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Offshore Support Journal

Offshore Support Journal

Kick the can or take a haircut? The challenges of OSV financing

Mon 11 Feb 2019 by Ed Martin

Kick the can or take a haircut? The challenges of OSV financing
Stig Borsberg Eriksen (SpareBank 1 SR-Bank), end-right: "Banks may not like to be owners [...] but we don’t just start writing off debt for nothing"

Financial experts discussed the difficulties OSV owners face obtaining financing in the current market at the 2019 Annual Offshore Support Journal Conference.

DNB Bank’s president of ocean industries and offshore Arnfinn Eilertsen, NIBC Bank’s associate director of offshore energy Wim van Wijngaarden and SpareBank 1SR-Bank’s director and head of energy and maritime industries Stig Horsberg Eriksen were joined by Norton Rose Fulbright partner Richard Howley on a panel to discuss issues such as refinancing, the likelihood of bankrupticies, market restructuring and consolidations.

Commenting on the outlook for owners seeking financing, Mr Howley reflected on the downturn in bulk and container shipping in the late 2000s and said “If you can take one thing from that it’s that there is life, eventually [but] there’s a lot of pain and rationalisation required to get to that point.”

“A good level of communication is needed between owners and banks about what is needed, how the next few years are going to play, what the pressure points are and how to address restructuring.”

“Chapter 11 and other more aggressive structures do have their place but if you can do anything to avoid that you should ”

Mr Eriksen said “The downturn in 2014 exposed cyclicality and volatility of the offshore sector to an extent no one had foreseen.”

“Some of us are in this business to stay [but] for other banks it’s a case of once bitten twice shy.

“For those of us who remain I can only hope that memory will not fail us. Future projects seeking bank finance will need to have a combination of equity, and from owners with industrial or financial leverage and more diversified ownership.”

Mr Eriksen noted that the family-owned nature of many companies, and the financial and emotional investments this entails, is a particular cause for concern. “We saw how vulnerable a lot of [family-owned] companies were – they had committed every penny to the business and had very limited access to capital when the crisis hit.”

“That’s a structural weakness of a large part of the industry and something that needs to be addressed in future,” he added.

Considering alternative sources of funding, Mr Van Wijngaarden noted that some Chinese yards offer attractive financing by imposing a 95% milestone payment on delivery noting that there is also direct lending available from leverage funds that are unconstrained by the regulations banks face. “But more ships, more funding – I don’t think that will make the balance in the market any better,” he added.

Mr Eilertsen responded “There will always be [shipbuilding] as shipyards are labour intensive and have lots of subsuppliers... it’s a way of keeping people at work.”

“Our experience with some of these Chinese arrangements is that they are not optimal when you come to a situation where you have to negotiate or do restructuring. They are not very flexible, it’s based on everything going as planned from the beginning,” he added.

Responding to an audience question about new business models based around leasing equipment such as walk-to-work gangways or battery installations, Mr Arnfinn said his company is exploring these options, but there would be basic criteria such as whether such equipment could be included in the ship mortgage and whether contracts that would be capable of repaying the additional equipment cost are in place.

“Let me stand up for the very unpopular activity of kicking the can,” Mr Eriksen said in response to being asked whether financiers should practice more of a “tough love” approach and be willing to take haircuts.

He noted that as there has been a scarcity of funding coming into the sector, bankers involved in OSV financing have had limited options.

“We’ve been in a situation where we’ve had mortgages on modern, quality ships in operation with very limited debt capacity, but our evaluation has been that the best way to preserve value is to let the vessels trade in the market that there is and wait for the upturn.

“As long as there hasn’t been a lot of buying interest that has seemed to us to be the only option.”

“We certainly won’t take haircuts for nothing,” he said. “Banks may not like to be owners – in some cases we will be and probably [already] are, but we don’t just start writing off debt for nothing, rest assured.”

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