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Interview with a maritime hedge fund manager

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This week we interview the manager of a maritime hedge fund to discuss his views on finance in shipping markets.

What are today’s smart investment opportunities?

Greener fuels, optimization and automisation of the logistics chain (artificial intelligence) and autonomous ships are great R&D investments for larger shipping companies that can afford them, however there are significant financial barriers for smaller entities.

Are banks willing to invest in new technology?

Generally speaking no, they prefer tried-and-tested investments, they are not trailblazers in terms of taking risks. What it comes down to effectively is the second-hand value. The banks prefer to finance generic assets with a liquid secondary market. New tech investments are, and should, usually be financed by equity.

Is there hope for bank lending this year and beyond?

Slowly but gradually I believe that shipping banks may increase their lending to the sector. The latest struggle for banks has been their offshore lending portfolios which have required their full attention. This exposure has now somewhat stabilised (through restructuring etc) although it will take a lot longer before the sector itself will fully recover. Provided offshore and the shipping segments do recover however, the risk goes down, activity goes up, and the banks will increase their lending once again.

Are ship finance banks able to finance new projects? If so, what type of vessels are they willing to finance?

Perhaps, if you are a long-standing client, in good financial shape, i.e. positive cash flow and a solid balance sheet, and the leverage that you require is not more than 50-55%.

Banks prefer to finance newer tonnage, ideally less than 5 years old, maximum 10 years old, unless they are refinancing vessels. Most shipping banks would prefer not lend towards anything smaller than a Handymax unless it is a fleet financing.

How many banks are currently lending and what amounts?

There are indeed a number of well-known banks who remain active in the shipping sector. The lending amounts vary and could typically range from $20-25m for a single vessel to a small client, to $200-300m for a fleet of vessels, typically then as a participation in a larger syndicated facility as opposed to bilateral lending.

Is there enough money to finance new projects?

Yes, there is enough money in the system to finance more than just replacement projects. That said, the market will never be as it was before the financial crisis since nowadays the banks are required to hold 2-3 times the amount of Tier 1 capital than they used to. Consequently, banks will never have the same capacity to provide as much and as cheap liquidity as they did before 2008. This is significant because the maritime sector cannot really flourish without abundant and inexpensive capital.

What about Startups? 

It is almost impossible for startups to gain finance from banks today. They tend to use alternative solutions for financing such as leasing houses (sale & leaseback), private lending or private equity. The problem with this however goes back to what I previously said about shipping companies not being able to afford too high a funding cost given the return of the assets themselves. This is, or should be, the greatest barrier to entry into the industry for startups.

Is consolidation necessary?

Yes I believe so, at least in certain sectors, dry bulk being the prime example. This is unlikely to happen however since most shipowners, to put it diplomatically, rather like to go it alone. Other sectors, like container, have already seen a lot of consolidation. Some sectors, like car carriers, are practically oligopolies and would probably benefit from an increase in competition.

IPO’s and Capital markets, are they moving towards a recovery?

Probably not, the capital market for shipping will not recover until the markets themselves improve significantly. Even then, the companies themselves must gradually improve to the point where their share prices and market capitalisations do not constitute a liquidity barrier for entry by the larger institutions. That could take a while and consolidation would help in this respect.

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