Foreign banks leading ship finance

Foreign banks are increasingly moving in to fill the vacuum left by local banks that have been reluctant to enter the shipping finance market.

Existing foreign banks in the UAE with experience in financing ships in mature markets are setting up transport desks in the region, fully staffed with maritime economists and bankers, said senior market sources.

And some international banks are entering the region for the first time specifically to tap the shipping industry with departments dedicated to ship finance.

“There has been a vacuum in the sector for some time due to the lack of enthusiasm expressed by local banks towards shipping finance,” says Jonathan Hill, managing director, shipping funds, Tufton Oceanic in Dubai.

“Foreign banks are increasingly being lured to this region because of this vacuum plus the clear performance of the regional shipping market that has been on a rise.”

Despite the excellent performance, the regional shipping market has increasingly found it difficult to secure financing from local banks and instead many have had to arrange financing from banks overseas.

Currently, National Bank of Fujairah is the only bank in the region dedicated to ship finance, while other local banks such as Emirates NBD, have extended only a few loan facilities on ships.

Meanwhile, French bank Natexis Banque Populaire and Dutch-owned Fortis Bank have established offices at Dubai International Financial Centre (DIFC) to specifically target the financial needs of regional shipping companies. Although the two banks are not new to the UAE financial sector, it is the first time in the region that they are concentrating on shipping finance as a separate unit.

Other foreign banks in UAE with transport desks dedicated to shipping finance include Standard Chartered Bank, Credit Suisse and Hypoveriens Bank.

While a few local banks have endeavoured to provide some financing, it has been deemed insufficient and often comes with strings attached. Industry analysts believe the reluctance by local banks to provide financing stems from their lack of knowledge of the shipping industry and the general dynamics of the market.

They also argue there is a general lack of interest on the subject among local banks since they have not ventured to find out the benefits that underline the need to grant ship loan facilities. Hill notes local banks still consider shipping finance a risky venture considering the industry’s past.

“The history of shipping is that it is a volatile industry. There have been previous investments done and backed by bank loans but did not go well and banks lost money. This explains the general lack of interest and the reason why banks are reluctant to become experts on the subject,” reasoned Hill.

Against this background, Tufton Oceanic began its operations in the region in 2001 to help arrange loans for regional shipping companies from banks overseas and to create ship leasing funds.

The company has worked with major banks involved with ship finance in London, Hamburg and Rotterdam as well as banks in France to help secure financing for local shipping companies. And in 2004, Tufton Oceanic struck up a deal with Dubai Islamic Bank to start a ship leasing company, Al Islami Oceanic Shipping Company, utilising Shariah compliant equity from the bank. A second fund with Dubai Islamic Bank was formed later with a similar name.

“DIB gave us capital to invest. We leveraged it with that and bought a number of ships for lease, we put them on lease and once we had spent the initial amount of capital, DIB issued investment units, which the retail customer buys,” said Hill.

In the first fund, investment units were sold for $25,000 (Dh91,750) a piece with a projected yield of about 8.5 per cent.

In the second Al Islami company, investment units are being sold for $25,000, with a projected yield of eight per cent per annum.

In February this year, Tufton Oceanic started up another fund with a Kuwaiti financial house with an equity commitment of $50 million, and with leverage, it will enable the company to purchase ships for $200m to $250m for lease.

“We are documenting our first transaction. Once the entire process is completed, we will start selling investment units or shares to investors identified by the fund,” explained Hill. The company also operates another fund, the Oceanic Operating Lease fund, which is funded by capital from other sources in Australia, hedge funds in the United States and other countries outside the Middle East.

“With this core capital we get, be it from DIB, Kuwait fund or Oceanic Operating Lease Fund, we leverage that by going out to commercial banks and borrowing debt that is secured on ships we wish to purchase or lease,” said Hill.

He said banks in the region need to change their attitude towards the shipping industry in order to support its current performance record and the dream to make Dubai a maritime hub.

“Shipping finance is the backbone of a successful shipping industry. If you look at countries such as Singapore and Greece that have become major maritime hubs, they have been successful due to an excellent shipping finance system.”

However, local banks are currently presented with the challenge of a lack of people with specialised knowledge of the shipping industry.

While local banks might wake up to the benefits of shipping finance, their efforts may be curtailed by the very high costs involved in importing experts from countries with mature ship financing systems as well as costs of training the current staff about the market.

As more foreign banks, with vast experiences in the shipping industry enter the region, they will tend to have a competitive edge over local banks due to their wide knowledge base of the subject and its dynamics.

However, Hill said if local banks finally open up to local shipping firm , they might outshine foreign banks due to proximity and confidence. “Local banks will surely have a better understanding of the local companies and there is a special relationship between the two that builds confidence,” said Hill.

With the world demand for oil increasing, shipping analysts believe demand for tankers from the Middle East will remain high in the coming years and they foresee increasing growth in the regional shipping industry.

And with more companies coming into the region to invest in tankers, workboats as well as bulk carriers and container liners, shipping finance institutions have predicted a sharp rise in demand for loans to buy ships .

Simon Anton, Senior Tanker Analyst in Kuwait, said an increase in lending institutions with an inclination to the shipping industry will be a big push to the regional shipping market.

“The industry is certainly lucrative and there is currently a willingness by many local companies to venture into it. If these companies can easily access capital, we see increased activity in the sector,” said Anton.

He, however, warned that in the long run, individual returns on the business are likley to dwindle as more players enter the market.

Sharafudin Sharaf, President of UAE Ship Owners’ Association, said local banks are beginning to recognise the growing need for ship finance in the region and that this is taking a fast pace with Islamic banks.

Local shipping firm, Gulf Energy Maritime has been able to raise close to Dh1 billion in the past four years from banks suc as Emirates Bank International, Mashreq Bank, Abu Dhabi Commercial Bank and First Gulf Bank to purchase 10 vessels.

“Banks are slowly realising that the shipping industry is growing. However, the question will remain on whether they will be able to overcome the competition in the business,” said Sharaf.

The numbers

2001 The year in which Tufton Oceanic began its operation in the region to help arrange loans for shipping firms

8.5% The projected yield per annum of investment units sold for $25,000. The shipping finance deal was funded by DIB

$50m The value of equity commitment in a fund  started by Tufton Oceanic with a Kuwaiti financial house

Dh1bn The fund raised by Gulf Energy Maritime from local banks over the past four years to purchase 10 vessels