Outcome 5 part 1 Flashcards
What is the starting point for risk analysis in ship financing?
The starting point for analysis is cashflow analysis. Because shipping is so capital intensive, financial structure has a major impact on the cashflow and true risk can only be identified by working through this.
Explain how different financing options carry different levels of risk via the use of an example. (List the 4 scenarios)
Some financing options that allow comparison of risk with same market cycle:
1. Relatively short-term loan of 6 years, 70% advance, equal payments over term.
2. Relatively short-term loan of 6 years, smaller payments for 5 years and one bullet payment in last year
3. Long-term lease of 15 years, equal repayments over term, interest on declining balance basis
4. 15 year bond, 9% annual coupon, principal paid in year 15
Draw the graphs from figure 14 (lots of effort but might be worth it)
Case 1:
Loan made at top of a freight cycle; rates don’t cover repayments, but 70% of loan has been paid down, so ships remaining market value covers outstanding amount. Repossession is a hassle and bankers want to avoid – so 6 year loan is not ideal for financing a new vessel – RISKY
Case 2:
Repayments much lower in first 5 years, reducing cashflow risks, but if bullet cannot be repaid – becomes a problem – RISKY
Case 3:
Spreads repayments over long period, some years there might be a shortfall, but surplus in other years results in full payment. Problem arises if no alternative funds to cover periods of shortfall – default. LESS RISKY
Case 4:
Interest fixed at 9% and principal only repaid in final year. Provided shipowner could cover any shortfall periods, leads to a profitable situation all round. Although, doubtful whether such a structure would exist without partial amortization due to refinancing risk.
Summary
Any financial structure relying on earnings to repay interest and principal during first half (of this example; replace with ‘sustained period of low earnings’) was bound to run into problems. Bond works well because payment is deferred until cash had accumulated at end of period.
