand prices are low. Freight rates continue to decline, 3%
whereas it seems that vessels’ secondhand prices are being sup- 0 0% 0%
ported by high expectations for future earnings. We see little to 0-5 5-10 10-15 15-20 20-25 25+
Orderboo
indicate that market fundamentals will improve significantly k
Sources: Clarksons, Danish Ship Finance VLCC Suezmax Aframax Share of fleet
within the next year or two. The fleet is scheduled for further
growth, while demand for Crude Tankers looks unlikely to be able
to employ the new deliveries, even though global oil demand con-
tinues to grow at a healthy rate. The Crude Tanker orderbook can only be characterised
as fleet renewal if we consider vessels as young as 15
THE LONG-TERM OUTLOOK IS BLEAK years eligible scrapping candidates
The temporary factors that are currently supporting Crude Tanker 5 5

Orderbook / Scrapping candidates (dwt)

Orderbook / Scrapping candidates (dwt)


demand will fade when OPEC terminates the production cut. 4.5

When that happens, freight rates and secondhand values are 4 4

likely to face additional pressure. Still, the long-term factor that


Fleet renewal

Fleet renewal
3.2 3.1
has yet to be priced into younger vessels’ secondhand prices is 3 3

‘peak oil demand’ which looks likely to occur within the lifetime of
most vessels currently trading. Industry executives argue that 2 2

global oil demand will peak within the next ten to 15 years.
1 1
0.7 0.8
YOUNGER VESSELS’ SECONDHAND VALUES MAY DECLINE 0.7

Looking at the market’s current pricing of secondhand vessels, it 0 0


appears to us that expectations for younger vessels’ potential fu- VLCC Suezmax Aframax

ture earnings are high. Older vessels are priced at a relatively Orderbook / 20+ year old Orderbook / 15+ year old
Sources: Clarksons, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

modest premium to their scrap values – the spread between the


price of a 15-year-old VLCC and its scrap value is USD 6 million –
but the price for an additional five years’ cash flow is significantly The current pricing structure of VLCCs indicates high
expectations for future earnings
higher (fig. 7). Thus, if the high expectations for younger vessels 90 90
81
are not fulfilled secondhand prices may see a reduction.

A FLEET RENEWAL EXERCISE OR SURPLUS CAPACITY BUILDING UP? 72


63
18 72

The low premium for a 15-year-old VLCC relative to its scrap price

VLCC ship price


may reflect the market’s expectation that a significant share of 54 54

VLCC ship price

MillionUSD
25

MillionUSD
older vessels (i.e. older than 15 years) will be scrapped. This hy- 38
pothesis is supported to some extent by the size of the orderbook 36 36

in relation to the number of scrapping candidates in the fleet (fig. 22


16

16
5). The orderbook is so large that it almost looks like a fleet re- 18 6 18
newal exercise aimed at replacing most vessels older than 15 16
years (fig. 6). In the event of this, we would expect further down- 0 0
ward pressure on older vessels’ secondhand prices in the years to Scrap 15YR 10YR NB
5YR
come, but prompt demolition of older vessels may improve freight Cost of accessing additional years of cash
Current prices

rates. flow Sources: Clarksons, Danish Ship Finance

HIGH EXPECTATIONS ATTACHED TO FUTURE EARNINGS


The prices of younger assets imply that the market expects Seaborne crude oil trade is expected to grow 2.4%
freight rates to be mean-reverting (i.e. to increase in the future). annually up to 2020
Asian oil demand will drive global growth and the US will increasingly rely on
Investors are currently paying approximately USD 11 to access domestic productionfor domestic consumption
USD 1 of cash flow for a five-year-old VLCC compared with USD 1,800

8 to access USD 1 of cash for a ten-year-old VLCC. While


Seaborne import volumes 2020
3% 4% 3% 3% 2%
1% 2%
price/earnings ratios look more in line with the historical averages 1,350
calculated on a gross (excluding opex) rather than a net basis, -1%
Expected import volume CAGR 2017-2020
Million tonnes

we believe the free cash flow equivalent is more relevant for de-
900
termining an investor’s reservation price than gross earnings. We
therefore argue that younger vessels could be overvalued com-
450
pared with their actual future earnings potential.

PEAK OIL DEMAND BEING REACHED REPRESENTS A RISK 0


The long-term earnings potential of Crude Tankers is closely Asia Europe North Africa South Oceania Central
America Other America
linked to future demand for crude oil. If global oil demand peaks America
within the next ten to 15 years, this may begin to be reflected in
Sources: IHS Global Insight, Danish Ship Finance Import volumes 2020 Growth
the pricing of younger vessels. Crude Tanker demand is expected
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

to grow slowly as global oil demand moves towards the peak,


then to start declining. This trend is expected to be irreversible, If all remaing orders are delivered, gross fleet growth
although global oil demand may drift back and forth near the will reach 7% in 2017
Fleet growth will not start to slow down until after 2019
peak. Now, let us focus on the short- to medium-term outlook.
42

CRUDE TANKER DEMAND SET TO RISE 2.4% ANNUALLY UP TO 2020 Annual fleet growth
7%
We expect nominal Crude Tanker demand to grow by approxi- 6%
7%
6%
28
mately 2.4% annually up to 2020 (fig.8). The Crude Tanker fleet

Deliveries
is expected to grow at a gross rate of 7% in 2017 and 6% in 2018

Million dwt
3% 3%
(fig. 9). Longer travelling distances are currently supporting dis- 14 2%
tance-adjusted demand, but we consider the OPEC production cut 1%
0.3%
a short-term event that will not add much additional demand to
0
the market and hence will not absorb the front-loaded orderbook

Scrappin
in the short to medium term. Travel distances are likely to decline
when OPEC ends the production cut. -14

g
2012 2013 2014 2015 2016 2017 2018 2019 2020

ADDITIONAL STOCK BUILDING MAY SUPPORT SHORT-TERM DEMAND


Global oil stocks remain high and will continue to represent a lim- Sources: Clarksons, Danish Ship Finance VLCC Suezmax Aframax Expected
deliveries
iting factor for Crude Tanker demand in the near future. It re-
mains to be seen whether additional stocks will be built. This could relatively high demolition prices. Further encouragement may be
represent a short-term demand impetus for Crude Tankers, alt- provided by the impending new sulphur cap and ballast water reg-
hough it would simply be taking from future demand. ulations. Freight rates seem unlikely to recover to any great extent
during this period, unless tonnes-miles demand increases. It re-
ASIAN DEMAND IS DRIVING TRADE VOLUMES mains to be seen, though, how quickly younger vessels will be
Global oil demand is primarily growing due to the Asian econo- scrapped and thus how quickly surplus capacity will be reduced.
mies, although OECD demand has surprised positively in 2017.
India and China alone are predicted to account for about 45% of NO IMMINENT IMPROVEMENT IN CRUDE TANKER MARKET LIKELY
the growth in global oil demand up to 2020. Indian oil demand We continue to argue that the Crude Tanker fleet is in little need
showed some weakness in 2017, caused by the government’s de- of new additions. Oversupply is likely to remain a challenge during
monetisation policy, but strong expectations for future Indian car the next two years. Freight rates could decline further and younger
sales and air travel are positive for the long-term outlook. It is a vessels’ secondhand prices could continue to fall. The scarcity of
similar story for Chinese demand growth, although shrinking do- old demolition candidates suggests that vessels will not be
mestic oil production is another contributing factor. scrapped soon enough for freight rates to recover during the next
two years (fig. 5).
THE INCENTIVE TO SCRAP VESSELS IS INCREASING
Scrapping of older vessels is likely to increase if demand fails to THE OIL SUPPLY OUTLOOK REMAINS HIGHLY UNCERTAIN
employ the large number of vessels being delivered during the The state of the oil market is always highly uncertain. Global oil
next two years, as we expect more owners to take advantage of demand continues to grow, but the global oil supply outlook re-
mains shrouded in uncertainty. Much of the uncertainty centres on
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

the duration of the OPEC production cut. When OPEC increases production, oil prices could start to
decline again, bringing the oil markets back into contango. This could support the Crude Tanker
market by encouraging oil storage but would at the same time shorten average travel distances. The
impact on US shale produc- tion of an OPEC production increase remains uncertain, but in previous
cycles we have seen that US shale production is highly responsive to changes in the oil price. Still, we
find it unlikely that Crude Tanker utilisation will see sustainable improvements from these effects.

VESSEL SUBSTITUTION MAY CHANGE SOME SHORT-TERM DYNAMICS


VLCC demand could improve at the expense of Suezmax demand when US export facilities are
upgraded. Today, few American ports can handle a fully-laden VLCC. The Louisiana Offshore Oil Port,
offshore Louisiana, is one of the few ports capable of receiv- ing VLCCs, but it is primarily used as an
import facility. However, the port of Corpus Christi, which handles around 70% of all US crude exports,
has received funding to start a project that would allow fully-laden VLCCs to call at the port. The
project has no set completion date, but when finished it will significantly reduce freight costs and
turnaround time for vessels, and is likely to make the use of VLCCs much more attractive for US
exports, pos- sibly at the expense of Suezmaxes. However, a counter effect of decreased turnaround
time is also reduced fleet utilisation.

***
In short, the overriding factor affecting the Crude Tanker outlook is high fleet growth. A shortening of
average travel distances when OPEC oil production increases again will only deteriorate the outlook
further. We expect the Crude Tanker market to stay chal- lenging at least until the end of next year. ▪
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

PRODUCT TANKER
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

PRODUCT TANKER
THE PRODUCT TANKER MARKET IS OVERSUPPLIED, AND THE LR
SEGMENTS ARE AT RISK OF ADDING FURTHER TO THE OVERCA- Average Product Tanker earnings remain low and have
PACITY. THE HIGH FLEET GROWTH IS OUTPACING DEMAND declined by 28% year-to-date
Annual average earnings in 2017 are 17% below the 2016 level
GROWTH, AND DEMAND IS EXPECTED TO GROW SLOWLY IN THE 40,000 40,000
COMING YEARS. FREIGHT RATES AND SECONDHAND PRICES Clarksons' Average Clean Products Earnings
ARE LOW, ALBEIT INCREASING.
July 2015
30,000 USD 28,000 per day 30,000
THE PRODUCT TANKER MARKET AT A GLANCE

SURPLUS CAPACITY CONTINUES TO WEIGH ON PRODUCT TANK-

USD per day


USD per day
ERS. FREIGHT RATES AND SECONDHAND PRICES REMAIN LOW 20,000 20,000
BUT ARE SHOWING SLIGHT SIGNS OF IMPROVEMENT. Annual average

Oversupply is keeping the Product Tanker market subdued. After


10,000 10,000
two years of strong growth, the Product Tanker fleet has ex-
panded further in 2017, growing by 3.9% in the first nine months.
Demand for Product Tankers has been relatively robust, but is
0 0
growing too slowly to employ all the new vessels. This has kept 2012 2013 2014 2015 2016 2017

freight rates at very low levels in 2017 (fig. 1). Sources: Clarksons, Danish Ship Finance

HIGH INVENTORIES ARE KEEPING THE MARKET SUBDUED


Product Tanker timecharter rates have stabilised at a
Strengthening demand for petroleum products and continued low low level in 2017
oil prices have lifted refinery margins in 2017 compared with 2016 Average timecharter rates are marginally up with a 1% increase year-to-date
40,000 40,000
levels, leading refiners to ramp up production. But despite growth
in consumption of petroleum products, the increase in production
of petroleum products means that drawdowns of global product
1-year timecharter rate

1-year timecharter rate


30,000 30,000
inventories have been limited. The high inventories have curbed

USD per day


USD per day

trade in petroleum products by reducing the need for imports,


20,000 20,000
and have held back arbitrage trade in 2017 by capping the po-
tential for temporary regional imbalances to emerge. 15,300
13,500
13,400
10,000 10,000
CLEAN TANKER EARNINGS HAVE FLUCTUATED AROUND A LOW BASE
In the third quarter, Clean Tanker spot earnings saw a short-lived
spike. Hurricane Harvey in the US Gulf Coast forced refineries to 0 0
shut down, causing the Product Tanker market in the Atlantic Ba- 2012 2013 2014 2015 2016 2017

sin to tighten in early September. But despite temporary in-


LR2 LR1 MR
Sources: Clarksons, Danish Ship Finance
creases over the first nine months, average spot earnings have
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

been low and by the beginning of October had declined by 24%


year-to-date. Timecharter rates were up by 8% for MRs and 5%
Product Tanker secondhand prices have marginally
for LR1s in the first nine months. LR1s are now trading below improved in 2017 with a 1% increase year-to-date
MRs. LR2 timecharter rates declined by 7% in the same period, MR secondhand prices have fared best with a 9% increase year-to-date
60 60
most likely due to excessive fleet growth of 11% overwhelming
the market (fig. 2). MR and LR1 rates have been supported by

5-year-old secondhand price


5-year-old secondhand price
strong growth in exports from the US to Latin America, especially 45 45

to Mexico and Brazil, and increased European exports to West

MillionUSD
MillionUSD
Africa. Additionally, MR rates have been supported by growth in
30 30
intra-Asian petroleum products trade. But Product Tanker 32 26.5
24
timecharter rates remain near historical lows. By end-October,
the 1-year timecharter rate stood at USD 13,500 per day for MRs, 15 15

USD 13,400 per day for LR1s and USD 15,300 per day for LR2s.

INCREASED DEMOLITION AND SLOWDOWN IN DELIVERIES 0 0


2012 2013 2014 2015 2016 2017
Product Tanker demolition picked up from the low level in 2016,
reaching 1.1 million dwt in the first nine months – a 47% increase
Sources: Clarksons, Danish Ship Finance LR2 LR1 MR
compared with the whole of 2016. At the same time, deliveries
lost some pace with 6.8 million dwt entering the fleet, versus 7.3
million dwt in the same period in 2016. The slowdown was caused
by 30% fewer MR deliveries, both in terms of dwt and number of The prices of older MR vessels are close to the lowest
observed since 2002
vessels, while LR2 deliveries increased by 17% in 2017. 60 60

CONTRACTING ACTIVITY HAS MORE THAN DOUBLED IN 2017


Highest 10 percent
Contracting activity has grown sharply in 2017 with 5.1 million
dwt ordered in the first nine months, up from a historical low of
40 40
MR ship prices

MR ship prices
1.5 million dwt in the whole of 2016. Activity in the secondhand
MillionUSD

MillionUSD
34
market has also increased, with 4.8 million dwt changing hands
in the first nine months of 2017, up from 2.9 million dwt in 2016. 24
20 20
ASSET PRICES ARE IMPROVING SLOWLY Lowest 10 percent 16
On average, Product Tanker asset prices have been lower in 2017
9
than in 2016. But, year-to-date all Product Tanker secondhand 4
prices have risen, with the exception of five-year-old LR1 vessels 0 0
NB 5YR 10YR 15YR Scrap
(fig. 3). MR asset prices have fared best in 2017 and are up 9%
and 5% for five-year-old and ten-year-old vessels, respectively,
Sources: Clarksons, Danish Ship Finance Median Current
year-to-date, although this is from a very low base (fig. 4).
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

OUTLOOK

THE OUTLOOK FOR THE PRODUCT TANKER MARKET IS FOR SLOW Seaborne trade in petroleum products is expected to
DEMAND GROWTH AND THERE ARE SIGNIFICANT DOWNSIDE grow by 1.9% anually up to 2020
RISKS. HIGH SCHEDULED FLEET GROWTH AND A SCARCITY OF 500

4.6% 5.6%
OLD VESSELS FOR SCRAPPING TARNISH THE OUTLOOK FOR THE 2.9% 1.8%

Seaborne import volumes 2020


1.5% 0.9% 0.3% 1.1%
400
LR SEGMENTS. IN CONTRAST, MANY OLDER VESSELS IMPROVE -0.9%
THE OUTLOOK FOR THE MR SEGMENT, BUT THESE NEED TO BE Expected import volume CAGR 2017-2020

Million tonnes
300
DEMOLISHED FOR NEW DELIVERIES TO BE ABSORBED.
The short-term outlook is characterised by modest growth in de-
200
mand and a front-loaded orderbook (fig. 5 and 7). Inventory
drawdowns could pave the way for regional imbalances again and
100
strengthen arbitrage trade. Still, we do not believe demand
growth will be adequate to employ the new vessels, and thus we
0
assume many vessels will have to be scrapped to keep freight Asia North Latin Europe Africa Other Middle Oceania FSU
America America East
rates and secondhand values stable, especially younger LR ves-
sels. Premature scrapping could reduce the economic lifetime of
Sources: IHS Global Insight, Danish Ship Finance Import volumes 2020
vessels by up to five years, which could lower the value of older
vessels. The medium-term outlook is highly sensitive to Asian de-
mand and few new orders being placed.
Volumes of seaborne petroleum products are expected
YOUNG VESSELS SENSITIVE TO TIMING OF ‘PEAK OIL DEMAND’ to grow more slowly in the fut ure than in the
Product Tanker demand is expected to grow by an annual average 1,500 past 1,500

of less than 2% up to 2030 (fig. 6). If oil demand peaks before


2030, vessels that are currently young may find it hard to gener-
CAGR 1.8%
ate suitable risk-adjusted returns on invested capital. The jury is
still out, but from a long-term investor’s perspective we argue it 1,000 1,000
Million tonnes

Million tonnes
CAGR 3.8%
seems reasonable to hold back ordering in the coming years.

GEOGRAPHICAL DIVERGENCE IN FUTURE DEMAND EXPECTATIONS


From 2020, oil demand and thus demand for petroleum products 500 500
is expected to peak in the OECD countries, due to a retiring work-
force, a mature transport sector, fuel efficiency gains and aggres-
sive public policies. Non-OECD demand for petroleum products is
expected to continue to grow over the next 10-15 years until the 0 0
2000 2030
peak, as a growing middle-class will increase demand for 2
017
transport fuels and consumer goods (e.g. plastics products).
Sources: IHS Global Insight, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

DIESEL DEMAND IS EXPECTED TO INCREASE, BUT ONLY SLOWLY bally dominate an emerging industry in contrast to the ‘old’ inter-
The outlook for diesel demand is positive, but growth is expected nal combustion engine car industry. Chinese car manufacturers
to grow slowly by around 1% per year up to 2025. This will be are producing the largest number of electric vehicles globally and
driven by increased demand for road freight (i.e. heavy-duty ve- Chinese consumers are buying the most electric vehicles in the
hicles), particularly in China. world. However, both the electric vehicle industry and consumers
in China are aided by aggressive subsidies – for consumers, the
GASOLINE DEMAND CAUGHT BETWEEN A ROCK AND A HARD PLACE
subsidies are second only to those in Norway. Six Chinese cities
In the OECD region, low oil prices have led to a brief resurgence
account for approximately 70% of electric vehicle sales, and in
of gasoline demand in the past few years, but a structural decline
these cities licence plates for internal combustion engine cars are
is expected to set in from 2018. Globally, gasoline demand is ex-
available only by lottery. It could be that the ease with which a
pected to peak any time from 2025. In the short term, fuel effi-
licence plate can be obtained has been the main incentive for pur-
ciency gains will hold back demand growth, while electric vehicle
chasing an electric vehicle rather than any other considerations.
penetration will cause a deceleration in the long term.
Either way, this illustrates the power of policy. Exactly how soon
ELECTRIC VEHICLES MOVING FRONT AND CENTRE the government wants the Chinese only to drive electric vehicles
The approaching electric vehicle revolution seems to be gaining is the single biggest uncertainty for gasoline demand going for-
traction among car manufacturers and regulators. Volvo has ward.
pledged to sell no new cars without electric engines from 2019.
AIR TRAFFIC GROWTH AND PETROCHEMICALS ARE BRIGHT SPOTS
Other car manufacturers have similarly ambitious plans for ‘going
Rising living standards, especially in non-OECD countries, are set
electric’. Regulators are advancing the agenda, with France and
to boost global demand for air travel and consumer products
the UK joining, among others, Norway, the Netherlands and India
strongly and thereby feedstock for the petrochemical sector be-
in setting deadlines for when sales of light-duty vehicles with in-
yond the peak as demand for other petroleum products decline.
ternal combustion engines will no longer be allowed. Chinese reg-
This will support jet fuel and naphtha demand. The increase in
ulators are also planning to ban internal combustion engine
naphtha demand will primarily be seen east of Suez. However, jet
vehi- cles, but the timing remains uncertain. As we have
fuel and naphtha account for only a small share of total oil demand
discussed in previous reports, forecasters have continuously
compared with diesel and gasoline, and thus despite their good
underestimated the rate of adoption of electric vehicles. With
growth prospects, they are unlikely to compensate for declines in
the recent an- nouncements and China signalling its intention to
demand elsewhere.
jump on the bandwagon, forecasts could be set for major
revisions and ‘peak gasoline demand’ could come much sooner ATLANTIC BASIN REFINERIES FACE STRONG COMPETITION
than we currently an- ticipate. Due to the expected slowdown in demand growth, only half the
historical rates of refinery capacity additions in Asia are needed.
CHINA IS THE BIGGEST RISK TO GASOLINE DEMAND GROWTH
New Asian refineries tend to be globally competitive, which threat-
China is pushing aggressively for electrification of its car fleet,
ens the Atlantic Basin refineries’ ability to export petroleum prod-
and has at least three reasons for doing so. Electric vehicles do
ucts competitively to distant growth markets. US refineries’ pri-
not aggravate air pollution and neither do they add to demand for
mary export market is Latin America, but exports to Asia have
oil imports. Thirdly, they present an opportunity for China to glo-
increased sharply over the past two years. If Asian refinery capa-
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

city outgrows domestic demand, the weakest Atlantic Basin refin-


eries could be at risk of closure. Less refining capacity in the At- The Product Tanker fleet is young and the orderbook
represents 9% of the fleet
lantic Basin could mean reduced travelling distances, as trade of Scrapping potential is very limited with only 12% of the fleet 15 years or older
petroleum products would be increasingly centred east of Suez. 72 44%
38%
In particular, this could affect LR2s which are preferred on the Percentage of fleet >>

long-haul West to East trades. However, in terms of volumes this


54 33%
trade is still not very big.

Percentage offleet
27%

Fleet distribution
23%

Million dwt
PRODUCT TANKER SUPPLY TO CONTINUE TO OUTGROW DEMAND…
36 22%
With little growth in demand expected and further fleet growth
scheduled, supply will continue to outpace demand in the Product
9%
Tanker market for at least another year. Gross fleet growth is 18 7% 11%

expected to reach 6% in 2017 (fig. 8), and more is scheduled. 3% 2%

…AND THERE IS MORE FLEET GROWTH SCHEDULED FOR 2018 0 0%


0-5 5-10 10-15 15-20 20-25 25+ Orderbook
The orderbook currently consists of 234 vessels with a combined
capacity of 14.5 million dwt (fig. 8). Of these orders, 65% are
Sources: Clarksons, Danish Ship Finance LR2 LR1 MR Share of fleet
scheduled to be delivered by the end of 2018. By that time, gross
fleet growth could have risen to 7.5% from September 2017 lev-
els. Yet another year of rapid fleet expansion is likely to sustain
the downward pressure on timecharter rates and secondhand If all remaining orders are delivered, gross fleet growth
will reach 6% in 2017
prices as supply outstrips underlying demand and high invento- Fleet growth will subside to a lower level after 2018
ries keep arbitrage trade subdued. Further, fleet growth will con- 15

tinue to be an issue in the Product Tanker market beyond 2018, Annual fleet growth
6%
since most of the vessels ordered in 2017 are not scheduled to be 6% 6%
10
delivered until 2019 (fig. 8). 4% 4%

Deliveries
Million dwt

ONLY 225 PRODUCT TANKERS ARE 20 YEARS OR OLDER 2% 2%


5 2%
More than 90% of obvious scrapping candidates in the Product
1%
Tanker fleet (i.e. vessels 20 years or older) are MRs, and for every
MR vessel 20 years or older in the fleet there are 1.1 vessels in 0

Scrapping
the orderbook (fig. 7 and 9). Therefore, we maintain our opinion
that the MR segment is well-positioned to withstand fleet growth
-5
despite the oversupply. Increased demolition of older vessels 2012 2013 2014 2015 2016 2017 2018 2019 2020

should mean that the MR orderbook is absorbed into the fleet


without putting much downward pressure on timecharter rates Sources: Clarksons, Danish Ship Finance LR2 LR1 MR Expected deliveries

and ship prices.


