Outcome 4

Question 1

List the four ways ship-owners and shipping companies can raise finance:

Answer 1

1. Private funds
2. Banks finance
3. Capital markets
4. Special purpose vehicles

Question 2

Discuss 1. Private funds

Answer 2

• owner’s private resources, the earnings of other owned ships, or investment/loan from friends or family. Friends/family who understand shipping more likely to tolerate volatility of its returns. Occasionally companies or high net worth individuals.

Question 3

Discuss 2. Banks finance

Answer 3

• Mortgage-backed loan – Term loan provided by bank, secured against mortgage on ship. Large loans may be syndicated between several banks. Allows banks to lend to one ship companies which would otherwise not be creditworthy for large loans required. Loans should generally not exceed 50%, but no firm rules. Credit judgement must be made by bank on acceptable risk level.
• Corporate loan – Loan secured against the company’s balance sheet. Used by large companies. Advantage is the flexible source of capital – term loan repaid relatively quickly but revolving credit provides overdraft facility to cover cashflow fluctuations.
• Shipyard credit – Loan provided or guaranteed by government to assist domestic shipyards in obtaining orders
• Mezzanine finance – high-yielding debt, with some form of equity attached, e.g. equity warrants. Not widely used in shipping.
• Private placement - place funds directly with companies that need finance. Only really available to shipping companies of investment-grade quality.

Question 4

Discuss 3. Capital markets

Answer 4

3. Capital Markets:
   * Public offering – if a private company wants to raise equity in public market it must make an IPO. Prospectus drawn up describing company, its markets and financial performance, and offering shares to be listed on specific exchange. Once issues is made, shares traded on secondary market where price determined by supply and demand. Allows investors to buy and sell shares at any time.

*Bond issue – debt security redeemed on specific date on which issuer pays interest. Shipping company sells bonds to financial institutions and pays them interest and at end of term the capital repaid to bondholder.

Question 5

Discuss 4. Special purpose vehicles

Answer 5

• Special purpose company (SPC) – shares in a special purpose company sold privately by individuals or may be listed on stock exchange.
• Limited partnership – Limited liability partnership set up as a vehicle for financing ships
• Finance lease – Long-term finance based on sale of ship to company which benefits from tax allowances and leases ship back to user.