A boom in shipbuilding | Hellenic Shipping News Worldwide
OWhile some shipyards struggled to stay afloat during the initial COVID-19 outbreak, the post-pandemic environment should usher in an encouraging era for shipyard order books.
In 2020, container ship orders fell to their lowest level in a decade and dry bulk and tanker orders saw similar declines. 2021 and 2022 have seen a slight increase in orders, and shipment analysts are now predicting that 2023 will again see high levels of orders across all sectors, raising fears of potential oversupply. The demand for new builds is such that many shipyards are finding it increasingly difficult to meet new orders.
Impact on funding
The huge order book forecast for 2023 begs the question: where does the capital come from to finance all this new construction?
The answer may lie in creative financing solutions and diversification of funding sources. Earlier this year, it was announced that a shipowner had secured financing for its dozens of new builds through various financing structures. These included a mix of loans guaranteed by export credit agencies, sale-leaseback agreements, syndicated bank loans and equity. We have seen other shipowners turn exclusively to sale-leaseback financing to fully cover their major newbuilding programs. Yet some continue to rely on traditional equity and debt financing.
It is therefore clear that despite this influx of orders, shipowners continue to seek and find various and alternative sources of financing for ships.
Recently, charter rates have reached record highs, mainly due to the increasing demand for capacity following the post-pandemic boom. This lack of ships has given shipowners the advantage in charter negotiations, allowing them to obtain higher rates and longer rental periods.
As a result, one would assume that this flurry of newbuild orders could allay carrier concerns about skyrocketing charter rates. However, the long lead times for new build orders will likely mean that this extra capacity won’t be felt for some time. It remains to be seen whether charter rates will stabilize at pre-pandemic levels once the new builds currently on order finally come into service.
Some caution should be exercised by shipowners if the increase in newbuilding orders does indeed lead to an oversupply of ships. An increase in capacity will result in lower charter rates. This can affect the owners’ ability to repay their financing obligations and care should be taken when negotiating employment contracts. While adequate safeguards should always be in place to ensure timely repayment of loans and interest, concerns about this are likely to be exacerbated by fears of a vessel’s earning potential declining. .
Source: By Reed Smith Transportation Lawyers Susan Riitala and Celine Collis