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

LR SCRAPPING UNLIKELY TO ABSORB THE ORDERBOOK


There are more than six times as many LR2s on order as there
are obvious scrapping candidates in the fleet, and 12 times as The LR orderbook is excessively large compared to the
number of available scrapping candidates in the fleet
many LR1s (fig 9). Shipowners are unlikely to scrap enough ves- The MR segment is much better-positioned in terms of the number of scrapping
candidates available
sels to ease the oversupply and we do not anticipate any let-up
12.1
in the pressure on freight rates and secondhand prices in the 12

Orderbook / Scrapping candidates (dwt)

Orderbook / Scrapping candidates (dwt)


12

short term. Further, if demolition of LRs picks up to reduce fleet


9
growth, even more pressure could be added to secondhand prices 9

Fleet renewal

Fleet renewal
due to a shortening of the vessels average operating life (fig. 10).
6
LR1 SEGMENT INCREASINGLY MARGINALISED 6.1
6
On several parameters, the LR1 segment seems to have become
increasingly marginalised in recent years. Since 2011, just 9% of 3 3
2.1
all Product Tanker orders have been for LR1s. And of the 72 Prod- 1.4 1.1
uct Tanker orders placed in 2017 only two were for LR1s. LR1 0
0.5
0
vessels have also traded at a discount to MR vessels in terms of LR2 LR1 MR

timecharter rates for most of 2017, and five-year-old LR1 vessels Orderbook / 20+ years old Orderbook / 15+ years old

are the only benchmark to have shown a price drop in 2017 (fig. Sources: Clarksons, Danish Ship Finance

2 and 3). Traders’ main consideration when chartering vessels is


flexibility versus USD per tonne of cargo. Typically, MRs offer
greater flexibility (e.g. many US ports only take MRs) and LR2s The pressure on secondhand prices stemming from
are cheaper in terms of USD per tonne. For now, some may prefer shorter operating lifetimes could be about to intensify in
LR1s due their greater flexibility than for LR2s, but as infrastruc- the LR segments
40 40
ture is upgraded to fit larger vessels, LR2s may squeeze LR1s out
*No LR2 vessels weredemolished
of the market further. Average scrapping age in 2014, 2015 & 2016

Average scrapping age


OVERSUPPLY IN THE CRUDE TANKER MARKET MAY SPILL OVER 30 28 30
Oversupply and strong fleet growth in the Crude Tanker market
26
Years

Years
during the next two years could have repercussions for the Prod-
uct Tanker market. Many Crude Tankers could be competing with 20
20 20
Product Tankers on their first East to West voyages as they are 18
16
delivered from the yards, since earnings are close to parity and
fewer crude oil cargoes are available. This could become an issue
10 10
particularly for LR2s, with new Aframax and Suezmax vessels po- 2013 2014 2016 2018e 2019e
tentially encroaching on their market. 5
201 2017 2020e

e e:LR1 MR
the estimated average scrapping age if each time a vessel
LR2*
Sources: Clarksons, Danish Ship Finance is delivered, the oldest vessel in the fleet is scrapped.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

OVERSUPPLY AND LOW DEMAND GROWTH ARE CLOUDING


THE OUTLOOK
Annual demand for petroleum products and thus for Product Tankers
is projected to grow slowly each year until ‘peak oil de- mand’. We
expect oversupply to continue to put pressure on the LR segments
and they are likely to become increasingly chal- lenged in the next
year or two. Further, we see significant down- side risk to LR
secondhand prices if demolition activity picks up and average
operating lifetimes shorten. MRs are better-posi- tioned to absorb
the orderbook through scrapping, but low de- mand growth means
that owners may have to increase demolition of older vessels. ▪
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

LPG TANKER
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

THE LPG MARKET IS STILL DOMINATED BY OVERSUPPLY.


FREIGHT RATES AND SHIP VALUES ARE NEAR ALL-TIME LOWS.
VLGC spot rate around USD 29 per tonne
THE OVERCAPACITY COULD SHRINK DURING THE NEXT 12-18 Stockpiling for the winter season has supported spot rates in September and
October
MONTHS, BUT LOW FLEET UTILISATION MAY KEEP FREIGHT
150 150
RATES LOW IN THE YEARS TO COME.
THE LPG MARKET AT A GLANCE 120 120

THERE HAS BEEN NO LET-UP IN VESSEL OVERSUPPLY FOR THE Annual average

USD per tonnes

USD per tonnes


LPG MARKET IN 2017. THE BRISK PACE OF DELIVERIES HAS 90 90

Spot rate

Spot rate
CONTINUED.
60 60
VLGC FREIGHT RATES HAVE DECLINED SINCE APRIL Apr 2017
After marginal freight rate improvements in the first four months 32

of the year, pressure started to mount on the VLGC segment 30 30

Oct 2017
(>65,000 cb.m.). In the second quarter, the northern hemi- Oct 2016 29
0 23 0
sphere’s summer season weakened LPG demand and unfavoura- 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
ble arbitrage conditions between the US and Asia led to cargo
VLGC spot rate (Middle East to Japan)
cancellations, resulting in ample vessel supply and declining Sources: Clarksons, Danish Ship Finance
freight rates (fig. 1 and 2). However, stockpiling for the northern
hemisphere’s winter season started to support rates from Sep-
The 1-year VLGC timecharter rate is stabilising at around
tember onwards. By October, the VLGC spot and timecharter rate USD 18,000 per day
were around USD 29 per tonne and USD 18,500 per day, respec- The 1-year MSG timecharter rate hit an all-time low in October
80,000 80,000
tively.

THE MGC TIMECHARTER RATE HAS HIT A NEW ALL-TIME LOW IN 2017
1-year timecharter rate

1-year timecharter rate


60,000 60,000
The MGC segment (20-45,000 cb.m.) saw market conditions de-
teriorate in the first ten months of 2017. Record-high fleet growth
USD per day

USD per day


combined with disappointing demand has made it harder for ves- 40,000 40,000

sels to secure employment at decent rates. The ammonia trade VLGC Oct 2017
18,535
has declined on the back of increased domestic production from
20,000 20,000
the US, the world’s largest importer. The low VLGC freight rates
VLGC all-time low
leave little room for MGCs to broaden their LPG trades. Since Jan- 14,663
MGC Oct 2017
14,014
uary, the MGC timecharter rate has fallen by around 15%, reach- 0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
ing a new all-time low of around USD 14,000 per day in October
VLGC MGC
(fig. 2).
Sources: Clarksons, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

POSITIVE DEVELOPMENT IN COASTAL LPG CARRIERS


Market fundamentals are improving for coastal LPG carriers
VLGC ship prices
(<5,000 cb.m.). The yearly average timecharter rate has in- VLGC prices are in or moving towards the lowest observation band
creased by around 12% in 2017. Only three newbuilding orders 120 120

have been placed in the last 12 months and the orderbook is ex-
pected to run out at the end of 2018. Note that we do not normally Highest 10 percent
90 90
include coastal LPG carriers in this report and we exclude the seg- Output range, Q2 2003 to Q2 2017

ment from the rest of the chapter.

MillionUSD
Ship price
Million USD
Ship price
64
60 60
NEWBUILDING AND SECONDHAND ACTIVITY IS INCHING UP 57

Eleven newbuilding orders were placed during the second and


Lowest 10 percent 42
third quarters of the year. A total of 14 vessels (seven VLGCs, 32
30
four MGCs and three SGCs (5-20,000 cb.m.)) have been ordered 30

in 2017 – six more than in all of 2016. Ten of the vessels are 10
7
scheduled for delivery in 2019. In the secondhand market, four 0 0
NB 5YR 10YR 15YR 20YR Scrap
VLGCs, five MGCs and nine SGCs have changed hands – five more
Median Current
than in the whole of 2016. Five sales were newbuild contracts,
Sources: Drewry, Danish Ship Finance
two were resales and the other 11 were eight years or older (av-
erage age of 15 years).
MGC ship prices
ASSET PRICES REMAIN UNDER PRESSURE All prices except the 15-year-old and scrap are at all-time lows
Despite the slight rise in newbuilding activity, the total number of 80 80

newbuilding orders is still low and prices remain under pressure.


Both VLGC and MGC newbuilding prices have declined by USD 1 Highest 10 percent
60 60
million since the start of the year. In the same period, average Output range, Q2 2003 to Q2 2017

secondhand prices for VLGC and MGC vessels have fallen by 8%


Ship price

Ship price
Million USD

Million USD
and 14%, respectively. In the MGC segment, only the 15-year- 40 42

old secondhand price and the scrap price are not at all-time lows. 40 31
percent
Lowest 10 23
SCRAPPING REMAINS LOW 20 20
17
The depressed market conditions have not yet led to any mean-
10
ingful scrapping. In the first ten months of 2017, one VLGC, three 4
MGCs and seven SGCs were scrapped, far from sufficient to coun- 0 0
NB 5YR 10YR 15YR 20YR Scrap
terbalance the 54 vessels (21 VLGCs, 24 MGCs and 9 SGCs) en-
tering the fleet during the period. Median Current
Sources: Drewry, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

OUTLOOK

MARKET FUNDAMENTALS SHOULD IMPROVE SLIGTHLY IN 2018. The orderbook is equivalent to 11% of the LPG fleet
HOWEVER, OVERSUPPLY IS NOT LIKELY TO SUBSIDE MUCH UN- Only 2% of the fleet is older than 30 years, limiting scrapping potential
16 50%
TIL 2020. DEMAND IS EXPECTED TO REMAIN RELATIVELY 44%

STRONG, ALTHOUGH DOUBLE-DIGIT GROWTH IS UNLIKELY.


Percentage of fleet >>
12 38%
Increased volumes of low-cost LPG from the US are changing the

Percentage of fleet
LPG markets. Most suppliers are defending market shares by

Million cb.m.
25%
pushing exports. This has saturated the global market with LPG, 8 25%
with the surplus being directed to Asia. The market is now at a
point where demand growth could decline to single digits due to
11% 11%
4 13%
structural barriers. Increased demand from households will con- 7% 7%
4%
tinue to be the backbone of the market, particularly in Asia. How- 2%
ever, additional demand as a result of lower LPG prices seems 0 0%
Order-
unlikely, since much of the potential has already materialised. 0-5 5-10 10-15 15-20 20-25 25-30 30+
book

THE ORDERBOOK WILL CONTINUE TO PRESSURE RATES AND VALUES VLGC LGC MGC SGC
The orderbook is equivalent to 11% of the fleet, with one-fifth Sources: Clarksons, Danish Ship Finance

scheduled for delivery before the end of the year (fig. 5 and 6).
The LPG market is already oversupplied and expected fleet growth
of 9% in 2017 will maintain the downward pressure on freight Fleet growth is expected to pick up in 2019
A yearly demolition rate of 50% is forecast for vessels older than 30 years and
rates and secondhand values. Only 2% of the fleet is older than due for special survey. Yearly contracting is constant at 1.2 times Jan-Sep 2017
contracting
30 years and it is therefore not possible for the incoming vessels
6.0 18%
to be absorbed without vessels being scrapped prematurely or 17%

laid-up. We expect freight rates and secondhand values could re-


4.5
main under pressure until 2020. Annual fleet growth
Million cb.m.

9%

Deliveries
7%
3.0
OVERSUPPLY IS NOT EXPECTED TO SUBSIDE MUCH UNTIL 2020 5% 5%
3% 4%
Demand is expected to outpace supply in 2018, only to fall short 1% 2% 2%

again in 2019. The short-lived potential we see for improved mar- 1.5

ket fundamentals over the next year may not be enough to raise
0.0
freight rates substantially due to the current oversupply. The sup-

Scrap-
ping
ply surplus may dominate the market until 2020 (fig. 6 and 7).
-1.5
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
SUPPLY AND DEMAND BALANCE WILL BE FRAGILE IN 2019
Expected scrapping from 2017 to
Orders placed in 2017 scheduled for delivery in 2019 will increase 2020 equals 2% of 2017 primo fleet

Sources: Clarksons, Danish Ship Finance VLGC LGC MGC SGC


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

2019 fleet growth from 2% to 5%. Thus, the expected market


recovery will be postponed further if additional orders are placed
with scheduled delivery in 2019 or 2020 (fig. 6 and 7). Seaborne LPG demand is expected to grow between 3-
5% per year over the next five years
120 120
SURPLUS PRODUCTION DRIVES GROWTH IN SEABORNE VOLUMES
3%
The large surplus of LPG in the Middle East and North America will Annual growth 5%
3%
5%
continue to drive exports in the seaborne market (fig. 8). The two 5%
5%
90 90
exporters should grow at roughly the same rate over the next five 13%

years. However, US LPG production could start to become unat- 13%

LPG demand

LPG demand
Milliontonnes

Milliontonnes
11%
tractive if oil prices decline significantly. This could happen if 60 7% 60

OPEC oil production increases. If US LPG production slows relative


to domestic demand prices should increase and US LPG could be-
30 30
come too expensive to export.

TRAVEL DISTANCES ARE EXPECTED TO CONTINUE TO INCREASE


Asia will continue to drive seaborne LPG demand and is expected 0 0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
to be the fastest-growing import market. This should increase
Seaborne LPG volumes
travel distances as more LPG is transported from the US to Asia.
Sources: IHS Global Insight, IHS Energy and Danish Ship Finance

BUT DOUBLE-DIGIT DEMAND GROWTH COULD BE A THING OF THE PAST


Compared with the past four years, the 3-5% forecast annual
growth could seem conservative (fig. 7). However, several Middle Eastern and North American exports and Asian
changes in the Asian markets are expected to lower the growth imports will continue to drive the LPG market
Intra-regional trade is not included
rate to single digits. In the next five-year period, Asian imports 120 120
Export market share Import growth rate
will be sensitive to a lower growth rate in the Chinese petrochem-
ical and industrial sectors. In Japan, continuing competition from
90 90
natural gas (citygas) will most likely cause LPG imports to con- -5% -11%
0%
Million tonnes

Million tonnes
LPG import
LPG export

tract. A reversal in price-sensitive demand from South Korea’s 39% -2%


-1%

60 60
petrochemical sector could cause negative growth in the country’s 38%

LPG imports. However, strong demand growth from the Asian 4%


7% 4%
7%
household sector, except for Japan, is expected to continue. The 30
49%
10% 8% 30

overall result should be relatively strong and stable, but single- 47%

digit, LPG demand growth. We will now discuss these trends in 0 0

more details. 2017 2018 2019 2020 2021 2022 2017 2018 2019 2020 2021 2022

Export Import

SLOWING GROWTH IN THE CHINESE PETROCHEMICAL SECTOR Middle East North America CIS Africa Asia Europe Latin America

For reasons of product purity, Chinese propane dehydrogenation Sources: IHS Energy, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

plants (PDH plants) prefer imported LPG over domestic. Chinese


PDH plants are therefore an important driver for Asian LPG im-
ports. If Chinese PDH capacity is run at an 85% utilisation rate, LPG consumption is expected to grow around 3% per
year until 2022
around 4,5 million tonnes of LPG in feedstock is required annually, Imports are expected to cover around 3/4 of consumption growth
50,000 0,000
which is roughly 10% of total Asian LPG imports. In 2017, Chinese 4%
5 2% 3%
PDH plants are expected to have increased utilisation rates, 40,000
-2%
40,000
driven by relatively favourable production margins. This makes CAGR consumption 2017-2022

future LPG demand growth unlikely to originate from a production 30,000 30,000

Million tonnes

Million tonnes
increase at existing plants. Demand growth driven by new PDH

LPG

LPG
20,000 20,000
plants is also expected to be limited. A conservative estimate is
that over the next four years an average of one new plant per 10,000 10,000
year is expected to come online and growth in PDH capacity dur-
ing the period could decline compared with the last four years. If 0 0

this happens, Chinese LPG imports will be affected, and the im-
-10,000 -10,000
port growth rate is likely to slow. Asia Europe Latin America Total

Consumption growth 2017-2022


FUEL SWITCHING COULD LOWER CHINESE DEMAND GROWTH Consumption growth covered by import
Sources: IHS Energy, Danish Ship Finance
At the start of 2015, the combination of increasing supply and a
freely moving market price drove the price of LPG below the reg-
ulated price of industrial natural gas in China’s south-eastern
Asian LPG consumption by sector and country
provinces. This stimulated a switch from natural gas (NG) to LPG 140 140
in heat-creating processes throughout the industrial sector. In the
two-year period from 2015 to 2016, fuel switching is estimated
Other 17%
to have doubled Chinese incremental LPG demand. Since the end 105
Other Asia 22%
105
6%
of 2016, however, rising LPG prices have caused the price differ- Industrial
South Korea
Petrochemical 15%
ential to decrease or become negative in many of the south-east-
Million tonnes

Million tonnes
9
% Japan 12%
ern provinces. A large part of the industry is expected to have
LNG

LNG
70 70

switched back to natural gas this year, and in provinces where India 18%

the price differential remains in favour of LPG added growth from Household and 62%
switching is limited, as most companies are already using LPG. 35 commercial 35

Fuel switching is therefore unlikely to generate any growth in the China 39%

near term. It is more likely that the effect of back-switching (LPG


0 0
to NG) will dominate. If this happens, LPG demand from the in- Total Asian Sector Country
dustrial sector is likely to decrease, which could also dampen consumption consumption consumption
Sources: IHS Energy, Danish Ship Finance
growth in Chinese LPG imports.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

NEW REGULATIONS SHOULD MAKE FUTURE SWITCHING LESS LIKELY remains favourable. However, if the price spread becomes unfa-
The Chinese government has issued new regulations for natural vourable, price-sensitive LPG demand is likely to decline, alt-
gas distribution in 2017. Once implemented, the regulations hough there might be some mitigating effect as the new PDH
should lower the price of industrial natural gas. This will make plants reach optimal utilisation. Therefore, it is uncertain whether
switching from natural gas to LPG less likely to happen, as LPG South Korean LPG demand will generate additional imports in the
prices will need to decline further for the price differential to be next five years.
favourable.
THE INDIAN HOUSEHOLD SECTOR CONTINUES TO GROW
JAPANESE LPG IMPORTS ARE EXPECTED TO DECLINE India is expected to overtake Japan as the world’s second-largest
Japanese LPG imports have been on a downward trajectory for LPG importer in 2017. India’s LPG imports are primarily driven by
more than a decade and the negative development is expected to demand from the household sector, and in 2016 accounted for
continue. The Japanese household sector accounts for more than 15-20% of Asia’s LPG imports. The Indian government has en-
half of the country’s LPG demand, but competition from natural couraged a switch from dirty-burning fuels, like wood and char-
gas has steadily increased. In densely populated areas (i.e. cities coal, to cleaner-burning LPG in the household sector through
and large towns), natural gas (citygas) is fulfilling an increasing fuel subsidising reforms and massive investments in
share of household demand. Potential LPG demand growth is infrastructure, which have brought LPG coverage to over 70% of
thereby being shifted from cities to rural areas, where consumers the nation. The aim is to increase coverage to over 90% within a
are more dispersed and LPG usage is usually lower. In 2016, Jap- two-year period. This could contribute to overall growth in
anese LPG imports are estimated to have accounted for around India’s LPG demand of around 9% per year in 2018 and 2019.
20% of all Asian LPG imports – roughly 10% of global LPG trade. In this period, India’s domestic LPG production is expected to
It is expected that Japanese LPG imports could decline around remain stable and de- mand growth is therefore likely to be met
10% in 2017 and the trend could continue in 2018. through increased im- ports. If these assumptions hold true,
Indian LPG imports could increase by more than 15% per year
SOUTH KOREAN IMPORT GROWTH IS UNCERTAIN
over the next two years.
In 2016, South Korean LPG imports increased by around 30%,
reaching a record high and accounting for around 10% of Asian DEMAND MAY TEMPORARILY BE BETTER FOR THE REMAINDER OF 2017
LPG imports. This growth was driven by the petrochemical sector The 2020 outlook remains challenging, since single-digit demand
and was due to a combination of new PDH capacity coming online growth is unlikely to be able to employ the incoming vessels. Still,
and price-sensitive demand. Low LPG prices relative to naphtha the short-term prospects may be better, since stockpiling for the
prices sparked increasing use of LPG as feedstock in petrochemi- winter season in the northern hemisphere may temporarily em-
cal plants. Asian plants generally allow 10-15% of feedstock to ploy an increasing share of the fleet. ▪
be LPG and plants are quick to substitute naphtha with LPG up to
this limit when prices are favourable, and demand is therefore
unlikely to increase further even if the LPG-naphtha price spread
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

LNG TANKER
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

THE LNG SEGMENT IS SLOWLY ON ITS WAY OUT OF A FREIGHT


RATE RECESSION. FLEET UTILISATION IS EXPECTED TO IM-
The 160K cb.m. spot rate has recovered almost USD
PROVE OVER THE NEXT THREE YEARS, BUT THE LONG-TERM DE- 23,000 per day since bottoming out in March 2016
MAND OUTLOOK IS DIMINISHED BY THE ADVANCES WE ARE 150,000 150,000

SEEING WITHIN RENEWABLE ENERGY.

THE LNG MARKET AT A GLANCE

THE LNG MARKET IS STILL OVERSUPPLIED, BUT FREIGHT RATES 100,000 100,000

USD per day

USD per day


WERE SUPPORTED BY STRONG DEMAND AND DELAYED NEW-
Oct 2017
BUILDING DELIVERIES IN THE FIRST NINE MONTHS OF 2017. 50,250
Jan 2017
1-year TC 160k cb.m. 47,750
The LNG shipping industry has been oversupplied since 2013, 50,000 50,000

since many liquefaction facilities have been significantly delayed.


Nonetheless, the seaborne LNG market continues to expand.
Growing global demand for natural gas combined with depleting
0 0
gas field production in Asia is increasing regional demand for sea- 2011 2012 2013 2014 2015 2016 2017

borne LNG imports. Seaborne LNG supply appears to have moved


Spot rate 160k cb.m
firmly into a phase of rapid expansion as major new liquefaction Sources: Clarksons, Danish Ship Finance

projects ramp up output, particularly in Australia and the US.


While the low oil and gas price environment continues to exert Seaborne LNG trade has increased 10% in the first nine
significant pressure on new liquefaction project sanctioning, the months of 2017
12% 12%
supply and demand balance in the LNG shipping industry is pro-
10%
jected to improve gradually in the coming years. Jan-Sep
9% 8% 9%
SPOT RATES ARE UP BY USD 16,000 PER DAY
8%
Spot rates declined from their peak at USD 143,750 per day in

Seaborne LNG trade


Seaborne LNG trade

July 2012 until they bottomed out in March 2016 at USD 27,500 6% 6%
Growth rate

Growth rate
per day. Rates have since recovered almost USD 23,000 per day
to USD 50,250 per day (October 2017), reflecting improved utili- 3% 2% 3%
sation of the fleet (fig. 1). 1%
1%
SPOT RATES SUPPORTED BY STRONG DEMAND IN 2017 0% 0%
Spot rates have been supported by strong import growth from
-1%
Asia. Strong Chinese demand and an unexpected outage of South
-3% -3%
Korean nuclear power plant capacity account for most of the in- 2011 2012 2013 2014 2015 2016 2017
Sources: IHS Energy, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

crease in LNG import volumes. Rising exports from Australia, the


US and Angola have been more than sufficient to offset declining
Newbuilding prices are at a ten-year low, and have fallen
LNG exports from Qatar, the world’s largest exporter. LNG trading around 5% since January 2017
volumes are up by approximately 10% in 2017. Output bands are for the 160k cb.m. newbuilding price

265 265
LIQUEFACTION CAPACITY CONTINUES TO GROW Output range Dec 2006 to Oct 2017
Australia has delivered 65% (46 million tonnes per annum
Highest 10 percent
(Mtpa)) of new liquefaction capacity since 2015. This has short- 240 240

ened average travel distances, since Asian imports have become

Ship price
Million USD

Million USD
Ship price
more regional. In the first nine months of 2017, global liquefac- 215
Jan 2016
199 215
tion capacity increased by 5% to 355 Mtpa. The incremental ca-
pacity was added in Australia, Malaysia and the US. However,
190 190
start-up difficulties in both Australia and Malaysia have limited Lowest 10 percent
Jul 2017
the new capacity contribution to incremental exports, although 179

US exports have extended average travel distances a little. 165 165


2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

DELAYED DELIVERIES MAY HAVE STARTED A MARKET RECOVERY


160k cb.m. NB-price 174k cb.m. NB-price
Delayed deliveries have also supported freight rates. A record Sources: Clarksons, Danish Ship Finance

high of 36 LNG carriers (LNGC >100,000 cb.m.) were expected


NEWBUILDING PRICES ARE AT A TEN-YEAR LOW
to enter the fleet in the first nine months of 2017. However, only
The LNGC orderbook peaked in November 2015 with 164 vessels
20 vessels were delivered, limiting fleet growth to 5%. This meant
on order and has now come down to 123 vessels. The newbuilding
that fleet utilisation improved, since demand growth outpaced
price for a 160,000 cb.m. vessel has declined by around USD 20
supply growth by a factor of two. million and is currently at a ten-year low (fig. 3).
CONTRACTING IS INCREASING SCRAPPING REMAINS LIMITED
Orders for new LNG vessels are closely related to the final invest- Few older LNGC vessels are being scrapped, even though 28 of
ment decisions (FID) for new liquefaction capacity. From 2011 to the 499 vessels (>100,000 cb.m.) in the fleet are older than 30
2015, an average of 44 new vessels were ordered per year, even years and could qualify as scrapping candidates (fig. 4). Of these
when freight rates started to decline from 2013. Final investment older vessels, 21 are either idle or in lay-up. Many of these older
decisions for new liquefaction capacity declined markedly in 2016 vessels are essentially waiting for an opportunity to be converted
and contracting declined to six vessels. A total of 13 LNGC new- into floating storage and regasification units (FSRU), rather than
building orders were placed during the first nine months of 2017. being scrapped. In 2017, only two vessels (100-140,000 cb.m.)
Three of the vessels are equipped with regasification units and have been demolished. Both vessels were around 40 years old
can function as floating import terminals. All but one of the 13 and were put up for sale due to fleet renewal, but no buyers were
vessels are scheduled for delivery during 2019. found.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

OUTLOOK

THE LNG SHIPPING INDUSTRY COULD BE HEADING FOR A RE-


The orderbook is equivalent to 27% of the LNG fleet
COVERY. HOWEVER, THE ADVANCES WE ARE SEEING WITHIN Incoming vessels cannot be absorbed by scrapping

RENEWABLE ENERGY MAY REDUCE THE LONG-TERM DEMAND 30 38%


40%
POTENTIAL FOR GAS. Percentage of fleet >>
24 29% 32%
The LNG shipping industry could have passed its cyclical bottom. 27%

Percentage of fleet
However, the current upswing may be over before many of the

Million cb.m.
18 24%
current newbuilding orders have yielded a proper return on in-
17%
vested capital. Still, indications are that we will see increased fleet
12 16%
utilisation in the next three years. This will be driven by Asian and
European demand, while increased US exports are expected to
6 5% 8%
4% 5%
add tonne-miles. Vessel supply could run ahead of demand for
1%
short periods, though. 0 0%
0-5 5-10 10- 15-20 20-25 25-30 30+ Order-
RISK IS BUILDING UP 15 book

The long-term outlook is weakening, as risk is building up. First, >140k cb.m. 100-140k cb.m. 60-100k cb.m. 40-60k cb.m.

the market is veering more towards spot trades and vessels are Sources: Clarksons, Danish Ship Finance

being fixed on shorter contracts. Second, the global energy land-


scape is changing. The outlook for the oil and gas industry is
highly uncertain. New sources of energy supply are being added The fleet is expected to grow at an average rate of
to the global energy mix. The role of renewable energy in the around 8% per year over the next three years
We assume a delivery ratio of 65% for the remainder of 2017, and 75% for 2018-
global energy mix seems to be increasing faster than previously 2020
10.5
anticipated. Early large-scale penetration of batteries for electric- Annual fleet growth
ity storage (e.g. via electric cars) would facilitate a shift towards 9.0
9% 9% 9%
10%

renewable energy more quickly than currently expected. In the 7.5 7%


8% 8%
Millioncb. m.

