It is crucial for the sale and purchase (S&P) shipbroker to understand the problems ship buyer has to face in finding the money for financing ship. Major ship-owning companies finance their new ships from their own resources or by increasing their share capital. However, a common method of financing the purchase of a ship is via a bank loan secured by a mortgage. A prudent ship buyer enters into preliminary negotiations with a bank so that the general principles are covered. Preliminary negotiations mainly involve the bank satisfying itself that the ship buyer will be able to earn enough with the ship to repay the loan and the interest. It might cause delays in concluding negotiations and takes time for the ship buyer’s bank (lender) to ensure that the proposed ship complies with the business plan originally agreed between the lender and borrower.
It is customary for progress payments to be made by lender bank for newbuilding ships. There may be five (5) progress payments to shipyards:
- Signing the newbuilding ship contract
- Steel cutting
- Lay the keel
- Launch from slipway
- After successful sea trials
In some cases, loans for the purchase of newbuilding ships can be negotiated with the banks through the shipyards and/or shipyards act as financiers.
Generally, newbuiling ship credit arrangements have followed international agreements which lays down that up to 80% of the ship purchase price may be advanced at a rate of interest below the general market levels with the buyer finding the 20% out of his own resources.
Elaborate finance devices have been employed to provide front end finance and to grant periods of grace during which time the shipowner does not have to make any repayments. Such schemes which meant the shipowner not having to risk any of his own money seemed fine at the time but they were without doubt a major contributor to the deep recession in shipping after 2008.
In shipping business, no single cause is wholly responsible for the surplus in tonnage. However, shipyards understandably were prepared to go to almost any lengths to keep their shipyards working. Governments are more concerned with the short-term electoral effect of the unemployment caused by shipyard closures.
Many shipowners tend to work by instinct. If lenders were prepared to accept the shipowners’ business plans this simply fed their natural optimism so the providers of soft credit must shoulder the burden. After the latest shipping recession, many shipyards are closed and the search for the cheapest labor force moves relentlessly round the world so that there are now some countries with no history of shipbuilding replacing the traditional centers of shipbuilding excellence. Nowadays, most newbuilding ship deals are negotiated directly between the buyer and shipyard, it is relatively rare for sale and purchase (S&P) shipbrokers to be involved although some specialists in newbuilding ship contracting do exist.