Like all other businesses, those operating in the shipping world must sometimes find financing to keep their operations running. To that end, shipping company owners and freight forwarders must secure financing from various lenders. While the surge in shipping has brought in many lenders to the ship financing world, regulations play a significant role in how ship financing occurs.
Regulatory Compliance
In September of 2008, banking giant Lehman Brothers shocked the world by filing for bankruptcy and triggering a mass of banking issues. Other banks started falling like dominos as they searched for answers to massive debt issues occurring due to mortgage backed securities. Eventually, Bear Stearns took a fall and so did the stock market. Auto dealers felt the pinch, setting the stage for TARP loans, which would eventually go to help bail out different banks. This episode has since been dubbed the Great Recession.
As a result of the massive banking crisis, regulators started instituting widespread regulations for how the financial system will operate and how they will react in a time of crisis. In the United States, Congress passed the Dodd-Frank Act, which was the most sweeping banking regulation since the Great Depression. Across the pond, EMIR, the European Markets Infrastructure Regulation, went into effect. Basel II and Basel III were enacted, giving regulators wide authority to regulate the banking world.
These also affected the ship financing world where regulations and other circumstances changed the landscape dramatically.
Lending
Due to these regulations, lenders had to reconsider who and how they will lend their money. In fact, in 2016, ship financing syndicated loans were at $50 billion, whereas 2007 had them at $120 billion. This huge decrease corresponds with the downturn in the US economy and the change in conventional banking patterns.
Most of the syndicated loans in 2007 were via European banks, which have pulled back significantly due to regulations, in particular Basel III.
Current Lending Trends
With the pullback of European bank financing with an increasing growth in global shipping, someone had to step in and fill the void. Asian banks, particularly banks in China, have become increasingly active in the ship finance market.
In addition, larger shipping companies have utilized capital markets in the United States and Europe to finance their operations. They have gone and issued corporate bonds to get an immediate influx of cash in return for future payments.
For mid sized and smaller shipping companies, capital markets may not be feasible. Many of those companies utilized private equity funds, though those opportunities seem to be drying up in this market. Mid and small companies have also increasingly used mezzanine financing to bankroll shipping operations. Similarly, mid and smaller companies will look to alternative sources like factoring to finance their operations as they go forward.
If you are involved in the shipping business, partner with a law firm that understands the ins and outs of your business. Partner with the Kolodny law firm, a maritime law firm.
(image courtesy of Aidan Bartos)
Alan Kolodny is committed to representing injured clients in Texas and throughout the United States. Alan earned his B.A. from Rice University and his J.D. from Southern Methodist University.
He focuses his practice on representing plaintiffs in personal injury cases involving the following matters: maritime and offshore accidents, including those under the Jones Act; automobile and 18-wheeler truck accidents; and industrial site accidents, work-related accidents, and claims for injured railroad workers under the Federal Employers’ Liability Act.
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