Deliveries
event of this, gas-fired power plants could eventually be turned 6.0 4% 4%
3%
into peak capacity instead of providing baseload capacity for the 4.5
0%
energy grid. This would clearly reduce long-term demand for gas.
3.0

THE ORDERBOOK IS EXPECTED TO BE DELIVERED BY 2020 1.5


The orderbook currently represents 27% of the fleet and is ex-
0.0

Scrap

ping
pected to be delivered within the next three years. Most of the
-1.5

-
vessels on order are linked to long-term contracts, but some 10- 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
15% have been ordered without long-term import contracts. The >140k cb.m. 100-140k cb.m. Expected scrapping from 2017
to
scrapping potential is limited, as only 5% of the fleet is older than 60-100k cb.m. 40-60k cb.m.
Sources: Clarksons, Danish Ship Finance fleet
2020 equals 2% of 2017 primo
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

30 years. The fleet’s ability to absorb surplus capacity through


scrapping is therefore limited (fig. 4).
Demand is expected to grow at an average rate of
FREIGHT RATES ARE EXPECTED TO INCREASE around 7% per year over the next three years
Strong demand and longer travel distances are expected to result Asia is expected to drive demand and Europe should be the end destination for
any surplus LNG volumes
in increasing freight rates during the next three years. The fleet 400 400
3%
is set to expand at an average rate of 8% per year over the next 12%
6%
Annual growth
three years (fig. 5), while demand is expected to increase by 300 7% 300
8%
around 7% per year (fig. 6). This will not, per se, improve the 8% -1% 1% 1% 2%

Milliontonnes

Milliontonnes
LNG import

LNG import
balance between supply and demand but longer travel distances 200 200
(i.e. US exports to Asia) should reduce vessel availability and
hence improve the balance between supply and demand.
100 100

THE BALANCE BETWEEN SUPPLY AND DEMAND WILL BE DELICATE


The balance between supply and demand will be highly sensitive 0 0

to short-term fluctuations in vessel availability. The orderbook is 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

more front-loaded than we illustrate in fig. 5, since we assume Japan South Korea China India Other Asia Europe Latin America Middle East Other

that a number of orders will be postponed from one year to the Sources: IHS Energy, Danish Ship Finance

next. If that is not the case, freight rates may experience periods
of decline until demand absorbs the surplus capacity.

NEW LIQUEFACTION CAPACITY SHOULD INCREASE TRAVEL DISTANCES Growth in liquefaction capacity will be driven by the US,
Liquefaction capacity is set to increase by 25% to 451 million Australia and Russia
New US capacity should drive an expansion in travel distances
tonnes (Mt) over the next three years (fig. 7). Growth will be
500 500
driven by the US, Australia and Russia with a combined capacity 11% 0.3%

increase of 83 Mt. The large expansion in liquefaction capacity is 12%


8%
expected to change trading patterns. Over half (50 Mt) of the in- 375 375
Liquefaction capacity

Liquefaction capacity
10%
Annual growth
cremental capacity is expected to be added in the US (Gulf of 6%
4%
Million tonnes

Million tonnes
3% 2% 2%
Mexico/Atlantic Basin). This is the basis for the expected increase 250 250
in travel distances since US exports are expected to increase in-
ter-regional trade, particularly between the US and Asia.
125 125
ASIA AND EUROPE ARE EXPECTED TO DRIVE DEMAND
Asia is the end destination for almost three-quarters of all sea-
borne LNG volumes. The region is expected to increase imports 0 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
by an average of around 7% per year over the next three years and
Qatar Asia-Pacific Africa Australia US Russia Other
should account for almost half of all growth in the LNG market. Sources: IHS Energy, Danish Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Japan, South Korea, China and India are the largest importers in
the Asian region and comprise 60% of the total LNG market. Ja-
pan and South Korea have limited domestic production and have Expected 2017 gas consumption by sector and region
3,000 3,000
no pipeline supply that could limit their LNG import volumes. Eu-
rope is expected to see a massive increase in LNG imports, driven
Africa
by falling domestic production and a projected decline in pipeline LNG
Other Latin America

supply from North Africa. 2,000


Transportation Middle East
2,000

Gas consumption

Gas consumption
Commercial

Million tonnes
Million tonnes
Europe
JAPANESE DEMAND IS EXPECTED TO DECLINE Household

Japan’s LNG imports reached a record high in 2014, as the Fuku- Russia
shima disaster increased LNG demand in the power sector. Japan Industrial
1,000 1,000
is planning a gradual restart of nuclear power, although the time- Asia-Pacific

scale for this is uncertain. The government’s target is that nuclear


Electricity
power will account for around 20% of electricity generation by generatio
North America
n
2020, up from around 1% today. This plan is already behind
0 0
schedule. If nuclear power accounts for around 12% of electricity Total Sector Regional
consumption consumption consumption
generation by 2020, this would result in an average decline in
Sources: IHS Energy, Danish Ship Finance
LNG imports of 2% per year (fig. 6). Another factor making LNG
imports uncertain is the rapid deployment of renewable energy.
These demand uncertainties increase the need for flexibility in
Japanese LNG imports.
Forecast regional gas prices
IMPORT GROWTH SHOULD RETURN TO SOUTH KOREA Europe is a relatively low-price market due to pipeline imports from Russia,
South Korean LNG imports have been declining since 2013, when Norway and North Africa
9 9
the country’s electricity generation shifted towards nuclear power
and coal due to favourable prices. Today, this trend is reversing.
(Million British thermal units)

(Million British thermal units)


The country has signalled that it will halt new building of nuclear
facilities and will replace coal with gas and renewable energy. This 6 6
USD per MMBtu

USD per MMBtu


should result in an average increase in LNG imports of around 1%
per year over the next three years (fig. 6).
3 3
CHINA AND INDIA WILL DRIVE ASIAN DEMAND GROWTH
China and India are expected to increase LNG imports by average
rates of 13% and 3% per year, respectively, over the next three
years. The rising imports will be driven by increased use of LNG 0 0
2016 2017 2019 2020
in electricity generation and to some extent household, commer- 201
US (Henry Hub) 8 Asia avg. spot Asia avg. term
cial and industrial sector demand. Another equally important de- Sources: IHS Energy, Danish Ship Finance
Europe (UK NBP)
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

mand driver is the group of other Asian countries (fig. 6). This
includes Indonesia, Malaysia, Thailand, Singapore, and Pakistan.
For most of these countries, demand will be driven by declining LNG is expected to increase its share of European
gas supply by 2020
domestic production or falling pipeline imports. These countries
400 400
are expected to add as much incremental demand as China and
India during the period.

SURPLUS LNG VOLUMES ARE EXPECTED TO BE DIRECTED TO EUROPE 300 300

European gas supply


European gas supply
Europe is expected to be the end destination for surplus LNG not

Million tonnes
Million tonnes
absorbed by higher-priced markets (fig. 9). Even though Euro-
pean gas demand is expected to increase by only around 2% until 200 200

2020, LNG imports are expected to increase by around 17% per


year in the period (fig. 10). The increasing LNG imports are ex-
pected to replace declining domestic production and a projected 100 100

reduction in pipeline supply from North Africa. However, to


achieve the impressive growth rate LNG must outcompete Rus-
0 0
sian pipeline gas and this will depend on Russia’s future gas strat-
2017 2020
egy. Russia can either maximise prices or defend market share. Pipeline Imports Domestic production LNG
In our scenario (fig. 10) Russia maximises prices, resulting in a Sources: IHS Energy, Danish Ship Finance
Imports

higher market share for LNG. out. First, the decline in competitiveness of LNG relative to coal
RENEWABLE ENERGY MAY REDUCE THE LONG-TERM OUTLOOK (Europe) and shale gas (North America) has freed up volumes to
The long-term demand outlook is being shaped by the global be re-directed elsewhere. Second, the growth in LNG contracts
economy’s transition towards a less fossil fuel-intensive growth with destination flexibility has facilitated diversions to markets
model and by gains in energy efficiency. This is a long-term play, with higher prices (e.g. Asia). Third, the lower initial capital cost
structural by design and irreversible when new technologies (e.g. of ‘Floating Storage and Regassification Units’ (FSRUs) compared
solar PV, wind or electric vehicles) break the price parity with ex- to onshore regasification has allowed new countries to enter the
isting technologies. The penetration rate for new technologies is LNG market. Fourth, the large growth of the LNG fleet, especially
highly uncertain, however. vessels ordered without a long-term charter, has allowed low-cost
LNG imports. The LNG market is expected to continue to move
*** towards more destination flexibility and more short- and medium-
This is the first edition of our LNG Tanker report. The market is term contracts. The expiration of older contracts will most likely
relatively small (approximately 500 vessels) and around two reinforce this trend. The impact of these changes on the ships’
thirds of the volumes are moved on long-term contracts. But the future spot and charter dynamics is more uncertain to us. We do
underlying dynamics of the industry are changing. The volume of acknowledge that prices are only settled among available candi-
LNG cargo traded without a long-term contract has more than dates, but whether that will shelter timecharter rates from poten-
doubled from the amount traded a decade ago. Four factors stand tial pockets of supply surplus remains to be seen. ▪
Departement Teknik Sistem Perkapalan ITS

SHIP FINANCING IN MALAYSIA PT. MUARA JAYA

PRESENTATION OBJECTIVES

 To provide an overview of ship financing


(SF) in Malaysia.
 To highlight various financing sources for
ship financing in Malaysia
 To identify gaps between borrowers and
lenders in the Malaysian ship financing
scene.
 To recommend ways to make Malaysian
SF more vibrant.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

PRESENTATION OUTLINE

 Features of shipping industry


State of play in SF in Malaysia
Recent developments Lenders’
perspectives.
 Borrowers’ perspectives
 Bridging the gap between borrowers and
lenders
 Towards a more dynamic SF scenario in
Malaysia
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

MALAYSIAN SHIPPING INDUSTRY

 Consists of domestic / coastal &


international trade.
 Huge demand for shipping services Ships
carry 95% of nation’s trade.
 MISC dominates energy carriage.
 Cabotage Policy protects local players.
 Few local players in int’l liner trade.
 90% of nation’s maritime trade carried by
foreign shipping lines.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

MALAYSIAN SHIPPING INDUSTRY

 More than 100 shipping lines (foreign


and local) calling at local ports.
 Local ports are linked to around 200
ports worldwide.
 Foreign lines are represented by locally
incorporated ship agencies and owner’s
representatives.
 Most local lines are MASA members.
 Most foreign lines are ISOA members.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

STATE OF PLAY OF MALAYSIAN SF

 Few local financial institutions (FIs)


involved in SF in a big way.
 Local funds not adequate for shipping
sector.
 Asian financial crisis impact looms large.
 Many shipping companies say banks are not
very supportive of the industry.
 Banks say internal / external controls, lack of
exposure to shipping hamper lending.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

RECENT DEVELOPMENTS

 More local and foreign financial


institutions (FIs) dabbling in SF.
 Introduction of shipping trust by a local
player to be listed on Bursa Malaysia.
 Cross-over of financing structures into SF
from other sectors i.e. sale and leaseback
in aviation.
 Higher capex requirement due to higher
vessel prices.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

RECENT DEVELOPMENTS

 Frenzy of activities in shipping industry to


meet IMO deadline for double-hull tankers.
 More local shipping companies getting
listed on Bursa Malaysia.
 More orders for OSV by local players due
to boom in deepwater activities.
 Recognition of shipyard activities as a
strategic sector in Third Industrial.
 Masterplan 2006-2020.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

SOURCES OF FINANCING
 Bank lending
 Leasing
 Government funding
 Equity
 financing
 Bond
 financing
 Venture capital
 Offshore financing
 Islamic financing
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

BANK LENDING

 Single tranche term loans by


commercial banks most common.
 Loans either syndicated or bilateral.
 Tenure rarely exceeds 10 years for
newbuildings, 15 years for secondhand
vessels, shorter terms for ships with limited
useful lives.
 Secondhand ships easier to finance.
 Usually secured by a mix of mortgage,
covenants, guarantees & assignments.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

LEASING

 Not widely used but gaining popularity in corporate


finance structures.

 Emergence of Islamic SF leasing structures based on


Al-Ijarah concept.

 Advantages : Off-balance sheet treatment,


capital cost reduction.

 Disadvantages : long tenures, complex structures, tax


liabilities.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

GOVERNMENT FUNDING

 RM1.3 bil. Shipping Fund launched in


1992, plus another RM1 bil. in 2000.
 Funding via development financial
institutions i.e. Bank Pembangunan,
Bank Rakyat, BSN, Exim Bank.
 Operating, construction, scrap-and-
build subsidies
 Tax and depreciation allowances
 Customs duties and levies.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

EQUITY FINANCING

The biggest shipping companies listed on Bursa


Malaysia i.e. MISC, Halim Mazmin, PDZ, MMM,
Maybulk,
Global Carriers, Nepline, Alam Maritim, Coastal
Contracts.
Advantages : high profile, easy to raise financing
from shareholders once listed.
 Disadvantages : high listing fees, subject to
takeover, strict disclosure.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

BOND FINANCING

 Conventional and Islamic bonds being raised


to repay borrowings, finance vessel purchase
etc.
 Allow companies to raise alternative
financing, improve cashflow.
 Ease of covenants compared to bank loans,
but coupon rates higher than interest rates.
 More issuance of hybrid bonds i.e. zero
coupon, equity-linked bonds.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

VENTURE CAPITAL

Global Maritime Venture set up in


1994 to provide venture capital
fund to local shipping companies.
Government provided RM500 mil.
Shipping Venture Fund from the
RM1.3 bil. Shipping Fund.
Private venture capital firms
also give out small amount of
SF loans.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

OFFSHORE FINANCING

Labuan IOFC growing in popularity.


Offshore banks provide mostly debt financing
i.e. term loan, syndicated loan, bridging loan,
project loan, letter of credit, working capital.
They also provide equity financing (in
US$), sponsor / underwrite debt and equity
instruments.
Cheaper, less stringent process and
requirements compared to bank loans.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

ISLAMIC FINANCING

 Sukuk / Islamic securities schemes.


 Islamic bond issues i.e. MISC’s Murabahah
Medium Term Notes (MTN) issuance in 2006 and
Commercial Papers / MTN in 2007.
 Amanah Raya – Asian Finance Bank’s Islamic
Marine Fund.
 Ijara / leasing schemes.
 Funding by Islamic Development Bank.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

LENDERS’ PERSPECTIVES

More FIs have shipping on their radar and setting


up dedicated units.

Shipping is not a priority sector for most


Malaysian FIs.

Some FIs are stigmatized by past


experience in SF.

To FIs, clients’ creditworthiness, earnings


potential and repayment ability are paramount in
determining financing of shipping deals.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

LENDERS’ PERSPECTIVES

 Challenges for FIs : cost control, revenue


diversification, improvement of asset quality,
high earnings margins.

 Internal and external regulations restrict


participation of local FIs in SF.

 Some FIs feel certain booming shipping


sectors like O&G, chemical worth a serious
look.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

LENDING CONSIDERATIONS

 Financial standing and track record


Ability to service debt
 Single customer limit
Flag of
 convenience Collateral
 guarantees Type of
registry
 Industry development
Risks
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

RISKS INVOLVED
 Credit / financial
risk
 Market / business
risk
 Timing risk
 Sovereign risk
 Security risk
 Residual value risk
 Legal risk
 Operating risk
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

RISK MITIGATION

 Ship mortgage
 Assignments – earnings /
insurances / contracts / proceeds
 Guarantee / indemnity
 Pledging of assets, deposits,
shares
 Debenture
 Covenants
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

METHODS OF APPRAISAL

 Net present value (NPV)


 Internal rate of return (IRR)
 Cashflow / discounted
 cashflow Discounting
methods :
- Annual capital charge
- Growth rate of return
 Discounted profit ratio
 Payback period
 Asset valuation
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

BORROWERS’ PERSPECTIVES
 Shipping companies generally perceive
local FIs as lukewarm towards shipping.
 Small shipping companies say local
banks’ demands are too stringent.
 A chicken-egg situation persists as
banks will only lend money to solid
companies.
 Shipping companies feel the current ‘it
takes money to borrow money’ situation
is not helpful to boost SF.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

BORROWING CONSIDERATIONS
 Demand and supply elasticity
 Fleet upgrading / expansion
 Maritime trade pattern
 Opportunity cost of investments
 Shared ownership of vessels
 Rate of scrapping of vessels
 Legal framework
 Availability of competitive financing
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

MALAYSIAN SHIPPING COMPANIES’


‘WISH LIST’
 More focus by FIs on customer
needs
 Long, flexible tenure
 Competitive interest rates
 Speedy processing of applications
 Greater financing flexibility
 In-house shipping industry experts
 More diversified financing products
 More liquidity in the market
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

SUMMARY OF MALAYSIAN SF

Shipping companies want greater support


from FIs and want them to improve
knowledge on shipping.
Malaysia’s SF scene needs to go beyond
‘plain vanilla’ financing.
Some FIs are cautious but feel the sector
currently warrants attention.
Banks will lend to deserving applicants.
Past experience counts!
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

BRIDGING THE GAP BETWEEN


BORROWERS AND LENDERS

 FIs need to boost understanding of


shipping to assess risk / price deals
better.
 Shipping companies must strive to put
up strong case to qualify for financing.
 Alter ‘high risk, low return’ perception of
shipping but focus on partnership.
 Value strategic importance of shipping.
 Be more creative, daring in doing deals!
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

TOWARDS A MORE DYNAMIC SF


SCENARIO IN MALAYSIA

 Consolidate shipping sector.


 FIs must change views about SF.
 Make available alternative financing.
 Emulate best practices of leading SF
nations.
 Enhance ancillary services i.e legal,
insurance, consultancy etc.
 Put in place strategy to boost local SF.
Departement Teknik Sistem Perkapalan ITS

Ship Finance in Asia PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Today’s
Topics
1. The Growth of Ship Finance in Asia
2. What caused Asian Ship Finance to Expand?
3. The Rise of Export Credit Finance
4. Leasing: the next big thing in Asian Ship Finance
5. Some words of Warning
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

1. The Growth of Ship Finance in Asia


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Typically Asian banks supported local


owners. This is still predominant in
Singapore, Japan and Taiwan and
common in China. Terms offered
cannot be matched by international
shipping finance.

But Asian banks were not active on the


global scene - until after 2009.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

2. What caused Asian Ship Finance to Expand?


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

The Shipping
Market Cycle Ship
prices drop
Excess of shipbuilding Over-ordering by
capacity speculators/bargain hunters

Yards reopened or new


Over tonnaging
yards created

Demand for new-buildings Freight


increases rates drop

Demand for new-buildings


Freight rates recover
drops

Demolition
Fleet shrinks
increases

Source: DVB
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

A normal shipping cycle has one or two


high years and six or seven year lows.

But the 2003/4 – 2007/8 boom


cycle was different.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Prolonged Shipping Cycle led to Irrational


Exuberance and Escalated Asset Values

The 2003 to 2008 shipping cycle had a peak of four years for the
following reasons:

1. Inadequate shipbuilding capacity .

•The upswing started with too little yard capacity needed for
normal fleet renewal process

•Then the LNG wave came where people started to build ships for
projects and the offshore boom came

• The yards found themselves lacking capacity a longer period


of time

2.The rise of China after entry to the WTO in 2001 and massive
investment in infrastruture in the years to follow3

3. Abundance of liquidity in the financial markets


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Prolonged Shipping Cycle led to Irrational


Exuberance and Escalated Asset Values

But over the four year boom

Global shipyard capacity increased tremendously,


especially in China

The fleet of ships in all sectors more than doubled


because of low scrapping and massive newbuilding

Huge orders were placed even in 2009

Owners and bankers alike were behaving as if the


good times were here forever.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

And then the Global Financial Crisis Struck…

(unavailability of trade finance accelerated the shipping crisis)


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Financial Institutions failed or were bailed out by governments

Source: BBC
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Material Contraction in
Shipping Portfolio of Selected European Banks Ship lending capacity
among major shipping
banks
70

60 Distressed exposures to
non-core names and
50
excessive lending at the
40 2008 cycle peak caused a
2009 retreat to narrower
30
target market and
20 greater focus on
existing clients
10

0 Some prominent
shipping banks were
nationalized and some
faced over-exposure to
unique ship finance
conditions in home
markets
Source: Marine Money
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Those banks which WERE lending


increased pricing and severely tightened
covenants
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

And the Shipping


Markets
Plunged into Crisis

Unprecedented collapses in both shipping and


financial markets
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Pain Across The Entire Shipping Value Chain


Key Shipping Value Chain Participants

Asset Financiers Asset Owners Asset Operators


 Overextended balance sheets  Material decline in asset values  Rapidly deteriorating macro-
 Challenging overall liquidity – Breach of loan-to–value economic environment
situation covenants – Pronounced decline in
 Loans secured through  Declining rate environment demand
insufficient collaterals – Potential charter  Potential long-term contractual
– Loan-to-value covenants renegotiations commitment to use assets
inadequate  Substantial orderbook – High cost assets in
 Challenging operating declining rate environment
– Material outstanding puts margins under
environment is enhancing the finance commitments
execution risk of repossessions pressure
 New funding, if at all possible,  New funding, if at all possible,
prohibitively expensive prohibitively expensive

Source: Citibank
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Who was to become the white


knight?
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

3. The Rise of Export Credit Finance


China Exim. Sinosure. JBIC. NEXI. KEXIM. KEIC
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Q: What is an Export Finance


Agency?
A: Export Credit Agencies (ECAs) are public
institutions that facilitate financing for home
country exporters and investors doing
business overseas, particularly in developing
countries and emerging market economies.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Advantages of ECAs

• Availability – When commercial financing is limited/not available

•Long-term – The total loan horizons are longer than those


available on a purely commercial basis

• High loan amounts – can be 70/80% of value

•As the Seller’s Credit is a loan, the Seller may even receive interest
accrued on the principal

Source: Marine Money, HSBC


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Types of ECA Products

•Buyer’s Credit – A financial arrangement in which a bank or an export credit


agency extends a loan directly to a foreign buyer in the importing country to pay
for the purchase of goods and services from the exporting country

•Seller’s Credit – A financial arrangement in which the seller provides credit to the
buyer in respect of part of the purchase price of the good

•Export Credit Insurance – An insurance policy provided by an ECA that protects


an exporter of products and services against the risk of non-payment by a foreign
buyer

Source: Marine Money, HSBC


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Typical Buyer’s
Credit Structure
Shipowner
Refund Guarantor

Shipbuilder
Buyer’s Credit
Classification Export Credit
SPV Agency
Society
Loan
Repayment/
Management Mortgage
Company

Insurance Bareboat Charter/


Company Time Charter Charter Hire

Charterer
Source: Marine Money
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Typical Buyer’s Credit ECA financing


Structure - II provides credit
enhancement to
Shipowner lenders, facilitating
Refund Guarantor greater appetite,
longer tenors and
cheaper pricing than
wholly commercial
Shipbuilder sources of funding
Buyer’s Credit
Classification Commercial Bank
SPV
Society Loan
Repayment/ Buyer’s Credit
Mortgage Insurance
Management
Company Export Credit
Agency
Insurance Bareboat Charter/
Company Time Charter Charter Hire

Charterer
Source: Marine Money
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Important ECAs in Shipbuilding Nations in


Asia
China:
The Export-Import Bank of China (China Eximbank)
China Export & Credit Insurance Corporation (Sino-sure)
China Development Bank (CDB)
Japan:
Japan Bank for International Cooperation (JBIC)
Nippon Export and Investment Insurance (NEXI)
Korea:
The Export-Import Bank of Korea (KEXIM)
Korea Trade Insurance Corporation (K-sure)
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

