Is ship finance transforming faster than shipping? This was the question asked to the panel of the Seatrade ShipTech virtual conference, which included our Strategy Consultant, Sean Mclaughlin, alongside Paul Tivnan, CFO at Ardmore Shipping, George Mangos, Principle at Interunity, Jan Henrik- Hübner, Global Head of Shipping Advisory Maritime at DNV and Gary Howard, Europe Editor at Seatrade Maritime News. Sean provided invaluable advice about attitudes to investments in sustainability, green bonds, and staying apace with the new ship finance environment, which is outlined below.
The new industrial revolution
There is no doubt that shipping is currently experiencing unprecedented changes. Decarbonisation is going to have as much impact on the world as the industrial revolution of the 19th century. Only those who recognise both the risks and the opportunities, and have a strong game plan, will get appropriate financial support. Recognising the criteria needed to secure green financing is critical. Don’t think that you are immune from the measurement behind green financing. This may be where your funder is getting their cash from and in the long run all financing will be subject to “green” measures.
Whether retrofitting or building new vessels, the costs and time involved in shipping’s green revolution are substantial. Getting a strong cash and carbon return on investment is essential to success. Understanding your decarbonisation options and how demand will ebb and flow is key to making informed investment decisions at the right times. It is going to be a rollercoaster ride for most organisations, and for those who don’t recognise the direction of travel, it will be far from enjoyable.
The name’s bond, green bond
At the moment, genuinely green shipping projects are scarce, but there is finance available for them. This is great news for progressive ship owners and operators. However, it is important to remember, that when it comes to green bonds, don’t forget the word bond. It will still be priced based on the underlying credit risk. In time, the word bond becomes more relevant than the word green. Don’t think of going green as an option for cheap money. Sooner or later you will need to think of it as the only option because soon all finance is going to be green.
The Poseidon Principles provides evidence that green thinking in finance is becoming the norm, not the exception. While there was good social intention behind the principles, the real driver behind signing up was a hard commercial fact. If banks don’t recognise the impact of climate change on business, then they will end up with loan books that are worth nothing because the underlying assets behind that lending will be worthless.
Regardless of the size of your shipping company, you need to be prepared for decarbonisation now. While effective financing can be a challenge for smaller owners, you need to rise to that challenge. Looking on the bright side, smaller owners have the potential to move faster; if they have a good plan for their fleet. Taking an innovative approach to raising finance is key – if you find traditional finance relationships aren’t available, then you need to be prepared to cast your net wider and think of alternative financing structures.
Sean McLaughlin, Strategy Consultant at Houlder comments: “I spent a lot of my life arranging finance. Dealing with both debt and equity providers, there were two critical factors found in almost every transaction; you need a decent management team, with a decent strategy. The simple maxim in private equity is that you will invest in a bad business with a good management team before you would invest in a good business with a bad one. I would suggest that a good management team is one that recognises the challenges and the opportunities presented by decarbonisation.”
So, how can you develop an effective decarbonisation strategy? Start with the ship, not the clean technology or future fuel being offered. The solution to the efficiency problem is based on the dynamics of the ship and its unique operating profile. For example, Houlder recently completed a study on how a client could improve the fuel efficiency and therefore carbon performance of their vessels. The team found that through an improved operating profile supported by an automated docking system, the client had an opportunity to save 25% of the annual fuel bill. Who wouldn’t be pleased with that outcome? Win / win!
One of the problems with any green debate is that too many people think there is or will be a silver bullet, so they wait until it comes. But the reality is that, for decarbonisation, there’s no single or simple answer to all the challenges. Start by finding small efficiency improvements now. Otherwise, Carbon Intensity Indictor (CII) regulations, or the EU Emissions Trading Scheme, or even future UK and US climate regulations will catch you out.
Houlder continues to be approached by several alternative funders who are looking for investment opportunities, where they can help deliver life cycle or operational improvements to vessels. They are looking for owners who have the operational capabilities but may lack access to funding. Meanwhile, our traditional community of clients are looking for technical advice on managing their decarbonisation risk. Houlder is well positioned to assist shipowners and funders in navigating the multifaceted decarbonisation challenge.
To find out more about our advisory work, please visit: https://houlderltd.com/service/consultancy-vessels/