The Rise of Export Credit Finance

China Exim Flexes Financial Muscle


•Since its establishment in 1994, China Exim Bank has played an instrumental role in supporting China’s maritime
industry, having granted shipping/shipbuilding related loans of over RMB 116.8 billion (USD 17.1 billion) in the
domestic currency and USD 8.5 billion in greenback at the end of 2009

• Financed over 3,700 Chinese built vessels of over 120 million dwt

• Adopts a two-pronged strategy to support Chinese Shipbuilders by:


a) Encouraging foreign ship owners to build ships in China through attractive financing packages.
b) Providing shipbuilders bank guarantees required in their business which include refund guarantees, tender
bonds, performance bonds, payment guarantees and seller’s credit
• The objective is to nurture and provide financial support to a selected group of Chinese shipbuilders
including state-owned CSSC and CSIC, as well as privately held Jiangsu Rongsheng Heavy Industries, Sino-Pacific
Shipbuilding and Jiangsu New Century
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

China Exim Takes Bold Steps to Help


Greek and Italian Owners

In October 2010 during his visit to Athens Chinese Premier Wen Jiabao gave his
backing to Greek shipowners with the establishment of a massive USD 5 billion
shipping fund to facilitate the sale of Chinese built ships to Greek shipping
companies. This amount is reportedly said to have doubled to USD 10 billion

In the same month, China Exim signed an agreement with Confitarma (the Italian
Shipowner’s Association) to promote the availability of Chinese finance for Italian
shipowners placing orders at Chinese shipyards

Source: Marine Money, Lloyd’s List


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Some CEXIM transactions


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

More CEXIM transactions


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

The Export-Import Bank of Korea (Korea Eximbank) is an official


export credit agency providing comprehensive export credit and
guarantee programs to support Korean enterprises in conducting
overseas business. Established in 1976, the bank actively supports
Korea's export-led economy and facilitated economic cooperation
with foreign countries. Korea Eximbank's primary services include
export loans, trade finance, and guarantee programs structured to
meet the needs of clients in a direct effort to both complement and
strengthen the clients' competitiveness in global markets

SHIPPING LOANS AND FACILITIES TOTAL OVER


USD 30 BILLION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

KEXIM’s ship financing feature

Record of KEXIM’ S/F Credit Commitment 2008 Buyer's Credit

Bn($) Bn($)
3.5 25%
35.0
3.0bn 75%
30.0 3.0
25.0 2.5 30%
20.0 2.0
15.0
14.0bn 1.5 Builder's Credit
10.0 1.0 70%
5.0 0.5 30%
- - 70%
2007 2008 2009 2010 2011 2012 2013(e)

Total Buyer's Credit Offshore Ship

Record of KEXIM’ S/F Credit Balance 2012 Buyer's Credit


Bn($) Bn($)
50.0 12.0 28%
10.6bn
10.0 72%
40.0
8.0
30.0 30.3bn 6.0
48% 52% Builder's Credit
20.0 4.0
10.0 2.0
30%
- - 70%
2007 2008 2009 2010 2011 2012 2013(e)

Total Buyer's Credit Offshore Ship


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Filling gap of liquidity


 Deals going bigger
Contract Price Deal Value*
Vessel Type
(1 vessel, million) (million)

Bulker ~ 50 A.P. Moller Ichthys LNG


18 Containers CPF, FPSO
Container ~ 150 300 ~ 800 3,663mil 4,590mil
Tanker ~ 100
LNGC ~ 200
Drillship 500 ~ 800 400 ~ …???
FPSO/CPF… 600 ~ 2000
Seadrill 3 Ocean Rig
($mil)
Drillships 3 Drillships
($mil)
1,500 600 1,573mil 1,864mil
1,204

1,000 400
402

500 200

- - BGT Golar LNG


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
6 LNGCs 2 FSRUs, 6 LNGCs
Contract price (by project) KEXIM's commitment (by project) 1,337mil 1,730mil
* KEXIM’s previous deals
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

4. Leasing
4. Leasing
The next big thing in Asian Ship Finance
The next big thing in Asian Ship Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Q: What is Leasing?
A: Leasing is a process by which a firm can
obtain the use of a certain fixed assets for
which it must pay a series of contractual,
periodic, tax deductible payments.

Source: Wikipedia
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Typical Leasing
Structure

Equity Loan
Investment Lessor Lender
Equity Investors Loan
(Shipowner)
Repayment/
Mortgage

Lease Leasing
Income

Lessee
Source: Marine Money
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

When Banks Become Ship


Owners…
• Chinese banks moves into owning vessels through the establishment of ship leasing divisions

ICBC Leasing Bank of Communications Financial Leasing


Minsheng Financial Leasing China Development Bank (“CDB”) Leasing
China Construction Bank (“CCB”) Leasing
Agricultural Bank of China China Everbright Bank

And more to come, as other Chinese banks are applying to set up leasing their own subsidiaries

•State-owned chemical group Sinochem has its own ship-leasing division, that targets small and
medium size Chinese shipowners – International Far Eastern Leasing

•Standard Chartered Bank has a ship leasing division to provide clients bareboat charters, on long term
lease tenors of 5 to 12 years
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Ship Leasing in China


• In 2007 the China Banking Regulatory Commission (“CBRC”) launched its pilot project
and granted the first batch of twelve licenses for financial institutions to venture into
leasing – including Industrial and Commercial Bank of China (“ICBC”), Bank of
Construction, Bank of Communications, Minsheng Bank, China Development Bank and
China Merchants Bank

• Among the real pioneers was ICBC Leasing which has become a powerhouse since the
landmark RMB 5.3 billion (USD 780 million) leasing facility for Chinese state owned power
generation enterprise China Huaneng for 12 supramax dry bulkers constructed by China
State Shipbuilding Corp (CSSC) and other yards

• In 2013 ICBC Leasing supported a excess USD1 billion deal sale and leaseback deal with
French offshore group Bourbon
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Chinese leasing companies are well supported


by local banks who have
• Liquidity
• Encouragement from central authorities
(Government) to support shipping
• Leasing expertise
• Ability to do massive deals – even excess $1 billion
• But have not YET attracted many foreign clients
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Finally,

5. Some words of warning


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Traditional shipping banks

• Are mending their balance sheets and are lending again

• For top clients competition amongst the banks is fierce with


pricing down 100 bps in 12 months and covenants weakening

• This may price the ECAs out of the market or render the ECAs
less desirable in a transaction

Source: Marine Money, HSBC


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

The Asian banks have had their own distress


situations – even the ECAs

BLT TMT
Torm STX
Korea Lines Nanjing Tankers.

Source: Marine Money, HSBC


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Final Point
Will Asian banks (ECA and non-ECA) continue to
play the role they have played in the past five
years in shipping?
Or will the European and US shipping banks
take the lion’s share once again?

Will leasing be the next big thing in ship finance


in Asia?
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Departement Teknik Sistem Perkapalan ITS

Ship Finance in Germany PT. MUARA JAYA

1. Introduction

2. Status Quo of German Ship Financing Banks

3. Case Studies

4. Q&A
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

The German Ship Financing Banks - Status Quo

USD 450-500 Billion 2015


2012
Global Ship Finance
Industry Volume
30% 20%

70% 80%

■ Germany
Other… ■Other…
Germany
■ Other Nations ■ Other Nations

German Banks’ 2012


Shipping Exposure
35
29
30
24
25
18,5
18 18
20
in € billion

14
15
12
7 8,5
10 6,5
5

0
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

The German Ship Financing Banks - Status Quo

Development in the German merchant


fleet Vessels with more than 1,000 GT

4000

3500

3000

2500

2000

1500

1000

500

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Vessels total

Source: Federal Maritime and Hydrographic Agency (BSH)


/ German Shipowners‘Association (VDR)
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

The German Ship Financing Banks - Status Quo

Containership fleet by owner’s nationality

4.796

3.640

1.651
1.410
1.223 1.260
950 960 1.004
710
551

Greece
France

Taiwan

Japan

China

Germany
Denmark

Others
Singapore
South Korea

Switzerland

Source: IHS, www.ihs.com / German Shipowners‘ Association (VDR)


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

The German Ship Financing Banks - Status Quo


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Typical Structures – 1. Asset Deal

1
Asset Deal

+ Well known, standardized process


and documentation.

+ Huge sale and purchase market.

+ New Owner is incorporated by buyer (no DD).

+ Vessel will be sold free from any mortgages and


other encumbrances other than maritime liens
attached to the vessel.

- All existing contracts (e.g. management contracts,


bareboat and time charter contracts, insurance
policies etc.) must be (re-)entered into.

- New registration of vessel and mortgages required.

- Maritime liens remain attached to the vessel (as


always).
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Typical Structures – 2. Share Deal

2
Share Deal

+ Quick, lean and inexpensive process.

+ No transfer of vessel required, no re-registration of


vessel.

+ Vessel continues in operation.

+ No new oil major vetting and approval (tankers only).

+ All existing contracts (e.g. management contracts,


bareboat and time charter contracts, insurance
policies etc.) remain in place.

- No automatic cleaning of vessel from other liens and


debts (e.g. trade creditors).

- Assumption of all existing debt of shipowner (DD of


shipowner required).
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Typical Structures – 3. Enforcement


3
Enforcemen
t
Consensual Sale Ordinary Enforcement Quick Enforcement Insolvency Plan

+ Quick and lean process. + Credit bid sometimes + Credit bid sometimes + As largest creditors, lender
possible (depending on possible. can effectively control
+ Only the usual costs and jurisdiction). process.
fees for the deletion and + Transfer of vessel free from
re-registration of the vessel + Transfer of vessel free from all liens and other
+ Discharge of junior ranking
and mortgage and the all liens and other encumbrances. mortgages through
legal fees are payable. encumbrances. insolvency plan.
+ Relatively quick process (1-4
+ Purchase Price and credit - Costs and fees. weeks). + Continuation of vessel‘s
claim could be set off operation.
against each other. - Temporary suspension of + Costs and fees much less
vessel’s operation (lay up). than ordinary auction due to - Costs and fees.
- Requires shareholders’ faster process.
approval; - New oil major vetting and - Time required.
 nuisance fee? approval in case of tankers. - (Short) suspension of vessel’s
operation (lay up). New oil major vetting and
-
- No automatic cleaning of - In case of fleet of vessels: approval in case of tankers.
vessel from other liens and Coordinating of auctions at - New oil major vetting and
debts (e.g. trade creditors). different ports may be approval in case of tankers. No automatic cleaning of
-
difficult. Vessels should be vessel from other liens and
- Probably new oil major cargo free. - Quick enforcement debts (e.g. trade creditors).
vetting and approval in procedures only available at
case of tankers. selected ports (e.g. Malta, - Participation of junior
Gibraltar, Rotterdam) mortgagee could turn out to
be very difficult.
- In case of fleet of vessels:
Coordinating of auctions at
different ports may be difficult.
Vessels should be cargo free.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Comparison of estimated time required and costs (w/orefinancing)

Insolvency Plan
Share Deal Consensual Sale Enforcement
Proceedings

Ordinary
Estimated Quick
auct.:
3-6 weeks 3-8 weeks auction: > 6 months
Timeframe* 1-4 weeks
2-6
months+

USD
USD 50,000 for
100,000, Same as USD 100,000-200,000
deletion of old
Estimated + for quick for court and
mortgage,
USD 10,000 sometimes auction administrators
Costs** change of ownership,
1-2 % of + min. 0.5 + USD 50,000
registration of new
FMV million registration fees
mortgage

Estimated
USD 10,000 - 30,000 USD 10,000 - 30,000 USD 25,000 - 250,000 USD 75,000 - 100,000
Legal Fees

* Per vessel, but several vessels can be dealt with at the same time.
** Per vessel; depending on the vessel‘s purchase price/market value.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Time required for enforced sales

Time
Ordinary Enforcement Quick Enforcement
required*
Depending on location
Sailing the vessel to suitable port, Sailing the vessel to suitable port,
of vessel and cargo
on board.
preferably without cargo. preferably without cargo.

Upon arrival at port. Arresting the vessel. Arresting the vessel.

1-3 days. Appraisal of the vessel. Appraisal of the vessel.

Informing all known creditors of the Informing all known creditors of the
One week.
vessel and its owner. vessel and its owner.

Publishing a notice of the vessel’s


1-3 weeks after arrest. Sale of the vessel through the court.
auction in shipping gazettes.

Distributing the sale proceeds in


1-3 weeks after sale.
accordance with the local law.

Publication 2-3
months prior to Auctioning of the vessel.
auction.

1-3 months after Distributing the auction proceeds in


auction. accordance with the local law.

* Estimates.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Ehlermann Rindfleisch Gadow

Brief introduction of the Firm:

Hamburg Office The primary business of EHLERMANN RINDFLEISCH GADOW is the provision of legal
Ballindamm 26 advice and assistance on all kinds of maritime related transactions.
20095 Hamburg
From its offices in Hamburg and London, EHLERMANN RINDFLEISCH GADOW provides
Germany
T +49 40 3748 1451 legal advice to clients in all matters related to the financing of vessels and other maritime
assets and the restructuring thereof, the structuring and implementation of shipbuilding
projects, the sale and purchase of ships, containers and other maritime assets as well as
London Office
2 White Lion Court, Cornhill domestic and international corporate and insolvency law and M&A deals in the maritime
EC3V 3NP London industry.
United Kingdom Our clients are ship financing banks, PE and hedge funds, family offices and other financiers,
T +44 20 7118 1111
shipowners, ship managers and ship builders as well as the initiators of closed end funds.
With 25 lawyers being exclusively specialized in the above fields, the legal team of
EHLERMANN RINDFLEISCH GADOW is the largest in Germany in the field of maritime
finance and one of the largest in this fieldworldwide.
The international team of lawyers of EHLERMANN RINDFLEISCH GADOW is able to advise
on English, German, Liberian, Marshallese and South African law. EHLERMANN
RINDFLEISCH GADOW’s lawyers are admitted to these bars and to the bars of other
jurisdictions.

Rankings of the Firm (extract):


Chambers Global Rankings: Band 1
"Ehlermann Rindfleisch Gadow is the ‘indisputable market leader’.“

Legal 500:
"…‘absolute experts in ship financing’ with several clients stating that they ‘won’t
work without them’. Its financing experience spans three decades."
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Ehlermann Rindfleisch Gadow - Recent ShipArrests

ERG’s lawyers have recently been involved


in ship arrests and enforced sales
in these jurisdictions:
Departement Teknik Sistem Perkapalan ITS

Ship Finance in Turkey PT. MUARA JAYA

OFFICES & BRANCHES

Türk Eximbank currently operates with 629 employees.


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

TURK EXIMBANK & EXPORT


FINANCING
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

TYPES OF TURK EXIMBANK’S


SUPPORTS
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

FACILITIES

Domestic International
Insurance
Credits Loans
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

DOMESTIC CREDITS

Credit Programs
Short Term Medium –Long for Foreign
Credits Term Credits Currency Earning
Services

761

761
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INSURANCE
PROGRAMS

Short Term Export M/L Term Export Domestic Credit


Credit Insurance Credit Insurance Insurance

in 238 Country
Commercial and political risk cover

Coverage: 90% in principle


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL
LOANS

International International
Project Loans Trade Finance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL LOANS
Borrower

To finance the foreign


Public projects Private sector
buyers/employers… transactions

Limit allocation to
the reputable foreign
Financing for the consumer and State Guarantee
capital goods as well as projects
banks
• 12 countries
• 20 banks
• Total $ 550.7 million
limit
Short-Medium-Long Term Public Institutions under the
State Guarantee
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL LOANS
COUNTRY LIMITS

OECD Country Risk Classification


Category 0 (least risk) → Category 7 (highest risk)

GROUP GROUP GROUP GROUP GROUP GROUP


YEAR O, I, II III IV V VI VII

Country Limit
(million US 2016 750 600 450 400 350 350
Dollar)
Group Limit
(million US
2016 1,500 1,500 1,000 1,250 1,250 1,250
Dollar)
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL
LOANS
BANK LIMITS
EUROPE
AFRICA

Ukraine (1) Albania (1)

Nigeria(1) Afreximbank

Belarus (2) Russia (2)

North
Cyprus (1)

ASIA

Uzbekistan (1) Azerbaijan (2) 20 banks,


550,7 million US Dollar
Mongolia (3) Georgia (2)

Kıyrgyzistan (1) Kazakhstan (2)


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE
FINANCE
PROGRAMS

Loans Under
Foreign Bank
the State
Buyers’ Credit
Guarantee

Export
Domestic
Receivables
Banks’ Buyer
Discounting
Credit
Programs
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


EXPORT RECEIVABLES DISCOUNTING PROGRAM

Supplier Credit Facility

Insurance Policy as a Collateral

Discount of L/C, Bill of Exchange


or Open Account Receivables

Financing at Post Shipment Stage

Financing up to 12 years

Cost: insurance premium +


discount interest

Applicable in 238 countries


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


EXPORT RECEIVABLES DISCOUNTING PROGRAM

Advantages for the Turkish Exporter


 Competitive advantage among its peers
 Liquidity through discounting the receivables after delivery.

Advantages for the Foreign Buyer


 Longer deferred payment terms
 Non-use of bank lines of credit
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

EXPORT RECEIVABLES DISCOUNTING PROGRAM


EXPORT CREDIT FOR SHIPS (OECD RULES)

 Minimum 20% down payment (from buyer to exporter)


 Semi-annual installments
 Repayment period up to 12 years
 Minimum premium rate
……and
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

EXPORT RECEIVABLES DISCOUNTING PROGRAM


CASH AGAINST GOODS (OPEN ACCOUNT) WORKFLOW

2 SALES CONTRACT
IMPORTER EXPORTER

5 DELIVERY OF THE VESSEL

8
1
3

7
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

EXPORT RECEIVABLES DISCOUNTING PROGRAM


DOCUMENTS AGAINST ACCEPTANCE-BILL OF EXCHANGE
WORKFLOW

2 SALES CONTRACT

IMPORTER EXPORTER
5 DELIVERY OF THE VESSEL

8
1 6 10
4
BOE ACCEPTED

3
DOCUMENTS
DELIVERY OF

DOCUMENTS

BOE
11
13

12

14

7 DOCUMENTS

9 BOE
IMPORTER’S BANK EXPORTER’S BANK
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


EXPORT RECEIVABLES DISCOUNTING PROGRAM

Sample Pricing :
For 5 years repayment period with 10 equal installments;

• Discounting Interest Rate= CIRR= 0.31%


• Insurance Premium= 1.3% (indicative)

Contract Amount (Discounting Cost Included) EUR 1.016.642 A


Downpayment Ratio 20% y
Downpayment Amount EUR 203.328 B=A*y
Amount to be Insured (Export Receivables Payable Amount) EUR 813.313 C=A-B
Amount to be Credited EUR 691.316 D=C*0,85
Excluded Amount * EUR 121.997 E=C*0,15
Discounting Interest Cost EUR 6.068 F
Insurance Premium Cost EUR 10.573 G
Total Cost EUR 16.642 H=F+G
Net Payment Amount to the Exporter’s Account EUR 674.675 I=D-H
Exporter Company's Net Income EUR 1.000.000 J=I+E+B
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


EXPORT RECEIVABLES DISCOUNTING PROGRAM

Sample Pricing :
For 10 years maturity with 20 equal installments;
• Discounting Interest Rate= CIRR= 0.93%
• Insurance Premium= 3% (indicative)

Contract Amount (Discounting Cost Included) EUR 1.060.125 A


Downpayment Ratio 20% y
Downpayment Amount EUR 212.025 B=A*y
Amount to be Insured (Export Receivables Payable Amount) EUR 848.100 C=A-B
Amount to be Credited EUR 720.885 D=C*0,85
Excluded Amount * EUR 127.215 E=C*0,15
Discounting Interest Cost EUR 34.682 F
Insurance Premium Cost EUR 25.443 G
Total Cost EUR 60.125 H=F+G
Net Payment Amount to the Exporter’s Account EUR 660.760 I=D-H
Exporter Company's Net Income EUR 1.000.000 J=I+E+B
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


EXPORT RECEIVABLES DISCOUNTING PROGRAM

CIRR SampleTransaction

Germany
PPS / PA Pipe Extruder Lines
Amount: 406 thousand €
Tenor: 2 years
CIRR : 0,32% / Interest Rate: 2,25%
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


EXPORT RECEIVABLES DISCOUNTING PROGRAM

-MARINE SECTOR-SampleTransaction

 Export Transaction of Tugboat


Gabon  Tenor 5 years
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


EXPORT RECEIVABLES DISCOUNTING PROGRAM

Sample Uzbekistan
France Transactions
Buses Export Biscuit Production Line
Amount: 6,9 million € Kenya Amount: 660 thousand $
Machine Export Maturity: 3 years
Maturity: 1,5 years-3 years
Amount: 1.6 million €
Maturity: 5 years
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


DOMESTIC BANK BUYERS’ CREDIT PROGRAM

Borrower:
Intermediary Banks located in Turkey

Utilization:
Throughout the foreign branches and
subsidiaries of Domestic Banks in
Turkey

Pre shipment & Post shipment


Financing Option

Refinancing
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


DOMESTIC BANK BUYERS’ CREDIT PROGRAM

SUBSIDARIES BRANCHES
SUBSIDIARIES BRANCHES NETHERLAND BAHRAIN
GERMANY U.S. T.R.NORTH
AZERBAIJAN BULGARIA CYPRUS
BOSNIA H. GEORGIA
KAZAKHSTAN IRAQ
SUBSIDARIES BRANCHES
UZBEKISTAN UNITED KINGDOM
RUSSIA T.R.NORH CYPRUS GERMANY KOSOVO
BULGARIA IRAQ
TURKMENISTAN SAUDI ARABIA
GREECE FRANCE U.KINGDOM
NETHERLAND GEORGIA
SWITZERLAND BAHRAIN
T.R.NORTH LIBYA
RUSSIA CYPRUS Kuveyt Investment Co.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


DOMESTIC BANK BUYERS’ CREDIT PROGRAM

Sample
Iraq Transactions Kosovo
Construction Material Export Machine Export
Amount: 5 million € Amount: 600 thousand €
Maturity: 10 years Russia Maturity: 5 years
Concrete Production Machine
Amount: 1.1 million $
Maturity: 5 years
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


FOREIGN BANKS BUYERS’ CREDIT PROGRAM

Foreign Banks with whom Trade


Finance Loan Agreement Signed
Preliminary Analysis
Russia Kyrgyzstan
Credit Europe Bank Demir Kyrgyz Bank
Limit Allocation Georgia Azerbaijan
TBC Bank IBA
Bank of Georgia Pasha Bank
Belarus T.R.North Cyprus
Loan Agreement
Belinvestbank Creditwest Bank
Albania Mongolia
Development Bank of
Export Financing Banka Kombetare T.
Mongolia
Khan Bank

Nigeria Ukrania

10 different countries, 13 banks, 170.4 million $ Loan Sterling Bank West Finance

Agreement…
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


FOREIGN BANKS BUYERS’ CREDIT PROGRAM

Turkish R. of North Cyprus Russia


Sample
Construction Material Export Transactions Textile Export
Amount: 1,5 million $ Amount: 1 million $
Maturity: 6 months Maturity: 23 months

Belarus
Machine (Mangle)
Amount: 315 thousand €
Maturity: 23 months
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INTERNATIONAL TRADE FINANCE


LOANS UNDER THE STATE GUARANTEE

Sample
Transaction
Buyer: State Institutions

Djibouti
Limit Allocation under the
Geothermal Drilling Machine Park
Sovereign Guarantee
Amount: 10 million $
Maturity: 6 years
Loan Agreement

Export Financing
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The ship-owning market is affected by the business cycles; the volatility creates high profit
opportunities but can also lead to large losses for investors. This is why the interest of doing
investments in shipping companies distinguishes from investing in other asset-based
businesses. According to Norwegian Ship-owners Association, Norwegian shipping companies
points out that it is hard to get access to capital to make new investments
(NorgesRederiforbund 2013). Limited access to capital is a factor that can slow down further
growth and innovation in the industry.
[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Shipping Cycle


through

The shipping cycle consists of four


stages; through, recovery, peak and
collapse. The repeating character of
the cycle is distinctive. This is an collapse recovery
overview of the different stages in
order to explain how the shipping
cycle development can affect the
choice of financing.
peak

[3] Financing in the Ship-owning Industry


MSc in Innovation and Entrepreneurship
Mathilde Kallestad
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Shipping Cycle through

ships queuing at loading-points


Trough has three characteristics; ships
queuing at loading-points, fall in the
freight rates and financial pressure. Low fall in the freight rates
freight rates can lead to negative cash flow
and in extreme cycles, this can result in
banks foreclosing. Ship owners might have
to sell modern ships at distress prices well financial pressure
below their book value to increase funds.
As the wave of difficult decisions passes
and the market starts to correct, the crisis
declines.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Shipping Cycle recovery

The next stage is recovery, when supply


and demand move towards balance. The
freight rates starts to level the operating
costs and there are fewer vessels at the
quay. The market sentiment is still
perceived as uncertain, but gradually
confidence grows.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Shipping Cycle


peak

During a Peak/Plateau freight rates rise,


often two or three times operating costs.
In extreme cases, it can actually be as
much as 10 times. The duration of the
peak can be a few weeks, but a peak can
also last for several years. High earnings
increase liquidity and the banks agree to
lend against strong asset values. Modern
vessels sell for more than the new building
price and new building orders increase.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Shipping Cycle

As supply overtake demand, the market


moves into the collapse phase and freight
rates fall precipitately. Spot ships built up
in key ports, low freight rates and reduced
operating speed for ships recognize this
stage. Few companies sells their ships and
the liquidity remains high

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Shipping Cycle

Summarized
the supply-demand balance forms the cycles.
There will always be losers and winners, but ship-
owners and shippers will not be winners at the
same time. The winner at a given point is a result
of the supply-demand balance in either the
market or the world. Easier access to capital
seems to be whenever the ship-owner is the
winner. The ship-owning industry is asset based
and in times with strong asset value, the bankers
are willing to lend more money. Additionally,
investors show interest in the companies,
especially in the stage of recovery when the
stock price is still low. The need for capital is
often at its highest when times are bad and
[3]
increasing share capital is expensive.
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

Ship Finance and


Shipping Economics
Starting a shipping company requires a lot of capital. The
investment costs are often very high as shipping is an
asset-based industry. Therefore, the company must find
the best way to finance both their new builds and the
company in general in order to get profitable. According to
Stopford (2008) shipping is regarded as a specialist
business. It differs from other asset-based businesses
because of the internationally mobility; a ship-owner can
choose the legal jurisdiction of the vessel. This means
that ship-owners can choose legal jurisdiction out of
economic considerations. Some countries, Bahamas for
instance, will be a preferred country to register a vessel,
because of advantages such as, trading mobility, reduced
taxes and reduced wage costs (Bahamas registered vessels
are allowed to hire crew from foreign countries).
[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

Ship Finance and


Shipping Economics

Banks are often more interested in recessions than booms, in the ship-owning
industry. Stopford (2008), explains this with their interest in getting repaid,
because bankers just get paid interest. For bankers, the value of the firm is
only a concern whenever the debt exceeds the value. Investors on the other
hand, look at the investments potential and often consider those with high
profitability, thus high risk. The lenders and shareholders payoff is
comparable to selling and buying options exemplified in figure 1.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

Ship Finance and


Shipping Economics
LENDER

The lenders payoff is comparable to selling a call option since the bank loses
money first when the firm’s debt is greater than the value. Hence, lenders
are concerned about recessions and not so interested in booms. Recessions
can lead to losses but a lender will never take advantage of a boom because
they are solely paid by interest.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

Ship Finance and


Shipping Economics

Shareholders payoff can on the contrary be compared to buying a call option.


Unlike the lenders, a shareholder will not get payoff as long as the
company’s value and debt are equal. If the value of the firm exceeds the
firm’s debt however, the shareholders will earn payoff for the excess amount.
These two statements have an interesting connection to the financing
theories presented later in the chapter.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

Ways of Financing Ships and


Ship-owning Companies

There are several ways to finance ships and ship-


owning companies. In the following chapter,
three financial sources for doing so are
presented, starting with private funds.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

Ways of Financing Ships and


Ship-owning Companies

Private funds are capital the company holds. For


start-up companies, the initial funding often
comes from heritage, investments or loans from
family and friends. For existing companies, new
investments can be made with capital from the
already existing cash flow. If the company does
not possess a sufficient amount of money, several
financing methods can be combined. This leads
us to the next financial source, debt financing.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

Ways of Financing Ships and


Ship-owning Companies
According to Stopford (2008) bank loans are the
most important source of ship finance. Loaning
capital is advantageous as it leaves the company
with full ownership of the business. On the other
hand, interest rate is a concern when
considering a bank loan as it might be very
expensive for the company. Companies issue Buying a bond from a company means that
bonds when they wish to borrow money from you lend the company an amount of money.
the public on a long-term basis. Issuing a bond is The bond issuer will pay an interest, called the
often done when the company’s internal capital coupon, but none of the principal will be
sources do not cover the bank’s capital repaid until the end of the lending period. The
requirement, comparable to a top-up loan. cash flow from a bond is constant resulting in
a fluctuating value. When interest rates in the
marketplace rise, the bond is worth less and
opposite when the interest rates fall (Ross,
[3] Westerfield et al. 2007).
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

Ways of Financing Ships and


Ship-owning Companies
The final method for financing is to search for
funding in the equity markets. By making a
public offering of shares, the company can
increase equity. Searching for funds in the
capital market is often a less preferred method
for finding funds. The owners must give up parts
of their stocks, which over time, can cause a
greater loss than paying interest. The price of
financial distress is on the other hand unknown The shipping industry became more active on
and increasing share capital can be profitable in the stock exchanges around the world and
some periods. developed public offering of equity as a capital
source. It has remained a minor player in ship
finance because most of the ship-owning
companies are small and do not have the same
need for raising very large sums of money
(Stopford 2008).
[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

Ways of Financing Ships and


Ship-owning Companies
Capital structure is a key issue in finance; it shows the company’s debt willingness. Below are four
tables showing the debt/equity ratio for the companies in this study, the tables are established
based on numbers from the companies’ 2012 annual reports and proff.no.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Static Trade-off Theory

The theory of capital structure has been


dominated by the search for optimal
capital structure where the company is
eager to reach an optimum. Optimums
normally require a tradeoff, for example
between the tax advantages of borrowed
money and the costs of financial distress
when the firm finds it has borrowed too
much (Shyam-Sunder and C. Myers
1999). Optimum varies between
companies and finding it involves
advanced calculations and is dependent
of the market cycles.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Static Trade-off Theory

According to the trade-off


model, each firm balances
the benefits of debt, such as
the tax shield, with the cost
of debt, such as distress
costs. The optimal capital
structure for a company
varies, however the
debt/equity ratio for asset-
based industries tends to be
approximately two.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Static Trade-off Theory

The optimal capital structure


depends on whom it is going to
benefit. Changes in capital
structure benefit the stockholders
if and only if the value of the firm
increases. In the presence of
corporate taxes having debt is
positive related to the firms value.
A leveraged firm pays less in taxes
than the all-equity firm does. In
addition, the value of a leveraged
firm is greater than the value of an
all-equity firm, because the value of
the firm is the sum of debt and
equity.
[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Static Trade-off Theory

Tax deductions on the company’s


earnings, due to debt, gives the
company greater profit. Why
different companies choose
different capital structures is often
a result of the company’s or the
manager’s attitude to debt.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Pecking order Theory

Although the trade-off theory has dominated


corporate finance circles for a long time, attention is
also being paid to the pecking order theory (Ross,
Westerfield et al. 2007).
According to Shyam-Sunder and C. Myers (1999), the
basic pecking order model, which predicts external
debt financing driven by the internal financial deficit,
has much greater time-series explanatory power than
a static trade-off model, which predicts that each
firm adjusts gradually toward an optimal debt ratio.
According to the pecking order theory, changes in
debt/equity ratio are driven by the need for external
funds, and not by reaching an optimal capital
structure.
[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Pecking order Theory

Ross, Westerfield et al. (2007), states that if a firm


issues stock, the firm was likely overvalued
beforehand. Opposite, if a firm issues debt, the stock
was likely undervalued. This indicates that timing is
the financial manager’s only consideration in financing
issues when following the terms of the pecking order
theory.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Pecking order Theory

The theory of the pecking order provides two rules. Rule number one; use internal financing,
meaning that if the company has capital it will use this first to finance new investments. Rule
number two; issue the safest securities first.
Issue straight debt before issuing convertibles. In this context, safe means that the decision is
not affected by revelation of a managers’ inside information. This means that a company will
always use retained earnings before they issue debt and they will always issue debt before they
issue stocks.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


The Ship-owning Industry

The Pecking order Theory

Implications to this theory are that there is no target amount of leverage;


1. each company chooses its leverage based on financing needs.
2. Second, profitable firms use less debt. Profitable firms are in less need for financing
because they use generated cash to finance their investments.
3. Third, companies like financial slack.
The pecking order theory is based on the difficulties of obtaining financing at reasonable
costs. If the company can be ahead of time and possess capital that they use to fund
profitable projects in the future, this can make the company independent of the capital
markets when a project comes up (Ross, Westerfield et al. 2007). When profit is transferred
to equity to finance future investments, it is unlikely that these companies will pay dividend.

[3]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Shipping strategy
[4] A study of strategy within the
shipping business
Future and past perspectives on strategy and
present
implications on an expanding shipping company -
A single case study approach at Offshore AS
Master’s Thesis – Maritime Management
International Masters Programme
VICTOR ERIKSSON
ANDERS LUTTEMAN

Shipping strategy is of importance because it gives a platform to identify and solve


business problems as well as improve internal and external collaboration with
involved stakeholders, such as the company's customers, competitors, authorities and
NGOs. The company studied in this case is very dependant on these two
collaborations. By studying literature in the theoretical field of strategy and looking at
the subject from different angles, it becomes clear that shipping is not so elaborated as
a single topic within the literature on strategy. According to Niamie and Germain
(2014) it shows three components that have three main topics (in order of appeared
frequency) - alliances, diversification and specialization.
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Shipping strategy

According to Lun, Y.H.V et al. (2010) five components should be included in a welldeveloped
shipping strategy, shown in Table 5 below. There are different levels of strategy and all have
different aspects of what they should do and contribute with if seen as a hierarchy; (A)
Corporate strategy; (B) Business strategy; (C) Functional strategy.

[4]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Definition of strategy

Strategy has no clear definition and academia


describes it differently. It could be defined as the
short and long term objectives of a firm, how it
should be done and why it should be that way
(Fredberg and Kalling, 2013). Strategy could also be
defined as a way to describe and explain
performance variations, both short term, long term
and across the organization. This definition contains
the same characteristics as the one that Chandler
had in his classic definition from the 60’s. Strategy . Another definition, more different perhaps and
could also be explained as follows - there is a even cynical, is the one from Burgelman (1983):
current state → what and how → vision. The arrow “strategy is theory about the reasons for past and
is the strategy to reach the vision without current success of the firm”. De Bono puts it in
neglecting and disregarding the short term goal another way: “strategy is good luck in a hindsight”
that is in play because of the incentives it gives to (Weick 2001, p. 345). The Prussian general Carl von
the firm’s stakeholder Clausewitz, deceased 1831, described strategy by
saying: “ Where absolute superiority is not
attainable, you must produce a relative one at the
[4] decisive point by making skillful use of what you
have” (Aaker, 2008, p. 119).
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Perspective on strategy

There are many different perspectives on strategy.


One perspective occurs when the industry sets its
own rules on how to implement strategy - studies
of customer patterns in the external market
become the denominator that determines how to
design the strategy for such a market. Another
perspective arises when companies analyse which
resources and capabilities could be developed as
valid contributors to a strategy. On the Swedish
online bookstore Adlibris the latter search would
result in 12,000 hits (websites on 2015-04-02). The
perspectives inside these books diverge greatly,
although they share a few common denominators,
such as the fact that they are mostly American and
often rely on Michael Porter’s theories. Porter still
seems to be the prime mover behind strategies and
their implications (Whittington, 2001).

[4]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Perspective on strategy

There are many different perspectives on


strategy. One perspective occurs when the
industry sets its own rules on how to
implement strategy - studies of customer
patterns in the external market become the
denominator that determines how to
design the strategy for such a market.
Another perspective arises when companies
analyse which resources and capabilities
could be developed as valid contributors to a
strategy. On the Swedish online bookstore
Adlibris the latter search would result in
12,000 hits (websites on 2015-04-02). The
perspectives inside these books diverge
greatly, although they share a few common
denominators, such as the fact that they are
mostly American and often rely on Michael
Porter’s theories. Porter still seems to be the
prime mover behind strategies and their
[4]
implications (Whittington, 2001).
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Perspective on strategy

Classical:
Classical strategy is formal and has a clear focus on
deliberateness in its implementation, as well as on profit
maximization and analysis of the environment. Whittington
(2001) states that this could be due to the fact that
Americans are very individualisticThe Classical approach has
its origins in two companies from the US in the 1920s - Du-
Pont and GM (Whittington, 2001), and is based on Mature
Industries, Capital Intensive, Monopoly Power. The classical
approach advocates the need to forecast, makes accurate
plans and heavily relies on the use of finance and planning
techniques. It is fair to wonder whether strategy should
develop from such, on paper very clear, but in reality rather The Economic view of strategy is
ambiguous plans. about maximizing profit, striving for
total optimization and using the
known assumptions about humans as
its basic rationale.
[4]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Perspective on strategy

Processual:
Pettigrew and Mintzberg believe that strategy can be
seen as craftsmanship and its creation is a constant
process in itself. They call this view of strategy
Emergent as it is about the process of learning while
executing the strategy. This contrasts to Porter's
harsher Military view on how to execute a strategy and
is greatly influenced by the field of psychology. From
this perspective strategy seems to somehow be a
confusing process as developments emerge as the A firm's daily routine, which is the result of
strategic decisions and processes unfolds. This way of what occurs in the market within which the
thinking also questions the concept of the rational company operates, determines the strategy for
economic human being, which in turn leads to the organization - an organisation cannot
question the cognitive rational thinking of humans as choose the strategy as this unfolds over time.
such. According to Pettigrew and Mintzberg humans The context for the processual perspective is
do not work rationally nor are clear in their cognitive Protected, Bureaucratic, Knowledge based
processes.
[4] firms.
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Perspective on strategy

Processual:
Systemic: Systemic strategy approach focuses on the
external environment. In more specific terms it is
about the society in which a company is positioned. A
central aspect is the rationale underlying the
implemented strategy in the specific sociological
context. For example, IKEA and SAAB Missiles have
different strategies depending on the sociological
environment in which they are positioned, to reach the
same goal (financial profit). The behaviour of these
companies is therefore different since the business
networks surrounding their company are vastly
different. The context for the systemic perspective is:
(1) Non-Anglo Saxon (2) Family and state firms. The
systemic view uses finance and planning techniques as
credibility check and not as a guide to what to do.
[4]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Perspective on strategy

Evolutionary:
This approach questions the top management ability
to act and plan in a rational way in order to fulfill
basic financial goals. Instead it is the market that
drives the company towards profit. How to execute
strategy in this market will differ from leader to leader
and ultimately only those who adapt to prevailing
conditions will survive, hence it is precisely the market
conditions that determine winners and losers. Here the
‘Law of the Jungle’ applies, which means that those
managers who fail to find capital or clients ultimately
disappear from the market. Theorists that advocate for
this theory do not believe in an organization’s ability to
differentiate and adapt in a sustainable way. The
context for the Evolutionary theory is: (1) Small Firms,
(2) Emerging Industries, (3) Anglo-Saxon, (4)
Conglomerates.
[4]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Perspective on strategy

Evolutionary:
This approach questions the top management ability
to act and plan in a rational way in order to fulfill
basic financial goals. Instead it is the market that
drives the company towards profit. How to execute
strategy in this market will differ from leader to leader
and ultimately only those who adapt to prevailing
conditions will survive, hence it is precisely the market
conditions that determine winners and losers. Here the
‘Law of the Jungle’ applies, which means that those
managers who fail to find capital or clients ultimately
disappear from the market. Theorists that advocate for
this theory do not believe in an organization’s ability to
differentiate and adapt in a sustainable way. The
context for the Evolutionary theory is: (1) Small Firms,
(2) Emerging Industries, (3) Anglo-Saxon, (4)
Conglomerates.
[4]
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PT. MUARA JAYA


Economic growth and trade

During the period 1980-2010 the


world economy grew by 3.5% per year
on average in terms of GDP4, resulting
in an absolute growth of almost a
factor of 3. Figure 2.1 presents the
growth for nine world regions, namely
North America, Latin America, Europe,
Russia and its neighbouring countries,
East Asia, South Asia, Africa, and
As the maps show, the bipolar economic world of 1980, with
Australia/New Zealand.
North America and Europe being comparatively important has
changed into three poles with East Asia as a newcomer.
Furthermore, the South Asia region has shown above average
growth, with 6% a year surpassing the size of the Latin
[5] Study on the Analysis and Evolution American economy. The Middle East and the Russian region
of International and EU Shipping illustrate that economic growth is not always a given and that
Final report political unrest or economic crises can lead to a decade of
September 2015 economic decline.
YUDHA PRASETIYO
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PT. MUARA JAYA


Economic growth and trade
Growth in GDP, trade and seaborne
shipments are interlinked and continue to
move in tandem. In theory trade can grow
faster or slower than GDP. This relationship
has varied over time, although for the last
two decades the WTO 2014 and Bussierre
et al find a relationship of a factor of two
or of approximately two (indicating that
trade grows twice as fast as GDP)6.
Looking at the future this relationship is
uncertain and part of the scenario makes
assumptions (see appendix I). The
resulting maritime trade depends on the
value to volume ratio of trade and the
share of maritime mode. Currently more Figure 2.2 more specifically illustrates the
than 80% of global trade in terms of developments in seaborne trade per cargo type and
tonnage is transported by sea7. distinguishes oil and gas, five major bulks (iron ore,
grain, coal, bauxite/alumina and phosphate), and
other dry bulk and containers.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Economic growth and trade

Worldwide patterns
by type of cargo
in this section we analyse the
dominant geographical trade
relationships, with specific
attention to the position of the
EU within these relationships.
In the maps we focus on the
three dominant maritime flows
of liquid bulk (in tonnes for
petroleum products), ). For each of the three product groups the three
containers (expressed in maps illustrate the ten largest trade relationships
manufactured products), and between the nine world regions in terms of
all other bulk products (among combined import and export flows. The nine
other things, agriculture, coal, regions are similar to the regions in Figure 2.3. In
ore, building material, Annex I we analyse time series developments for
chemicals) the relationship between economic growth and
trade in more detail for the period 1999-2013.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Economic growth and trade

Worldwide patterns
by type of cargo
Figure 2.5 demonstrates that
for all other products, including
products such as coal, ore,
chemical or agricultural bulk
products, different dominant
geographical relationships are
present than for the other
cargo types. The dominant For the large European bulker fleet it is important to operate
trade flows here are between competitively in these worldwide flows, this fleet is mainly
China, mainly as an importer of employed in third (non-European) country markets. The sizes of
minerals and building these flows are related to the stage of development of the
materials, and Latin America countries, and especially to the rapidly industrialising countries
and Australia as suppliers of which have a high demand for bulk products like coal and ores. In
natural resources. The main the future, South Asia is likely to become an increasingly
import flows of bulk products prominent destination for bulk flows. The WEO for instance,
to Europe come from South expects India to become the largest importer of coal by the early
America and Africa. 2020s12.
[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Fleet Developement

This section presents the historical fleet developments by vessel type, ownership, and
flagging over the last three decades for the EU and the other main maritime countries.
Furthermore, the section focuses on the developments in flagging and differences in
ship registry conditions between the main registry countries in more detail. Finally, the
section focusses on differences within Europe. The preliminary findings in this section
will be supplemented and verified with the outcomes of the survey as executed under
phase three of this study.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Fleet Developement

Fleet developments by vessel type,


ownership and flagging

As a result of economic growth and


increased maritime trade in the period
1980-2014 the world fleet has increased
by 44% in terms of the number of ships,
and by 185% in terms of ship volume
(expressed in Gross Tonnage as the
volume of the total vessel including
superstructure and accommodations
The overall growth of vessels by almost a factor of three
etc.). Figure 2.6 presents the fleet
(precisely 285%) differs strongly by vessel type. Of the main
development in volumes by vessel type.
vessel types the Bulker, with a growth of a factor four, and the
Vessel types include Oil Tanker, Chemical
container vessels, with growth of a factor of 14, both show an
tanker, LPG vessel, LNG vessel, Bulker,
above average growth rate. Oil tanker vessel volume has grown
General cargo, Container, Offshore and
more modestly by a factor of 1.5 and General cargo vessel
Other.
volume decreased during this period by a factor of 0.7, as a
[5] result of the increased use of containers to transport cargo.
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Fleet Developement

Fleet developments by vessel type,


ownership and flagging

Figure 2.7 2.8 present developments for the most dominant countries in the period of 1980-2014 in both
flagging and ownership, expressed in terms of vessel capacity (GT). The two figures show that both
worldwide flagging and ownership of vessels are concentrated activities but often not in the same
locations.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Fleet Developement

Trends in flagging and


position of EU

Potential explanations for the increased use


of open registries, besides lower labour costs
are favourable tax policies (tonnage tax, tax
exemptions), the economic advantage of
lowered environmental, labour and safety
standards, the quality of services, and the
ease of registration. Over the years the
differences between the open registries and
the EU flags state registries have diminished The competitive differences occur therefore at a
as a substantial number of EU countries have more nuanced level, e.g. tax exemptions within the
introduced the tonnage taxation system as tonnage tax system or recognition of labour
well and most open registries comply with certificates, or on other aspects as quality of
minimum international regulations. services. Below we discuss the various items in
more detail.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Fleet Developement

Trends in flagging and


position of EU

Regarding environmental, safety and labour standards a study by Elizabeth de Sombre19 on flagging
standards concludes that in practice the economic advantage of lowered standards is offset by
collective action by international organisations and states. Du Sombre notes that overall, open
registries are pressured to raise their standards while traditional maritime states lower their
standards somewhat. In this overview the main open registries, such as the Marshall Islands,
Panama, Liberia, and Singapore, all have a positive score for their performance on port state control
indicators, as well as on the ratification of conventions. The port state control indicators in the flag
state performance table18include scores for the three main Port State Control authorities, namely
the Paris MOU, the Tokyo MOU, and the United States Coast Guard.
[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Fleet Developement

Trends in flagging and


position of EU

For labour standards the registries differ in their requirements regarding nationalities of officers and
crew, and for certification requirements21. For the registries of Panama, Liberia, the Marshall Islands,
Malta and the UK there are no requirements with regard to the nationality at all. Several EU Member
States have requirements regarding the nationality of the master of the ship or a minimum
percentage requirement for the nationalities of the crew. The limitations in choice of crew
nationality have an impact on the manning costs of a vessel following wage differences between
European and non-EU Member States. Besides the nationality requirements, labour regulations and
inspections of the flag state also seem important and representatives from the industry indicate that
inspections of European flag states are considered to be more cumbersome than from open
registries.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Fleet Developement

Trends in flagging and


position of EU

Another competitive factor is the ownership requirements which differ per registry24). In general,
the main open registries make it rather easy to establish a legal entity in these countries without any
further ownership requirements. Most EU Member States, like Denmark, the UK, the Netherlands or
Greece, have more specific ownership requirements, like minimum ownership shares for their own
citizens, or for EU and EFTA natural and legal persons. Within Europe, Malta is an exception with no
nationality requirements for shareholders or directors. This condition in combination with other
favourable conditions, like tax regime and labour regulations, supports the growth of the registry of
Malta towards a number one position in Europe.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Fleet Developement

Trends in flagging and


position of EU

The differences in registries


mentioned above has a net
result that some European
shipowners flag out their
vessels to specialised
countries like Panama, Liberia
and the Marshall Islands.
Besides these three countries
an upcoming country for
vessel registration is
Singapore, which shows the . However, if we compare the EU with other developed countries
highest growth rate in such as the USA, Japan, and South Korea, EU Member States (or
flagging vessel capacity over some of them) seem to approach global competition in flagging in a
the last five years better way, as loss of market share in flagging is lower for Member
States than for above mentioned countries.
[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Fleet Developement

Trends in flagging and


position of EU

Tax reductions in many EU Member States seem to be an


important factor by which EU Member States have not lost a
larger share of their flags. However, to remain competitive
further pressure on taxation levels seems likely and without
international minimum standards EU Member States will need
to follow this trend. Regarding ownership and crew, safety,
This means that EU flag states will
security and environmental regulations, European flags could
lose some of their current market
follow two approaches: 1) Comply with the international
share for less value added market
standards. Promote European interests for higher standards
segments. This approach can be
through international organisations but do not implement
combined with the EU further
higher standards for Europe alone as this might affect the
striving to extend the international
competitive position of the European industry in this global
conventions in this field, or
market; 2) EU flag states use higher standards to protect
alternatively extend the port state
environmental, safety, and labour conditions and focus on the
control instruments, to improve the
market segments with higher value added activities (e.g.
level playing field for EU Member
offshore vessels, LNG vessels).
[5] States.
YUDHA PRASETIYO
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PT. MUARA JAYA


Fleet Developement

Trends in flagging and


position of EU
Table 2.1 looks at the average age of the
fleet by flag state, which might be an
indication that older ships prefer certain
flag states. The table shows that the
average age of the European fleet is
somewhat lower in terms of fleet
ownership, than in terms of flagging,
reflecting the higher growth rate in The average age figures do not confirm theories that
ownership compared with flagging. The old and less environmentally friendly ships are more
table shows that the countries with the likely to flag under these open registries. A final
highest increases in flagging over the last conclusion on this theory cannot be observed in the
five years, namely Singapore and the data for the aggregated level of all vessels as different
Marshall Islands, show the lowest average contradiction trends might not be feasible in the
age by flag. The high growth of Singapore aggregated figures. For example some registries grow
and Marshall Island over the last five year by a combination of newly build vessels and the
consists also of many new vessels reducing reflagging of older and less environmentally friendly
the average age of the fleet in these vessels.
[5] countries.
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Fleet Developement

Flagging trends by EU
Member States

In the sections above, flagging was mainly discussed at the level of the EU. This following
section demonstrates that there is a wide variety in flagging between EU countries. The
important EU flagging countries in terms of GT are Malta, Greece and Cyprus, followed by Italy,
Germany, Denmark, and the UK. Over the last fifteen years large differences have become
apparent between EU countries showing both increases and decreases in the flagging of vessels
(expressed in GT). The top three countries showing increases were Belgium with an index of 7.1,
Spain with 7.8, and Portugal with 8.5. In absolute volumes the growth was highest in Malta and
Greece. The top three decreasing countries were Poland, Romania, and Bulgaria (which all
approach zero).
[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Market developments in the
sector

The port and maritime industry is typically a highly competitive sector due to the many
different players, large volumes transported, long distances covered due to the considerable
spatial separation of production and consumption. The nature of this competition has changed
in recent years however. Nowadays, ports and the maritime industry compete as part of the
supply chains to which they belong. In fact, to strengthen their position in their logistics chains,
shipping companies sometimes take over terminal operating companies, as well as shipping
agents all over the world; examples of these are displayed in tables 2.2 and 2.3. Terminal
operating companies are the main suppliers of throughput services, and agents coordinate all
the actors and transactions in a port of call, and when shipping companies integrate with
operating companies or agents, it tends to be to control the quality of services and to use the
knowledge of the local transactions so that core maritime services are run cost-efficiently.
[5]
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Market developments in the
sector

The forms of control of the maritime industry and ports however, are likely to become
increasingly flexible as in addition to mergers, recent developments include as well alliances,
joint ventures and dedicated handling activities. Cooperation may involve carriers, terminal
operating companies, port authorities, hinterland operators, and hinterland terminal
operators. Some examples for container transport are displayed in Table 2.2 where shaded
cells refer to the occurrence of integration, sometimes under a specific name: in that case, the
latter is indicated. As can be seen, 14 out of the top 20 container shipping companies have
integrated vertically with port terminal operations, sometimes under an "own brand" name.
This integration spans the wide, global scope of terminals at which these shipping companies
call . This shows the increasing power that shipping companies try to gain and do effectively
gain over large international logistics chains, building increasing power vis-à-vis large shippers
which saw their power increase before.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Market developments in the
sector

Container lines also


integrate with hinterland
transportation services,
hinterland terminals, and
with shipping agencies.
Although integrating with
independent agents is
rare, there are cases in
which agents are
acquired by shipping
companies to later make
them a department or
subsidiary to the shipping
company.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Market developments in the
sector
Vertical integration into terminal operations not only
occurs in the container market, but also in the dry bulk
and general cargo markets. Table 2.2 shows instances of
leading shipping companies holding stakes in TOCs in the
latter two markets, which clearly illustrates the tendency
to integrate of shipping companies into port terminal
operations. That implies that the power of these large
dry bulk shipping companies against the end consumer is
even higher than in the case of shipping companies, and
further increasing over time. The spatial distribution is
much more concentrated than in the case of containers,
where globalisation is key.

The only market where much less vertical integration has taken place is the tanker market. This is
most likely due to the nature of the operations involved: not in all cases, transfer superstructure is
needed other than pipeline connections with refineries and the like, so that production and handling
are mostly in the same hands.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Market developments in the
sector
The driving forces of
integration include:
increasing control over
costs, pricing, entry and
exit behaviour, access to
technology and
knowledge, reduced
uncertainties, supply
assurance and reduced
complexities.

Developments in the maritime industry require


paying attention to shifting competitive balances
and market power. Anti-trust enforcement revolves
around the identification and measurement of
market power.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Market developments in the
sector

To verify whether and how the container shipping


industry’s market power is evolving, an analysis of
market competition in trade lanes between the key
origins/destinations was performed. The trade
lanes are shown in Table 2.4. The information is
based on a dataset developed by the Department
of Transport and Regional Economics of the
University of Antwerp, and updated to 31st
December 2014 (TPR-UA containerised trade
database)

[5]
YUDHA PRASETIYO
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PT. MUARA JAYA


Market developments in the
sector

Analysing the two indicators together,


the Concentration Ratio and the
Instability Index, it is possible to gain a
snapshot of the market structure and its
dynamics. Figure 2.10 displays the two
indicators and separates them according
to their median to arrive at four
quadrants: Low Concentration Ratio and
Low Instability Index, Low CR4 and High
II, High CR4 and Low II, and High CR4 and
High II.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Market developments in the
sector
Figure 2.10 presents the four quadrants.
The bottom left quadrant, Low CR4 and
Low II, implies that the market is
competitive in its structure but there
may not be competitive pressures
among the players. The possibility of
individual carriers exercising market
power under such conditions is limited.
The bottom right quadrant, Low CR4 and
High II, represents low market structure
concentration but high competitive
pressures among the players. Various
competition strategies may emerge
under this condition. Competition
regulations may pay closer attention to
the emerging competition strategies so
as to prevent collusion behaviour among
players in their efforts to increase their
market shares.
[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Market developments in the
sector
As discussed above, stable and concentrated
markets, as an indication of possible presence
of collusion, may enable carriers for instance
to profit from fuel prices variations. Fuel
prices represent the highest operating cost of
the shipping industry; and it has been
estimated that under collusion, carriers may
not delay passing fuel price increases through
to freight rates, whilst passing fuel price drops
through to freight rates may take up to half a
year. And as demonstrated by Fung (2014),
ocean carriers’ collusive behaviour is easier to
sustain in stable environments, because it is
more likely to agree on the price adjustments,
and less likely to misinterpret competitors’ In conclusion, collusion in the shipping industry may
pricing behaviour32. delay passing on the benefits of reduced fuel prices
for the shippers and final consumers.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Market developments in the
sector
A comparative analysis of the market
structure shows a clear shift. Previously there
was a situation with highly competitive trade
lanes, where some were heavily concentrated
but others were not, leaving options for
potentially new or smaller carriers to enter
some of the markets. This has shifted to the
recent situation where the market became
more highly concentrated and stable. Thus,
considerations like the ones described for the
top left quadrant may be needed. The case
for enhancing maritime agreements may be a
possibility to ensure free market access for
the global shipping industry.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Market developments in the
sector
A comparative analysis of the market
structure shows a clear shift. Previously there
was a situation with highly competitive trade
lanes, where some were heavily concentrated
but others were not, leaving options for
potentially new or smaller carriers to enter
some of the markets. This has shifted to the
recent situation where the market became
more highly concentrated and stable. Thus,
considerations like the ones described for the
top left quadrant may be needed. The case
for enhancing maritime agreements may be a
possibility to ensure free market access for
the global shipping industry.

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Trip-level cost structures, a
comparative analysis

Cost structures of the shipping industry are also an element to take


into account for the analysis of carriers’ competitiveness and market
competition. This section describes the generalised chain cost of the
container shipping industry, based on actual data collected from the
wider shipping and port industry, to which a model developed by
University of Antwerp - TPR is applied. The model simulates and
compares hinterland, port and sea transport costs of moving cargo on
specific trips and vessels characteristics, with a relevant selection
made for the purposes of this report as follows:
1. Origin: Berlin, Brussels, Paris, Milan, and Madrid;
2. Port of Departure: Bremerhaven, Antwerp, Le Havre, Marseille and Slow steaming, is described
Lisbon; in section 3.3.3 Conventional
3. Port of Destination: Shanghai, China and Norfolk, USA; high economic growth scenario
4. Ship cargo capacity: from 4,500 to 17,000 TEUs; and Environment-based fuel cost
5. Ship flags: Belgium, Spain, Portugal, Greece, Malta, and Poland The changes, is described in section
simulation of the effects that may be brought on ships’ operating 2.8 Environmental
costs by: requirements

[5]
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Trip-level cost structures, a
comparative analysis

Cost effects by origin, port of departure,


and destination of the trip

Analysing the different origins of the cargo shows


that the total costs of the chain (hinterland, port,
and sea costs) would encourage shippers to use the
nearest ports, although this does not always
happen in practice. For instance, Table 2.5 shows
that cargo originating from the Berlin area
minimises the total chain costs when using
Bremerhaven as the departure port, regardless of
the destination port, i.e. Far East or US East Coast.
Cargo originating from Brussels minimises costs
through Antwerp, Paris through Le Havre, and
Madrid through Lisbon, taking into account the five
selected European ports. A possible explanation is
that the hinterland costs of moving cargo to distant
ports are higher than the port cost structure and
sea transport cost savings.
[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Trip-level cost structures, a
comparative analysis

Cost effects by origin, port of departure,


and destination of the trip
The port capacity of Antwerp seems to be a reason
for such advantages vis-à-vis Marseille for cargo
originating from Milan, as cargo can be loaded in
larger ships and substantially reduce the
generalised costs at the port and of sea transport.
Such advantages cannot materialise for the case of
the US East Coast as a destination, as can be seen in
table 2.5. This is because both the hinterland and
total chain costs for cargo originating in Milan is
minimised if cargo is shipped through Marseille. Yet
Hence, any trip from North Europe to the US East
again, the analysis indicates that larger ship size
Coast through New York or Norfolk will only be able
contributes toward reducing generalised cost of the
to be carried out by ships of up to 7,200 TEUs.
trips. Therefore port competitiveness based on cost
Under these conditions, there are not enough
reductions may require growing capacity to handle
savings in the total chain costs from Antwerp to
larger ships . Although Antwerp is able to handle
offset the hinterland costs from Milan, leaving
larger ships, the ports of New York and Norfolk are
Marseille at a competitive advantage.
only
[5] able to handle ships of up to 7,200 TEUs37.
YUDHA PRASETIYO
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PT. MUARA JAYA


Trip-level cost structures, a
comparative analysis

Cost effects by origin, port of departure,


and destination of the trip
Deep sea transport and Lisbon’s competitiveness.
Therefore, for ports with similar cost structures as
Lisbon, competing for the Far East trade lanes
requires increasing port capacity for handling ultra
large container ships (ULCSs). For shorter deep sea
trade lanes or short sea shipping, or where
hinterland costs are favourable (e.g. cargo origin
from Madrid to Lisbon) or not required (e.g.
transhipment, feedering, or relay), Lisbon or other
ports alike can compete, which may be a reason for
the port of Lisbon’s 13% growth in TEU movements
noted in the last reporting year, from 2012 to 2013

[5]
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PT. MUARA JAYA


Trip-level cost structures, a
comparative analysis

Cost effects by origin, port of


departure, and destination of the
trip

[5]
YUDHA PRASETIYO
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Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Trip-level cost structures, a
comparative analysis

Cost effects by origin, port of


departure, and destination of the
trip

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Trip-level cost structures, a
comparative analysis

Cost effects by origin, port of


departure, and destination of the
trip

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Trip-level cost structures, a
comparative analysis

Cost effects by origin, port of


departure, and destination of the
trip
YUDHA PRASETIYO
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PT. MUARA JAYA


Trip-level cost structures, a
comparative analysis

Cost effects of vessel characteristics

Ship size has been regarded as the strategic result of cost


savings through economies of scale. Figure 2.11 shows that
generalised chain costs indeed decrease according to
changing the ship size from 4,500 to 18,000 TEUs. More
importantly, it shows changes in the generalised chain costs
of the trips. Size contributes to important economies of
scale with respect to fuel consumption, with cost reductions
of approximately 17%. Other economies of scale are seen in
fixed costs, manning, lubricants and oil, and management
costs at sea. Ship size also stresses port capacities, reflected
in increased terminal handling costs (THC) by approximately
13%. Fuel costs at the port and port dues also increase in
relative terms with respect to the total chain costs for a trip.
The end result is a decrease of the total chain costs from
955 to 585 Euro per TEU. For a full description of each one
of the components of the total chain cost components,
[5] reference is made to Annex III Micro/Simulation data.
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Trip-level cost structures, a
comparative analysis

Cost effects of vessel characteristics

In relation to the vessel operating


costs comparison by flag state shown
in figure 2.12, the estimation was
based on an average 22 crew per
vessel, and the capacity is 16,400
TEUs. Surprisingly, the fastest growing
flags in Gross Tonnage (GT) are not
cheaper in terms of operating costs
than the fastest dropping flags in GT. Belgium and Portugal have higher operating costs compared
Greece and Malta, the fastest growing to the fastest declining flag states, Poland, Romania, and
and largest flags in the EU in terms of Bulgaria. And Spain, which is one of the fastest growing, has
GT, are at the complete opposite lower operating costs than Poland. The two largest Flag
extreme in operating costs. Greece is States, Greece and Malta, also increased substantially in the
the most expensive flag with 259 Euro period from 2000 to 2014. The analysis shows that the main
per hour, whilst Malta is the cheapest differences in operating costs are attributed to crew,
among the selected flags with 131 followed by management and administration costs.
[5] Euro per hour.
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Benchmark analysis
shipping companies
Whereas the previous section focuses on container liner markets, this section presents a
benchmark analysis of the economic performance of shipping companies in all shipping markets
For the purpose of this study the dimensions for the segmentation of the shipping industry are
geographical and business sector-related. The first aim is to compare European shipping lines’
performance with that of companies from Asia and Worldwide. Secondly the analysis is carried
out by differentiating performance per type of transport segment, namely: Container; Dry bulk;
Tanker; and Miscellaneous. The Ferry sector has been excluded from the analysis because
companies active in this segment do not compete in different regions. The Miscellaneous sector
covers those shipping companies that operate in different market segments. Full account of data
clustering approach, data sources employed and analysis outcome is provided in Annex IV.
The data collection was based on three different sources, which provide information on
companies’ data from 2009 to 2013, required to perform the analysis.
The PwC Global Shipping Benchmark database;
The Avention database; and
Targeted desk research on companies’ financial statements.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Benchmark analysis
shipping companies
Economic analyses of the shipping industry
are based on three different indicators,
which are presented in the following
sections:
Costs of personnel per employee
Costs of personnel on sales
Sales per employee

The extensive data collection and research activity resulted in the analysis of more than 500
companies. However, only approximately 200 companies provided financial data (i.e. sales,
operative incomes) with the required detail and completeness. Information on the number of
employees and on the cost of personnel is provided only by a smaller share (approximately 110
companies). Over half of these are European companies42 (52%), one-third Asian (34%), with
the most of the remaining companies coming from North America (10%). Companies from
South America, Australia and Africa are significantly less well represented in the database (4%),
due to limitations in data availability. Most companies researched are government-owned, not
publicly listed, or provide consolidated data from holdings for which shipping is a minor
[5] business.
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Benchmark analysis
shipping companies

Cost of personnel per


employee

Cost of personnel per FTE (Full Time Equivalent employee) indicates how much the average employee
is remunerated by the company, in gross value (includes wages, taxes on labour, social security, other
benefits, etc.). Since financial statements do not generally provide for separate numbers for on board
personnel and for shore based personnel, the aggregated number of workers in terms of FTE is
considered.
Figure 2.14 summarises the average labour cost per employee broken down per transport segment
and region. No matter which transport segment is concerned, the average cost per employee is
higher for European shipping companies than for Asian ones. The widest gaps are found in the
Container and Miscellaneous sectors with European shipping companies facing average costs per
employee of two times higher than their Asian counterparts.
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Benchmark analysis
shipping companies

Cost of personnel per


employee

The gap in labour cost between European and Asian companies does not come as
a surprise. Several studies have reported on the different labour regimes and the
economic convenience coming from cheaper East Asian labour force in particular.
According to our findings, not only the wages, but also labour taxes and social
security costs tend to be higher for the employees of European companies.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Benchmark analysis
shipping companies

Cost of personnel per


employee
In this context several European shipping
companies have mitigated their costs for
on board personnel by having their fleet
or part of their fleet under open
registry.Shipping companies using open
registries may avoid the strict regulations
of developed countries and benefit from
several advantages including the
reduction of operating expenses as the
labour costs involved in ship operation.
Other advantages include the easy
registration of maritime vessels, lower This actually applies to more than 80% of European
taxes, and freedom of control by the shipping companies in the sample. Unfortunately, this
country of registry. Several of the practice has a detrimental effect on the employment
companies selected for the analysis have opportunities for European ratings and seafarers.
their fleet fully or partially flying an open
[5] registry flag.
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Benchmark analysis
shipping companies

Sales per employee


As shown in Figure 2.14, even if
several European companies fly
an open registry flag, their
average labour cost per employee
is higher than for the Asian
companies, whilst according to
our benchmark analysis (see
Figure 2.15), the personnel in
European companies is slightly Sales per employee indicate how much turnover the company
more efficient than the personnel generates for each full time equivalent employee (FTE). The indicator
in Asian companies. Indeed, the provides information on the productivity of the personnel. It is
average sales per employee of however, impacted among other things, by different labour
European shipping companies are conditions and laws (i.e. across countries, sectors, etc.), the labour
always higher than those of Asian intensity of the shipping sector, the level of training of employees,
companies. the quality of equipment employed, optimal planning and
organisation. Sales can also vary as companies are restructured, or
[5] lease vessels, to respond to a peak in demand.
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Benchmark analysis
shipping companies

Cost of personnel on
Sales
The incidence of labour costs on
sales is higher for European
companies than for Asian
companies (see chart below).
Indeed, the high level of
productivity of personnel
employed by European companies
does not counterbalance the
lower labour cost of personnel
employed by Asian companies. Miscellaneous and Container sectors, meaning that
Hence, European companies are European companies are suffering more from
less competitive than Asian competition in these sectors than in others. It is
companies in this regard. also relevant to note that only a small part of the
It is interesting to note that the overall costs faced by shipping companies are
widest gaps are found in the related to labour. Indeed, other operative and
financial costs might have a greater influence in this
respect.
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Benchmark analysis
shipping companies

Cost of personnel on
Sales

In conclusion, as a general trend, European


companies are confronted with higher costs of
personnel when compared to companies based in
Asia or in other regions. This issue has been only
partially overcome by investing in personnel
productivity, as demonstrated by the good
performances in terms of sales per employee.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Technological
developments
Ship sizes seem to be ever increasing as a
result of increased competition in the shipping
industry; causes are shown in Figure 2.17,
combined with the permanent search for cost
cutting, and the fact that technologies enable
larger ships. Shippers and consumers demand
more sea freight, and expect that service to
be reliable, and the reaction of the shipping
industry is increased capacity but with the
same number of ships. This allows better
control over the fleet to provide reliability of
service on the one hand, but on the other
hand, this also reduces competition and This increased capacity is coupled with the growing
therefore the number of carriers available for capacity of terminal operators to handle the cargo within
shippers. Ports are reacting to the trend an acceptable period of time, i.e. increased terminal
toward larger ship sizes with investments, productivity). The competition is important because it
better access to ports, mainly from already generally leads to innovations in ship size, advances in
existing mega-ports. information technology, the introduction of low emission
ships, tracking, tracing and monitoring, use of composite
[5] materials in the shipping industry, and new engines.
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Technological
developments

An increase in average
sizes of container ships can
be observed over the last
years, and even more
during the past ten years
(see Figure 2.18).

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Technological
developments
Furthermore, much research is being
conducted into innovating and improving
the characteristics of vessels. Researchers
from different organisations have started
investigating the possibilities of unmanned
vessels. Because of the fact that they
require fewer or even no personnel on-
board, there needs to be a reliable team to
remotely control unmanned vessels. This
goes in line with the reskilling of seafarers
and candidates to meet the highly
competent and capable labour needs for CO2 and other emissions will be reduced and the shipping
this kind of work. This may be an answer to industry can make massive savings due to lower fuel
the problem of making the maritime consumption. Technology is already available to achieve this,
industry more attractive and sustainable but current legislation prohibits unmanned ships. In order to
because unmanned ships can reduce change the law, research must demonstrate whether safety in
speeds, from 16 to 11 knots for example, unmanned vessels is at least as good as on existing manned
and in doing so, save up to 50% of the fuel vessels. Reskilling of seafarers to match their competences
they currently use. and capabilities to the needs of the new job vacancies, should
include more rewarding and new and more valuable job
vacancies, developing and attracting the best human
[5] resources of the EU
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Technological
developments

The competitiveness of the shipping


industry is also associated with port-
related technologies, as the
technological development of ships
cannot continue without ports being
able to support more advanced ship
operations. The Port Community
Systems (PCS) are one of the most
important port related technological
developments, designed to match the
growing efficiency and levels of
operations of the new ships. These PCS
allow seamless and reliable
information sharing between the ship
and all the relevant port and logistics
operators.
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Technological
developments

Technological developments influence


the costs (investment and operating
costs) for the maritime industry and
the levels of competition. Examples of
technological developments include
increasing ship sizes, unmanned
vessels, or alternative methods of
propulsion.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Technological
developments

Despite the existence of technological


developments, there is still no clear
understanding of the extent of the
diffusion of these innovations at the
global level. For instance, while ships
will continue to grow in size,
optimisation of ship designs could
drive technological developments
towards a more differentiated design
based on the specialised trade lanes
that the shipping industry serves.
Consider for instance, short sea
shipping versus deep sea shipping, or
the straits and channels used for sea
transport which differ per trade lane.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Technological
developments

Recently, the shipping industry


introduced a number of
technological developments, either
due to:
maritime transport needs,
environmental, safety, security
and labour regulations,
efficiency needs, and
fuel needs.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Technological
developments

Some of the
technologies that
may respond to
such drivers can
be introduced
either through
retrofitting or
through new
buildings, such
as those shown
in Table 2.6.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Technological
developments

Table 2.6 list a number of technological


developments taken up by the
shipping and maritime industry likely
to respond to a number of priorities,
which are:
1) Efficient and reduced power used on
board vessels,
2) Improved hydrodynamic and
performance and reduced vessel
impact at the sea,
3) Safer, secure, and efficient maritime
transport,
4) Improved overall vessel
performance,
5) Efficient and environmentally
friendly vessel powering, and
6) New concepts for innovative
services.
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Technological
developments

The above technological initiatives for innovation require different amounts of investments, but also have
different operational cost impacts. Depending on the level of pressure to automate or increase
productivity, the desire to invest in new technologies will be higher or lower. One of the recent
considerations for the maritime industry is fuel-related. The use of Heavy Fuel Oil (HFO)requires less
capital investments compared to Liquefied Natural Gas (LNG). However, the operating costs of HFO +
scrubber compared to LNG are higher (see Table 2.7). Additionally, although HFO + scrubbers and LNG are
comparable regarding their RoI over 15 years, LNG also entails supply chain efficiencies and flexibility, as
for smaller ports LNG can be supplied by trucks, rail and feeders.
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Environmental
requirements
Environmental regulations and
standards are traditionally key
drivers of vessel design and
business strategies in the shipping
industry. Since the SOLAS
Convention 1974, double hull
designs are required in all
passenger ships56. After the Exxon
Valdez accident, the USA required
the double hull design on oil
tankers with the oil Pollution Act
1990. The IMO followed with the
creation of the MARPOL
convention in 1992 for tankers’ oil
spills prevention. Finally the EU
accelerated the phasing in of
double hull design requirements
for oil tankers in the Regulation EC
417/2002.
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Environmental
requirements
MARPOL
ANNEX VI
To date, four large
developments regarding
emission legislation in
international shipping can be
distinguished, namely
MARPOL ANNEX VI, the
energy efficient design index
(EEDI), the Ship Energy
Efficient Management Plan
(SEEMP) and the White paper
of the EU (European
Commission, 2011).

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Environmental
requirements
MARPOL
A number of additional ANNEX VI
regulations and standards
have emerged over the last
four years and up to 2020 with
tight sulphur emissions. The
shipping industry has
responded through innovation
and new technologies, some
of which are mentioned in
preceding sections. The
driving and emerging
environmental regulations in
place today include:

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Environmental
requirements
MARPOL
An example of the drivers of ANNEX VI
the environmental regulations
are the emissions from
shipping due to the burning of
the sulphur content of marine
fuels. This contributes to air
pollution in the form of
sulphur dioxide and
particulate matter. Another
example is GHG emissions
from shipping, which led
IMO59 and EC60 to impose
environmental standards
through their Member States
to limit the emission of
greenhouse gases.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Environmental
requirements
MARPOL
ANNEX VI
The use for instance of LNG is expected
to bring emissions on NOx by
approximately 90%, and fuel costs
compared to Heavy Fuel Oil are down by
approximately 10%, and if LNG is
compared to Low Sulphur Maritime Gas
Oil, the cost is 40% lower. Accounting for
such differences, compliance with
sulphur regulations with the
introduction of LNG may represent a
generalised chain cost saving of around
5.2% for 4,500 TEUs Ships and 3.3% for
18,000 TEUs Ships.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Environmental
requirements
MARPOL
ANNEX VI
It is important to analyse the potential effects on
the competition in the deep-sea shipping
between seaports of the emerging international
maritime emission regulations on the one hand
and the potential underlying economic
motivations fostering the discussion of
introducing ECAs (Emission Control Areas) on the
other hand. The scope is limited to the main
container liners and the North European and
Mediterranean ports of call. For the policy-related
part, it has been found that the political theory of
public choice suggests that not the green lobby
but rather the petrochemical lobby is the major
driving factor provoking the very strict emission
caps

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Environmental
requirements
An alternative explanation can be traced to
international energy policy and the 'greening' of
MARPOL
the policy. The potential port shift from North
Europe towards Mediterranean ports seems
ANNEX VI
unlikely due to logistics disadvantages and service
problems in South-European ports, port
consolidation, economies of scale, the specific
nature of long distance container shipping and a
growing environmental awareness in North
European ports. Finally, no convincing proof has
been delivered that the main liner companies are
unprepared for this legislation and should be
persuaded to rearrange their routes in favour of
Mediterranean ports solely due to the various
emission regulations. The legal analysis however
pointed out that the current enforcement regime
of MARPOL Annex VI should be improved in order
to rule out the possibility of a low degree of
compliance in order to protect the competiveness
of complying ships
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Environmental
requirements
MARPOL
ANNEX VI
This argument is based on the
fact that despite increasing fuel
prices in the North Sea ECA (see
Table 2.9), the shift of
predominant position of pre-
ECA North-European ports to
post-ECA South-European ports
is limited to a small region in
North-Italy. This is based on a
Shanghai-Antwerp trip.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Environmental
requirements
Figure 2.12 differs very little from Figure 2.20, which implies that North European MARPOL
ports hardly give in hinterland regions to South European ports as a consequence
of the North Sea ECA. Only in North Italy, there is a minor shift towards a battle ANNEX VI
area from a few areas which previously were purely in hands of the North
European ports.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Security

The EU Maritime Security Strategy, adopted on


24 June 2014, identifies a number of threats
against maritime security:
a. Threats or use of force against Member
States’ rights and jurisdiction over their
maritime zones;
b. Threats to the security of European citizens
and to economic interests at sea following
acts of external aggression including those
related to maritime disputes, threats to
Member States’ sovereign rights or armed
conflicts;
c. Cross-border and organized crime,
including maritime piracy and armed
robbery at sea, trafficking of human beings
and smuggling of migrants, organised
criminal networks facilitating illegal
migration, trafficking of arms and narcotics,
smuggling of goods and contraband
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Security

The Strategy puts emphasis on the


importance of the naval capabilities
of the Member States to challenge a
number of the threat in case these
would occur in reality. Unfortunately
many navies of the Member States
have witnessed large budget cuttings
since the end of the Cold War to
such a scale that global operations
may be difficult to realise. But also
the flagging status of the merchant
navy plays a role. During the Falkland
With the reduced number of UK flagged ships this
Crisis in 1982 the United Kingdom
would be very difficult if not impossible nowadays
was only able to conduct the
according to British experts. Unfortunately this does
logistical operation to retake these
not only apply to the British navy only but to all
island because UK flagged vessels
navies of the European Union. There were already
were pressed into service to support
problems for EU navies to carry out two operations
the navy.
at the same time (the Libya crisis of 2011 and anti-
piracy operation Atalanta).
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Security

In order to play a role on the global level they rely on their own auxiliary ships or in case of
emergencies the merchant ships flying EU flags. The number of auxiliary ships has dropped down
sharply in EU navies (together with the number of warships). For example, in 1980 the Royal Navy of
the United Kingdom alone had fifteen tankers; today it has just five Tankers. Carrying on from this,
as of 2014 the German Navy has five Tankers, the French Navy has four Tankers, and the Italian Navy
has three Tankers. These are the navies of four principle European members of the NATO alliance,
and yet today their combined auxiliary strength, the thing which is most crucial to maintaining
effective fighting forces at distance from their nation’s shore, is on a par with what one of these
states had just thirty-four years ago.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Security

Most of the above listed threats can have a direct or indirect impact on maritime shipping. The
strategy however does not spell all these threats in detail. One of these could be named here. With
the introduction of the Exclusive Economic Zone (EEZ, article 55) the United Nations Convention on
the Law of the Sea (UNCLOS) generated a new potential for military conflicts at sea. The maximum
200 Nautical Miles wide zone gives coastal states sovereign rights for the purpose of exploring and
exploiting, conserving and managing the natural resources, whether living or non-living (Art.56
UNCLOS). This resulted in the need for additional boundary demarcation at sea. A specific role in
this process is given to islands, which according to article 121 UNCLOS islands generate their own
territorial sea and EEZ.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Security

The article also explains what an island is, or what it


actually not is: “Rocks which cannot sustain human
habitation or economic life of their own shall have
no exclusive economic zone or continental shelf”.
Since these wordings in UNCLOS many coastal states
have tried to convince other states that
1. They are the sovereign state of certain islands,
and
2. In case of doubt whether it is actually an island,
deployed military units on it on a semi-
permanent basis to testify that it can sustain
human habitation and hence define it as an
island in the meaning of UNCLOS which is
entitled to its own EEZ.
Many of the present island disputes are in Asian
waters, close to important international shipping
lanes (e.g. Spratly Islands in the South China Sea in
Figure 2.22). An escalation of these conflicts could
result in redirecting international shipping from Asia
to Europe and additional transport costs.
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Security

During the Libya crisis in 2011 it became clear that


European navies are not that well equipped to
handle a large security crisis close to the European
Union without the support of the United States
Navy

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Security

Of all the threats listed in the EU


Maritime Security Strategy above the
threats against port security and
piracy and armed robbery at sea have
had the largest effect on shipping
since the beginning of the 21 century.
Port security is arranged by the
International Ship and Port Facility
Security (ISPS) Code is an amendment
to the Safety of Life at Sea (SOLAS)
Convention (1974/1988) on minimum
security arrangements for ships, ports
and government agencies and came
into force in 2004. In the next section
we will discuss ISPS in relation to
workload of ship crews

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Security

Piracy and armed robbery against ships

Piracy, according to Article 101 UNCLOS, is


conducted
(1) on the high seas against
(2) another vessel and
(3) for private gain.
The IMO apples a wider definition and
speaks not of piracy, but of acts of armed
robbery against ships or at sea, thus also
encompassing attacks in territorial waters
and in internal waters like ports. There can This is because Article 105 UNCLOS entitles all
also be a political dimension to such acts. states to combat piracy in international waters,
The distinction between piracy (in while in all other cases only the coastal state has
international waters) and armed robbery in jurisdiction to act.
territorial waters and internal waters (ports)
remains very important.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Security

Piracy and armed robbery against ships

Piracy and armed robbery against ships


have undergone a change in patterns.
In 2000, most incidents occurred in
territorial waters and ports, with the
exception of the Strait of Malacca
where ships moving at high speed
were also subject to piracy and armed
robbery. In West Africa and in the Gulf
of Guinea there has been a . In Latin America, robbery is the main threat to
concentration of attacks on ships in the maritime security, affecting inland waterways as
Port of Lagos and the nearby Nigerian well as coastal waters and ports. The issue however
coast. Here, the pirates’ objective is rose to the top of the international maritime policy
usually to steal cargo, although agenda at the end of the last decade, when the
frequently crew members are also majority of incidents occurred in international
kidnapped and held for ransom waters, concentrated off the coast of Somalia.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Labour
Employment

The maritime transport sector is part of a global market which has developed a global governance
system based on the historic background of Mare Liberum (International Labour Organisation – ILO;
International Maritime Organisation - IMO). This system is well developed with instruments such as
the ILO’s Maritime Labour Convention (MLC), transposed into EU legislation by Directive 2009/13/EC,
and the IMO’s Convention on Standards of Training, Certification and Watchkeeping for Seafarers
(STWC), implemented by Directive 2012/35/EU.
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Labour
Employment

Crew sizes have become smaller due to


technological changes, greater efficiencies (larger
ships) and a push from shipowners to save labour
costs. The skills required by maritime professionals
have become more complex due to technological
developments and the increasing emphasis on
multi-model supply chains. In the last decade
security tasks have been added above the usual
working tasks of crews in order to comply with the
ISPS code (International Ship and Port Facility Code,
as part of the International Convention for the
Safety of Life at Sea SOLAS, 1974), as well as
additional security tasks to address piracy threats.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Labour
Employment

The effect that larger ships have on saving


labour costs is also interesting to note, as
illustrated by the two examples below:
1) When the capacity of a vessel dedicated to
bulk liquid transport is increased by 275%, the
costs of crew increase by only 2.68%, and the
technical costs by 25.64%; thus the daily crew
costs (data for 2007) were US$ 2610 in a
refined fuels tanker of 40,000 DWT, but only
US$ 2680 in both an Aframax tanker of
100,000 DWT and in a Suezmax of 150,000
DWT.
2) For bulk carriers, the cargo capacity and the
operating costs also show decreasing average
costs, that is, returns of scale. Thus, when the
cargo capacity is increased by 500%, the crew
costs increased by only 4.91% and the
technical costs by 77.82%.
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Labour
Employment

the role which labour costs play in the shipowners’ decision for ship registration, as labour
costs, together with maintenance and repairs, are one of the very few factors that shipowners
can directly act to reduce. This has resulted in a strategy undertaken by large ship-owning
countries and ship-owners to look for cheaper labour from outside Europe and reduce their
employment of European seafarers. European ratings are particularly affected by this
development, as illustrated in Table 2.10.

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Labour
Employment
A European Research project
demonstrated the considerable variation in
manning levels (deck and
engineering/engine officers as well as
ratings) for feeder container, product
carrier and Ro-Ro ships types between EU
Member States. The study concluded that:
Member States tend to have individual
approaches with regard to the
determination of safe manning levels;
Standard tables or catalogues on safe
manning are not used in the majority of
member states; and,
Safe manning levels are determined
mainly based on internal experience
gathered. According to this project there is
little standardisation of the vessel manning This means that a similar ship may require different
determination process across Member manning levels within the EU, which leads to
States. different operating costs and a disturbance of the
level playing field within the EU.
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Labour
Employment
Precise figures on employment in the
EU shipping sector are difficult to
deliver, as has been concluded by a
recent study for DG MOVE. The main
reason for this difficulty is a lack of
available data in most Member States.
The most recent report on shipping
employment was commissioned by
ECSA and gives an overview of direct
and indirect employment in the EU
shipping sector. Within the total
amount of shipping employment, 63%
of workers are involved in freight
transport (including towing and
dredging), 27% in passenger
transport, 9% in service and offshore
support activities, and 1% in renting
and leasing (Figure 2.23).

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Maritime Labour
Employment

Training needs in
the maritime sector

The competitiveness of European


transport industry is linked
intimately to the continuous
development and renewal of the
skills and competences of its Training CEDEFOP skill adaptation and mobility within the
workers. The transformation in labour market are particularly important for job creation when
European economic, competitive technological innovations drive growth and bring about
and technological landscape is sectoral shifts and occupational change. Initial vocational
likely to require innovative skills education and training as well as continuous training during
over the next years. The maritime the working life can help workers adapt to change and keep
sector, for instance within offshore, pace with the changing environment. Some studies are
is no exception to this. According suggesting that in the transport sector training employees
to the European Centre for the while on the job is required in order to meet up with
Development of Vocational increasing requirements. ETF points at the fact that jobs in the
transport sector are becoming more and more technical of
nature and that there is not enough supply to fill this gap
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Incentives and subsidies

Training needs in
the maritime sector

Each country may have


its own strategic
interest, which is then
reflected in its incentives
and subsidies. Table 2.11
shows examples of
incentives, subsidies or
support measures for
the shipping industry
and its cluster by the
countries of interest in
this study, as well as for
the top growing,
declining, and
consolidated flags in the
[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Incentives and subsidies

Training needs in
the maritime sector

[5]
YUDHA PRASETIYO
SECTION
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


Incentives and subsidies

Training needs in
the maritime sector

[5]
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Components of Strategic Planning

Source: Figure adapted from Marketing Strategy, Second Edition, by O. C. Ferrell, Michael Hartline, and George Lucas, Jr.
Copyright © 2002. Reproduced with permission of South-Western, a division of Thomson Learning.
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Marketing Strategy and Marketing Plan

• Marketing Strategy
– A plan of action for identifying and
analyzing a target market and
developing a marketing mix to meet the
needs of that market

Source:hocbongduhocmy.com.vn
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Assessing Organizational Resources and Opportunities

• Core Competencies
– Things a firm does extremely well (strengths),
which sometimes give it an advantage over its
competition
• Financial and human resources
• Reputation, goodwill, and brand names

Source:Aledo ISD
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Assessing Organizational Resources and Opportunities

• Market Opportunity
– A combination of circumstances and timing that
permits an organization to reach a target market
• Core competencies are matched to opportunities
• Strategic windows—
temporary periods of optimal
fit between the key requirements
of a market and the particular
capabilities of a firm

Source:tollebild.com
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Assessing Organizational Resources and Opportunities

• Competitive Advantage
– The result of a company’s matching
a core competency (superior skill
or resources) to opportunities
in the marketplace
• Manufacturing skills Source:The Balance Careers
• Technical skills
• Marketing skills
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 SWOT Analysis

• An assessment of the organization’s strengths,


weaknesses, opportunities, and threats
– Strengths—competitive advantages or core
competencies
– Weaknesses—limitations on competitive capability
– Opportunities—favorable conditions in the environment
– Threats—conditions or barriers to reaching objectives

Source:Dictio Community
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Establishing an Organizational Mission and Goals

• Mission Statement
– A long-term view, or vision, of what the
organization wants to become
– Mission statement answers two questions:
• Who are our customers?
• What is our core
competency?

Source: Email Vendor Selection


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Establishing an Organizational Mission and Goals

• Marketing Objective
– A statement of what is to be accomplished
through marketing activities to match strengths
to opportunities, or to provide for the conversion
of weaknesses to strengths
• Should be stated in clear, simple terms
• Should be accurately measurable
• Should specify a time frame for accomplishment
• Should be consistent with business-unit and
corporate strategy
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Levels of Strategic Planning

Source: Houghton Mifflin Company


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Corporate Strategy
• A strategy that determines the means for
utilizing resources in the various functional
areas to reach the organization’s goals
– Determines the scope of the business
– Guides its resource deployment
– Identifies its competitive advantages
– Provides overall coordination of functional areas

Source: Corporate Finance Institute


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Corporate Strategy
• Issues Influencing Corporate Strategy
Development
– Corporate culture
– Competition
– Differentiation
– Diversification
– Interrelationships among business units
– Environment concerns and social issues

Source: Corporate Finance Institute


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Business-Unit Strategy
• Strategic Business Unit (SBU)
– A division, product line, or other profit center within a
parent company

Source: Bayt.com Specialties


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Business-Unit Strategy
• Market
– A group of individuals and/or organizations that have
needs for products in a product
class and have the ability,
willingness, and authority to
purchase those products

Source: Houghton Mifflin Company


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Business-Unit Strategy
• Market Share
– The percentage of a market that
actually buys a specific product
from a particular company

Source: PetersGroup
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Business-Unit Strategy

• Market-Growth/Market-Share Matrix
– A strategic planning tool based on the
philosophy that a product’s market growth rate
and market share are important in determining
marketing strategy

Source: Wikipedia
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

 Business-Unit Strategy

– Factors determining SBU/product’s position


within a matrix
• Product-market growth rate
• Relative market share

Source: Statista
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Market-Growth/Market-Share Matrix (cont’d)


– BCG Classification
• Star—high growth market, dominant market share
– requires additional resources for continued growth
• Cash cow—low growth, dominant market share
– generates surplus resources for allocation to other SBUs
• Dog—low/declining market, subordinate market share
– has diminished prospects and represents a drain on the portfolio
• Question mark—high growth market, low market share
– represents a high-risk/cost opportunity requiring a large
commitment of resources to build market share
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Market-Growth/Market-Share Matrix (cont’d)

Source: “The BCG Portfolio Matrix” from the Product Portfolio Matrix, © 1970, The Boston Consulting
Group. Reproduced by permission.
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Marketing Strategy

• Target Market Selection


– Defining/understanding the target market by
• focusing on specific profitable customer groups/market
segments.
• recognizing changes occurring in the market.

Source: Demand Metric


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Marketing Strategy
• Creating the
Marketing Mix
• Analyze customer
needs, preferences,
and behavior
• Have the skills and
resources required for
product design, pricing,
distribution, and
promotion
• Maintain strategic
consistency and
Source: CoSchedule
flexibility in marketing
mix decisions
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Net Sights
• Corporate executives and marketing managers must stay
informed to develop successful strategies. CEO Express
provides access to newspapers, business journals, special-
interest publications, and syndicated news services as well
as a variety of other resources.

Source: Stitcher
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Creating the Marketing Plan


• Marketing Planning
– The systematic process of assessing
opportunities and resources, determining
objectives, defining strategies, and establishing
guidelines for implementation and control of the
marketing
program

Source: Stitcher
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Creating the Marketing Plan


• Benefits of Planning
– Provides the basis for internal
communication among employees
– Defines the assignment of
responsibilities and tasks and sets the
schedules for implementation
– Presents objectives and specifies
resource allocations
– Helps in monitoring and evaluating the
performance of the marketing strategy

Source: Pro-actions Business Coaching


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Creating the Marketing Plan

Source: Houghton Mifflin Company


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Implementing Marketing Strategies


• Marketing Implementation
– The process of putting marketing strategies into action
• Intended Strategy
– The strategy that the company decides on during the
planning phase
• Realized Strategy
– The strategy that actually takes place

Source: Houghton Mifflin Company


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Approaches to Marketing Implementation

• Internal Marketing
– Coordinating internal exchanges between the
firm and its employees to achieve successful
external exchanges between the firm and its
customers
– Helping employees understand and accept their
roles in the marketing strategy

Source: Assignment Point


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Approaches to Marketing Implementation


– External customers
• Individuals who patronize a business
– Internal customers
• A company’s employees

Source: The Sales Process Blog


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Total Quality Management


• Total Quality Management (TQM)
– A philosophy that uniform commitment to quality in all
areas of the organization will promote a culture that
meets customers’ perceptions of quality

Source: SlideShare
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Total Quality Management


• Benchmarking
– Comparing the quality of the firm’s goods, services, or
processes with that of the best-performing competitors

Source: Google Sites


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Total Quality Management


• Empowerment
– Giving customer-contact employees authority and
responsibility to make marketing decisions on their own

Source: Google Sites


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• The Role of Marketing in an Organization

• Empowerment
– Giving customer-contact employees authority and
responsibility to make marketing decisions on their own

Source: Steemit
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Organizing Marketing Activities

• Centralized Organization
– A structure in which top management
delegates little authority to levels below it
• Decentralized Organization
– A structure in which decision-making
authority is delegated as far down the
chain of command as possible
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Organizing the Marketing Unit


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• The Marketing Control Process

Source: Houghton Mifflin Company


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Controlling Marketing Activities


• Marketing Control Process
• Establishing performance standards and trying to match actual
performance to those standards

Source: Blue Dolphin Business Development


Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Controlling Marketing Activities


• Establishing Performance Standards
• Expected levels of performance against which actial
performance can be compared

Source: Nuphoriq
Departement Teknik Sistem Perkapalan ITS

3.1 Timeframe PT. MUARA JAYA

• Controlling Marketing Activities


• Taking Corrective Action
• Improve actual performance
• Reduce or change the performance standards
• Do both

Source: Failte Ireland


Departement Teknik Sistem Perkapalan ITS

3.2 Merging the Marine Money and Clarkson database PT. MUARA JAYA

1. Sample Data
sample includes all the merger and acquisition deals in the shipping industry available on the
Securities Data Corporation (SDC) database accessed through Thomson-Reuters. We do not
impose any restrictions other than requiring the acquirer to be a public listed company and
have announcement dates for the deal, while target firms can be either public or private. These
criteria result in 4,122 announced deals with a total value of over US$200 billion (see Fig. 1).
We collect share prices and relevant market and accounting data from Datastream
International. Data unavailability reduces our initial sample to 2,036 deals.
Departement Teknik Sistem Perkapalan ITS

3.2 Merging the Marine Money and Clarkson database PT. MUARA JAYA

2. Descriptive statistics
In Table 1 we present the annual distribution of the number of deals
and the mean and median of the market value of acquirers, the deal
value and the relative size of acquirer and target.17 The number of
deals increases between 1984 and the late 1990s. Around the 1992
financial crisis, M&A activity in the shipping industry slowed but
was followed by an upward trend towards the end of the 1990s,
which reached a peak of 66 deals in 1997. There was a decline in
2001/2002, seemingly triggered by the economic fallout from the
dot.com bubble, followed by an increasing trend until 2007 and
prior to the recent crisis, when it had reached an all-time high of 92
annual deals.
Departement Teknik Sistem Perkapalan ITS

3.2 Merging the Marine Money and Clarkson database PT. MUARA JAYA

2. Descriptive statistics
Departement Teknik Sistem Perkapalan ITS

3.2 Merging the Marine Money and Clarkson database PT. MUARA JAYA

Descriptive statistics of accounting and market variables for acquirers and targets are
presented in Table 2. The market and accounting monetary values are reported in US$
billions. The data are from Datastream and data unavailability restricts the sample size per
variable.
Departement Teknik Sistem Perkapalan ITS

3.2 Merging the Marine Money and Clarkson database PT. MUARA JAYA

3. Methodology and tests


use a standard market model approach to estimate the daily abnormal returns of the sample of
firm. The standard market model uses an OLS regression to estimate the parameters of the
market model, which regress the estimation-period daily returns of a firm on the daily returns of
a suitable market index from the same estimation period. The estimated coefficients are used to
compute the expected returns in the event period. The abnormal returns are then specified as:
ARit ¼ Rit EðRitÞ N 0;r2i
Departement Teknik Sistem Perkapalan ITS

3.2 Merging the Marine Money and Clarkson database PT. MUARA JAYA

3. Result
The results of the event study are reported in Table 3, which in Panel A lists daily average
abnormal returns from 5 days prior to the announcement date of the M&A deal to 5 days
after.25 No evidence of a significant pre-announcement drift in the share price of either
acquirer or target firms are observed, which implies the M&A announcement was a surprise to
the market
Departement Teknik Sistem Perkapalan ITS

3.3 Shipping Database Description PT. MUARA JAYA

 Database
• Information is not useful if not organized
• In database, data are organized in a way that
people find meaningful and useful.
• Database Management System (DBMS) is used to
input, sort, organize and store data.

Source: McKinsey
Departement Teknik Sistem Perkapalan ITS

3.3 Shipping Database Description PT. MUARA JAYA

 DBMS Components

Hardware: the physical computer system

Software: the program that allows users to access, maintain update the data

Data: Data are stored on the computer. In database data are separate entity from the

software that access them

Users: could be either (1) end users: people who has access to the database or (2)

application program: applications that access and process data

Procedures: rules that are defined and followed by the users


Departement Teknik Sistem Perkapalan ITS

3.3 Shipping Database Description PT. MUARA JAYA

 Database architecture
• Internal Level: Interact
directly with the hardware
• Conceptual Level: (1) Define
the logical view of the data.
(2) Define the data model. (3)
Contain the main functions of
the DBMS (4) Intermediary
level that free users from
dealing with internal level
• External Level: (1) Interact
directly with users (2) Display
data in familiar format

Source: W3schools
Departement Teknik Sistem Perkapalan ITS

3.3 Shipping Database Description PT. MUARA JAYA

 Database Model

• Database model defines the logical design of


data.
• Database model describes the relation between
different parts of data.
• There are three database models:
1. Hierarchical Model
2. Network Model
3. Relational Model
Departement Teknik Sistem Perkapalan ITS

3.3 Shipping Database Description PT. MUARA JAYA

 Hierarchical model

Source: Wikipedia
Departement Teknik Sistem Perkapalan ITS

3.3 Shipping Database Description PT. MUARA JAYA

 Network model

Source: Wikipedia
• Entities are organized in a graph
• Entities can be accessed through several paths
• Old and not used
Departement Teknik Sistem Perkapalan ITS

3.3 Shipping Database Description PT. MUARA JAYA

 Relational model

Source: Neo4j
• Data are organized in two dimensional tables (relations)
• Tables re related to each other
• Relational Database Management System (RDBMS) are more common model used today
Departement Teknik Sistem Perkapalan ITS

3.3 Shipping Database Description PT. MUARA JAYA

 Relational model

Source: Neo4j
• Data are organized in two dimensional tables (relations)
• Tables re related to each other
• Relational Database Management System (RDBMS) are more common model used today
Departement Teknik Sistem Perkapalan ITS

3.3 Shipping Database Description PT. MUARA JAYA

 Parallel & Distributed databases

Source: SlidePlayer
Departement Teknik Sistem Perkapalan ITS

3.4 Assumptions PT. MUARA JAYA

 What beliefs you as the researcher bring to the study.


 Use delimitations to address how the study will be
narrowed in scope.
 May be about the population of study, the instrument,
data gathering method, previous knowledge, etc.

Source: Product Frameworks


Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Present Value of Cash Flows as Rates Change

• Bond Value = PV of coupons + PV of par


• Bond Value = PV of annuity + PV of lump sum
• As interest rates increase, present values
decrease

Source: GENESIS
Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Bond Prices: Relationship Between Coupon and Yield


• If YTM = coupon rate, then par value = bond price
• If YTM > coupon rate, then par value > bond price
– Why? The discount provides yield above coupon rate
– Price below par value, called a discount bond
• If YTM < coupon rate, then par value < bond price
– Why? Higher coupon rate causes value above par
– Price above par value, called a premium bond

Source: Investopedia
Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 The Bond Pricing Equation


 1 
1 - (1  r) t  FV
Bond Value  C  
 (1  r)
t
 r
 
C= Coupon Payment
Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Interest Rate Risk


• Price Risk
– Change in price due to changes in interest rates
– Long-term bonds have more price risk than short-term bonds
– Low coupon rate bonds have more price risk than high coupon rate
bonds
• Reinvestment Rate Risk
– Uncertainty concerning rates at which cash flows can be reinvested
– Short-term bonds have more reinvestment rate risk than long-term
bonds
– High coupon rate bonds have more reinvestment rate risk than low
coupon rate bonds

Source: Corporate Finance Institute


Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Computing Yield to Maturity


• Yield to Maturity (YTM) is the rate implied by the
current bond price
• Finding the YTM requires trial and error if you do not
have a financial calculator and is similar to the
process for finding r with an annuity
• If you have a financial calculator, enter N, PV, PMT,
and FV, remembering the sign convention (PMT and
FV need to have the same sign, PV the opposite sign)

Source: wikiHow
Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Bond Pricing Theorems


• Bonds of similar risk (and maturity) will be priced to
yield about the same return, regardless of the coupon
rate
• If you know the price of one bond, you can estimate
its YTM and use that to find the price of the second
bond
• This is a useful concept that can be transferred to
valuing assets other than bonds
Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Differences Between Debt and Equity


• Debt
– Not an ownership interest
– Creditors do not have voting rights
– Interest is considered a cost of doing business and is tax deductible
– Creditors have legal recourse if interest or principal payments are
missed
– Excess debt can lead to financial distress and bankruptcy

Source: Gold Telegraph


Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Differences Between Debt and Equity


• Equity
– Ownership interest
– Common stockholders vote for the board of directors and other issues
– Dividends are not considered a cost of doing business and are not tax
deductible
– Dividends are not a liability of the firm, and stockholders have no legal
recourse if dividends are not paid
– An all equity firm can not go bankrupt merely due to debt since it has no
debt

Source: Living Building Chronicle


Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 The Bond Indenture


• Contract between the company and the bondholders
that includes
– The basic terms of the bonds
– The total amount of bonds issued
– A description of property used as security, if applicable
– Sinking fund provisions
– Call provisions
– Details of protective covenants

Source: www.lawonlinereport.com
Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Bond Classifications
• Registered vs. Bearer Forms
• Security
– Collateral – secured by financial securities
– Mortgage – secured by real property, normally land or buildings
– Debentures – unsecured
– Notes – unsecured debt with original maturity less than 10 years
• Seniority

Source: Teens Guide to Money


Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Bond Characteristics and Required Returns


• The coupon rate depends on the risk characteristics of the
bond when issued
• Which bonds will have the higher coupon, all else equal?
– Secured debt versus a debenture
– Subordinated debenture versus senior debt
– A bond with a sinking fund versus one without
– A callable bond versus a non-callable bond

Source: The Balance


Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Bond Ratings – Investment Quality


• High Grade
– Moody’s Aaa and S&P AAA – capacity to pay is extremely strong
– Moody’s Aa and S&P AA – capacity to pay is very strong

Source: mysmp.com
Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Bond Ratings – Investment Quality


• Medium Grade
– Moody’s A and S&P A – capacity to pay is strong, but more
susceptible to changes in circumstances
– Moody’s Baa and S&P BBB – capacity to pay is adequate,
adverse conditions will have more impact on the firm’s ability to
pay

Source: mysmp.com
Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Bond Ratings - Speculative


• Low Grade
– Moody’s Ba and B
– S&P BB and B
– Considered possible that the capacity to pay will degenerate.
• Very Low Grade
– pay

Source: mysmp.com
Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Bond Ratings - Speculative


• Very Low Grade
– Moody’s C (and below) and S&P C (and below)
• income bonds with no interest being paid, or
• in default with principal and interest in arrears

Source: mysmp.com
Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Government Bonds
• Treasury Securities
– Federal government debt
– T-bills – pure discount bonds with original maturity of one year or less
– T-notes – coupon debt with original maturity between one and ten years
– T-bonds – coupon debt with original maturity greater than ten years
• Municipal Securities
– Debt of state and local governments
– Varying degrees of default risk, rated similar to corporate debt
– Interest received is tax-exempt at the federal level

Source: Corporate Finance Institute


Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Zero Coupon Bonds


• Make no periodic interest payments (coupon rate = 0%)
• The entire yield-to-maturity comes from the difference
between the purchase price and the par value
• Cannot sell for more than par value
• Sometimes called zeroes, deep discount bonds, or original
issue discount bonds (OIDs)
• Treasury Bills and principal-only Treasury strips are good
examples of zeroes

Source: Smarter With Money


Departement Teknik Sistem Perkapalan ITS

3.5 Bond Interest Rate PT. MUARA JAYA

 Floating-Rate Bonds
• Coupon rate floats depending on some index value
• Examples – adjustable rate mortgages and inflation-linked
Treasuries
• There is less price risk with floating rate bonds
– The coupon floats, so it is less likely to differ substantially from
the yield-to-maturity
• Coupons may have a “collar” – the rate cannot go above a
specified “ceiling” or below a specified “floor”

Source: Investopedia
Departement Teknik Sistem Perkapalan ITS

3.6 Total Financing Need PT. MUARA JAYA

 To better understand how the underlying financing need in shipping has


developed during our period of analysis, we have created a proxy. Together
with our advisor and an industry professional (Greve, 2013), we have
determined that the Panamax bulk carrier class is a representative average
for the industry.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Assumptions
 Since the life expectancy of a ship is generally between 20-25 years, one can
argue that the second-hand prices for 10 year old ships would be most
representative for our proxy. However, the fleet modernization we have seen
in the past decade, partially driven by the increasing focus on fuel efficiency,
creates a skew towards the use of 5 year old second-hand prices. Thus, we
have decided to use the 5 year old second-hand prices for our analysis.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

 Calculation
 To create the proxy for total financing needs, we first calculated the financing
needs for the newbuilding and second-hand market. For the newbuilding
market, this was done by multiplying the newbuilding prices by the number of
deliveries in the respective month. Similarly, the financing needs for the
second-hand market, was calculated by multiplying the number of second-
hand ships sold by the second-hand prices. Adding these two together, we get
a total proxy of the total monthly financing demand for the Panamax class.
Departement Teknik Sistem Perkapalan ITS

3.7 Criticism of the dataset PT. MUARA JAYA

 In order of keeping integrity and avoid any misguidance in our data.

 3.7.1 Credibility of our data providers


 Public Capital Markets

• Public Issue
• Privileged Subscription
• Regulation of Security Offerings
• Private Placement
• Initial Financing
• Signaling Effects
• The Secondary Market
Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

Capital Market -- The market for relatively long-


term (greater than one year original maturity)
financial instruments.
Primary Market -- A market where new securities
are bought and sold for the first time (a “new
issues” market).
Secondary Market -- A market for existing (used)
securities rather than new issues.

Source: A Business Encyclopedia


Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

Public Issue
• Securities are sold to hundreds, and often thousands,
of investors under a formal contract overseen by
federal and state regulatory authorities.
• When a company issues securities to the general
public, it is usually uses the services of an investment
banker.

Source: SlideShare
Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

Investment Banker
• Investment banker receives an underwriting spread when
acting as a middleman in bringing together providers and
consumers of investment capital.
• Underwriting spread -- the difference between the price the
investment bankers pay for the security and the price at which
the security is resold to the public.

Source: Online College


Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

 Three primary means companies use to offer securities


to the general public:
 Traditional (firm commitment) underwriting
 Best efforts offering
 Shelf registration
Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

 Traditional Underwriting

Bearing the risk of not being able to sell a


security at the established price by virtue of
purchasing the security for resale to the public; Source:PwC
also known as firm commitment underwriting.

 If the security issue


does not sell well, either
because of an adverse
turn in the market or
because it is overpriced,
the underwriter, not the
company, takes the
loss.
Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

 Traditional Underwriting

Underwriting Syndicate -- A temporary


combination of investment banking firms
formed to sell a new security issue. Source:TEJU
Best Efforts Offering -- A security offering
in which the investment bankers agree to
use only their best efforts to sell the
issuer’s securities. The investment
bankers do not commit to purchase any
unsold securities.
Shelf Registration -- A procedure
whereby a company is permitted to
register securities it plans to sell over the
next two years
Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

 Privileged Subscription

Privileged Subscription -- The sale of new


securities in which existing shareholders are
given a preference in purchasing these
securities up to the proportion of common
shares that they already own; also known as a
rights offering.

Source:onionID
Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

 Terms of Offering

Terms specify:
the number of rights required to subscribe for an
additional share of stock the subscription price per
share the expiration date of the offering

Source: Due
Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

 Subscription Rights

Options available to the holder of rights:


Exercise the rights and subscribe for
additional shares
Sell the rights (they are transferable)
Do nothing and let the rights expire

Source: Fibank
Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

 Value of Rights

The market value of a right is a


function of:
the market price of the stock
the subscription price
the number of rights required to
purchase an additional share of
stock
Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

 How is the Value of a Right Determined?

P0 - R0 = [ (R0)(N) + S ], therefore
R0 = P0 - [ (R0)(N) + S ]

R0 = the market price of one right when the stock is


selling “rights-on”
P0 = the market price of a share of stock selling
“rights-on”
S = the subscription price per share
N = the number of rights required to purchase one
share of stock
Departement Teknik Sistem Perkapalan ITS

3.7.1 Credibility of our data providers PT. MUARA JAYA

 The Secondary Market

 Purchases and sales of existing stocks and bonds occur


in the secondary market.
 Transactions in the secondary market do not provide
additional funds to the firm.
 The secondary market increases the liquidity of securities
outstanding and lowers the required returns of investors.

Source: Corporate Finance Institute


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA


MARITIME SERVICE

Global provider of Maritime Communications


Solutions
Managing customer email & data services for
15 years
Installed on more than 4000 ships
Basis of meeting regulatory driven
applications
GlobeAlert ship security alert system
GlobeLocator long range identification and tracking of
ships
GlobeWeather forecasts
Other fleet management functions
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Service Overview
Satellite Delivery
CUSTOMER OFFICE
Efficient large file transfer
Marinet communications protocols Use existing office equipment and
systems to exchange messages
Sustained high speed transfer
and data with vessels at sea
Full duplex communications
Store and forward delivery
Email
Fax
Telex
Cable
Least Cost Routing Telephone
Email connectivity
Data Connectivity
GlobeCrewTM Kiosk
I
N
T GlobeSecureSM
Application E Optional Virtual
Data Satellite R Private Network with
Globe Wireless
N
E
T

HF Radio

Email Crew
Maritime Data
Network
Network Operations
Cost Effective Messaging Center
Near Real-Time Delivery
The Secure Message Handling
Timely delivery confirmation
System automatically routes all
CUSTOMER VESSEL Notification of satellite traffic incoming and outgoing
waiting on shore
messages to destinations
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Connected Worldwide
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

“Always on” connection


25 HF stations world wide
Approximately 300 channel pairs
Half receive and half transmit
Delivers 50,000 messages per day
Alternative to satellite systems
Traffic doubles every 18 months
Message growth and new applications
Flexible for efficiency improvement
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Guaranteed message delivery


Multiple frequencies and stations
Network operating centers in California and England
All stations have backup power
99.97% service availability over the last four years
Ships use both HF and satellite communications
Shipboard equipment is self diagnosing
24/7 customer support
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

Below Deck Equipment

Personal computer
Marine HF radio
Globe Wireless modem
Power supply
Departement Teknik Sistem Perkapalan ITS

DREDGING PT. MUARA JAYA

DREDGING

 Dredging is the removal of bottom sediments from streams, rivers, lakes, coastal waters and oceans.

 The resulting dredged material is transported by ship, barge or pipeline to a designated disposal site on land
or in the water

 Types of dredging: 1. capital dredging, 2. maintenance dredging

 Capital dredging: The term Capital dredging involves the removal of initial dredging there by increasing
the depth.

 Maintenance dredging: The term maintenance dredging involves the removal of sediments that have
accumulated since the previous dredging operation.

 Dredging involves project planning, design, operation and maintenance. Dredging, dredged material
disposal and other aspects of the overall navigation project should be considered as a totalproject.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

DREDGING REQUIREMENTS

 Dredges operate either mechanically or hydraulically.

 Dredgers has efficient pumps, heave compensating devices, electronic equipment for automatic
controls, water jets, sophisticated navigational equipment and advanced instrumentation.

 Basic dredging requirements are determined by channel design and shoaling rates.

 The quantities of material to be dredged are determined from past records and planning for
dredging
project should be based on long term requirements and hydrographic surveys.

 Horizontal positioning and depth measurements are conducted with electronic navigation and
positioning equipment and the data are usually reduced using computers.

 Accuracy and capabilities of positioning and surveying equipment are +/- 1 m or better using
global positioning systems.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

DREGING REQUIRED AREAS


1. Port and Harbours

2. Inland waterways

3. Maritime boards

4. Captive jetties

5. Shipyards

6. Oil and gas

7. Coastal protection

8. Recreation water bodies

9. Agriculture.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

DREDGING OPERATION LAYOUT

SEDIMENT DISPOSAL SEDIMENT TRANSPORT DREDGER DREDGE SITE


• Open Sea Disposal Barge transport Type Open
• Confined Disposal Pipeline Size Confined
• Beneficial Reuse Combi – B-P Dredging depth Sediment
Rainbowing Productivity
Fall pipe vessels
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

OPERATION AND DREDGER CLASSIFICATION


Dredgers classified based as:

Hydraulic - Removal of loosely compacted material

Least turbidity
Preferred choice in case of enclosed

water bodies calls for water

management.

Type : Cutter heads, TSHD, Hydraulic pipeline, Plain suction

Mechanical - Removal of both loose and hard compacted material.

Higher sand to water ratio.

Disposal site has a capacity limitation ( provided that the turbidity is


acceptable)

Type : Clamshell, Dragline and Bucket dredgers, Hopper.


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

TYPES OF DREDGERS

1. Mechanical dredges

2. Hydraulic dredges

3. Hopper dredges

4. Side casting dredge

5. Cutterhead dredge

6. Bucket wheel dredge

7. Dustpan dredge

8. Small hydraulic
dredge.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

CLASSIFICAION OF DREDGERS
DREDGE

MECHANICAL HYDRAULIC

SIDE PIPE
DIPPER BUCKET LADDER HOPPER AGITATION
CASTI LINE
N G

CLA DRA BACK BUCKET PLAIN CUTTE BUCKE DUS


M G HOE LADDER SUCTIO R T T
SHEL LINE N HEAD WHEEL PAN
L
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

MECHANICAL DREDGES

 A mechanical dredge has limited ability to transport dredged material.

 No self propulsion

 Relatively low production


 Advantages are : its ability to operate in restricted locations (e.g., docks, jetties and

piers)

ability to treat and dewater dredged material in placer mining operations


can be used in working with contaminated sediments with special adaptions.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

HYDRAULIC DREDGE

 Hydraulic dredges conduct both phases of the dredging operations. (digging and disposing)
 Placement or disposal is accomplished by pumping the dredged material through a floating
pipeline to the placement area or by storing the dredged material in hoppers that are emptied
over a placement area.

 Hydraulic dredges are more efficient, versatile and economical


 The dredged material is first loosened and mixed with ambient water by cutter heads or
water jets and pumped as fluid (slurry) through a long pipeline or to a hopper

 The basic components of a hydraulic dredge are dredge pumps, digging and agitation
machinery and hoisting and hauling equipment.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

HOPPER DREDGE
 Self propelled trailing suction hopper dredge revolutionized
the dredging industry by reducing the cost.

 Extensively used in Europe and the United States


 Can work in all hard materials
 Hopper capacities of several 100 to 10,000m3
 Usually unloaded through the bottom doors and some have pump-out
facilities
 The drag arms and drag heads extend from both sides of the hull, and each
is lowered to the sea bottom.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

HOPPER CONTINUED…
DREDGE
 The dredge moves slowly over the area to be dredged while the dredge
pumps move the sediment and water mixture through the drag arms into
hopper bins.

 Modern dredger have a single hopper in the mid-section.


 Drag head is the important part of the hopper dredge.
 A grating is used to prevent large objects entering the suction pipe
 New type of drag heads uses a rotating cylinder with knives
 An automatic drag head winch control system controls the movement of
the suction pipe and drag head.
 It has increased ability to operate in bad weather and minimizes risk damage
to equipment.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

SIDE CASTING DREDGE


 Side casting dredges discharge the dredged
material to the side of the channel and allow
for continuous dredging.

 Some hopper dredges are equipped with a


side casting boom
 These dredges are used to maintain
navigation channels where there is an

opportunity to place the dredged material


alongside the navigation channel.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

CUTTER HEAD DREDGE


 To excavate and move material hydraulically to a disposal location without
rehandling.

 During a dredging operation, the floating discharge and shore pipeline are
connected to the dredge.

 Additional equipment to support the operation is required such as derrick, tugs, fuel
and pipe barges, surveying boats and other site –specific special equipment.

 A cutter is connected at the forward end of the ladder and connected to the shaft of
the cutter motor.

 Generally two types of cutters: straight arm or basket.


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

CUTTER HEAD DREDGE CONTINUED…..

 Rotation of the shaft and cutter agitates soft or loose material and cuts hard material
that is then picked up by the suction.

 The ladder supports the cutter, suction pipe, lubricating lines and usually the cutter
motor and reduction gear.

 Forward end of the ladder is supported by an a-frame with hoisting equipment to


raise and lower the ladder.

 Length of the ladder determines the dredging depth.


 The diameter of the discharge line depends on the pump size and the suction pipe
diameter is usually 1.25 to 1.5 times the pump discharge diameter when a ladder
pump is not installed.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

CUTTER HEAD DREDGE CONTINUED…..

 Dredge pump is located forward in the hull with its centre near the loaded
waterline.

 Diesel engine, diesel electric motor or steam or gas turbine can be used to
drive the pump.

 Some cases, shore electric power may be used to drive the pump.

 Horse power varies from 186 to more than 11,186 KW.

 Pump rotative speed varies from about 300 to 900 revolutions per minute.

 Dredge is moved and held in position with spuds.


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

BUCKET WHEEL DREDGE


• A rotating wheel equipped with
bottomless buckets is used to cut or
loosen soil that is then directed into
the interior of the wheel and
conveyed to the suction line.

• The bucket wheel is attached to the


ladder as shown in the fig.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

DUSTPAN DREDGE
• The dustpan dredge is a hydraulic,
plain suction vessel.

• The wide (about same as hull width)


vacuum cleaner like head is lowered
to the bottom by winches.

• It has a high velocity water jet to


agitate and loosen material that is
subsequently pumped through a
floating pipeline to a disposal area.
Departement Teknik Sistem Perkapalan ITS

FINANCIAL PROVIDER PT. MUARA JAYA

INTRODUCTION

• Banks were used only a place to park


surpluses in earlier times.
• Banks have come out with many products.
• Forayed in rural areas.
• Provide third party products.
• Become one stop service providers.
• Convenient to customers.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

FINANCIAL SERVICES
 DISTRIBUTION
 Insurance products
 Gold coins
 Mobile recharge
 Mutual funds
 Government bonds
 DEMAT ACCOUNT
 SAFEKEEPING SERVICES
 COLLECTION OF TAXES & UTILITY BILLS
 ADVISORY SERVICES
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

INSURANCE

Insurance is defined as the transfer of the risk of a


loss, from one entity to another in exchange for
payment.
FEATURES:
 Insured is compensated for the financial loss
 Risk is transferred from insured to insurer
 A person can take more than one policy
 Insurance policies can be modified
 Premium is charged for Insurance contract.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

ADVANTAGES

• Safe and profitable long-term investment


• Assured income through annuities
• Uncertainties are reduced
• Creation of wealth over a period of time.
• Protection against rising health expenses
• Tax Benefits
• Planning for life stage needs.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

TYPES OF INSURANCE

(A) LIFE INSURANCE :


• Term Life Insurance
• Whole life insurance
(B) GENERAL INSURANCE
• Home Insurance
• Travel insurance
• Motor vehicle Insurance
• Health insurance
• Fire insurance
• Marine insurance
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

GOLD COIN

• It is universally acceptable since the coin is made of gold.

• Free and unrestricted import and export of gold under gold coin
standard ensures stability in foreign exchange rates.

• This is the simplest form of gold standard which can be easily


understood by the common people.

• Buying gold coins is its ease to liquidate.

• They have intrinsic value.


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

MOBILE RECHARGE

• Customers can recharge their account easily and instantly. The


account debits are reflected immediately into the account.
• Customers can enjoy the benefits of doing anytime and everywhere
online recharge.
• Online Recharge facility offers complete freedom to consumers to
do instant recharge of any desired amount as per their
convenience.
• Online recharge enables stress free, user friendly and convenient
option of refilling of the prepaid account for doing online recharge
over the internet.
• Online recharge not only offers convenient way of recharging
account from home, it also saves time and energy
• You can get your prepaid account recharged anytime and from
anywhere because they offer services 24/7 basis
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

MUTUAL FUNDS
• Pools savings from a number of
investors having a common
financial goal.

• Money is invested in capital


market instruments.

• Investors known as unit


holders.

• Shares profit & losses in


proportion to their holding.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

ADVANTAGES

• Diversification
• Transparency
• Tax benefits
• Professional management
• Liquidity
• Low transaction cost
• Well regulated
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

STRUCTURE OF MF

• Sponsor
• Trust
• AMC
• Custodian & Depositories
• Registrar & transfer Agents
• Bankers
• Distributors
• Brokers
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

TYPES OF MF
• Based on structure:
 Open-ended funds
 Close ended funds
• Based on type of security:
 Debt fund
 Equity fund
 Money market MF
• Hybrid funds
 Balanced funds
 Growth & income funds
 Asset allocation funds
• Others
 Commodity funds
 Real estate funds
 ETFs
 Fund of funds
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

GOVERNMENT BONDS

• Debt instrument
• Amount invested for a certain amount of time with a
certain interest rate.
• Issued in domestic currency
• Bonds issued in foreign currency- Sovereign bonds
• RBI Relief bond is the most popular.
• Tax saving tool for individual investors
• Carry 8.5% interest rate compounded half- yearly
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

DEMAT ACCOUNT

• Demat Account, a short form of saying Dematerialized Account is a type of


banking account which dematerializes the paper based physical shares.
• It can be considered as another form of a personal account where people keep
shares instead of money and cheques.
• Demat account allows you to buy or sell shares in safe, secure and convenient
way without any delay and paperwork.
• Opening a Demat account is as simple as a bank account opening.
• You can open a Demat account with any registered depository participant (DP).
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

PROCESS.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

DEPOSITORIES AND DPs

• A depository is a place where the stocks of investors are held


in electronic form.
• The National Securities Depository Ltd (NSDL) and the Central
Depository Services Ltd (CDSL).
• Under the arrangement, the Depository acts as registered
owner of the securities in electronic form in the books of issuing
company and the client will be the beneficial owner.
• The Depositary Participants are the agents governed by
Depositories through which one can operate the Demat
account.
• Depository participants are mainly banks and brokers. There
are 276 DPs in India.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

• Any individual or corporate can open a Demat


account.
• It is possible to open more than one Demat account in
identical names.
• Once a Demat account has been started, it is not
possible to change the account name.
• In such case a new Demat account needs to be opened
in the changed name, securities are to be transferred
from the old account to the new account and the old
account needs to be closed.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

BENEFITS
• A safe and convenient way to hold securities;
• No odd lot problem, even one share can be sold;
• Nomination facility
• Reduction in transaction cost.
• Change in address recorded with DP gets registered with all
companies
• Transmission of securities is done by DP eliminating
correspondence with companies
• Automatic credit into Demat account of shares, arising out
of bonus/split/consolidation/merger etc.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

SAFE KEEPING.

SAFE DEPOSIT VAULT :-

 Safe keeping facility is a


traditional function of banks.

 Lockers are easily access &


provided at very reasonable rates.

 Rents are charged as per size of


the locker and are payable in
advance.

 Locker can be hired by


Individuals, Firms, Limited
Companies, Association, Societies
etc.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

CONTD….

 Lockers are rented out for a


minimum period of one year.

 Nomination for Safe deposit


locker are available.

 Banks have two keys, one of


which is kept with the banks
so that bank can control
access to safe.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

SAFE CUSTODY.

 Banks accept sealed packets of


valuablesfor safe keeping in their
strong rooms.

 Packets were kept in the bank’s safe.

 Articles are returned upon the


customer handling over the receipt.

 Banks today deposit the


duplicate keys of branches for
safe custody with other banks in
case of emergencies.

 Only given in exceptional cases.


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

CONTD…

 Annual rent is calculated from the date you open the locker to the
same date next year.

 If you decide to close your locker in midyear ,in most cases, you
forego the annual rent which you paid at the beginning of the year.

 Most banks claim that confidentiality of the locker’s contents is


maintained, unless the income tax authorities or the police deem
otherwise.

 Locker facility is not available at all branches of a bank.


Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

COLLECTION OF TAXES

 Earlier, taxes payable to the Central government


and state governments could be paid only at the
branches of the SBI and other public sector banks.

 Now, almost all banks, including private sector


banks, have been authorized to collect taxes on
behalf of the government.

 The amount collected are remitted to RBI where


government account are kept.

 To facilitate easy payment of taxes, banks are


providing the facility of online payment of taxes
through net banking.
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

PAYMENT OF UTILITY BILLS

• Collection of utility bills


such as:

Telephone bills

Mobile bills

Electricity bills
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

CONTD..

• Standing instructions

• Convenient to
customers

• Banks earn
commission

• Maintain accounts of
utility organisations
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

ONLINE PAYMENTS

• Online shopping

• Advance tax

• Insurance premium

• E-tickets of railways, airlines

• Payment through debit


card/credit card
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

ADVISORY SERVICES

• Professional assistance needed by investors


• Banks offer consulting services to private banking
customers
• Help in minimising risks & maximising returns
• Help customers in conducting investment
transactions
• Contribute a substantial portion of profits of retail
banking business of banks
Departement Teknik Sistem Perkapalan ITS

PT. MUARA JAYA

TYPES OF ADVISORY SERVICES

• Wealth advisory services

• Asset advisory services

• Transaction advisory service


s
• Portfolio advisory services

• Debt advisory services


YUDHA PRASETIYO
SECTION

Thank You

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