Mideast shipping sector faces tighter liquidity in 2017

The Middle East shipping industry faces a capital shortfall of tens of billions of dollars this year as European banks restructure products and scale back ship financing operations, according to a report released ahead of a maritime conference in Abu Dhabi this week.

The substantial decline in finance from European banks, compounded by a lack of shipping finance provisions from regional banks, has led to tightening liquidity in the shipping industry.

This has forced marine operators to seek alternative finance in order to continue operations, said the report, published ahead of the ongoing Seatrade Offshore Marine & Workboats Middle East conference.

“The traditional European banks with ship finance desks are no longer lending the historic amounts they once did and this is compounded by a number of European banks retreating from the ship finance sector altogether,” said Tien Tai, banking lawyer and partner at HFW.

While some new lenders are entering the shipping industry in the Middle East, this does not replace the capital shortfall left by the banks that have exited, he added.

“There has been an ascendancy of alternative capital providers in the last 18 months, offering liquidity at a higher pricing, although these are more suited to one or two ship projects and not a substantial refinancing,” Tai said.

Since 2014, increasingly tough trading conditions in the global shipping industry have hampered the flow of capital markets transactions, law firm Norton Rose Fulbright said in a report last year.

The oversupply of ships, depressed freight rates, unsustainable debt, and negative macroeconomic environment have led to a slowdown in capital markets activity.

The difficulties in obtaining financing for the shipping industry are reflected in the bankruptcy of South Korea’s Hanjin Shipping, which was one of the world’s largest container carriers in terms of capacity.

In the Middle East, Islamic finance is regarded as a positive means by which to generate equity and maintain health in the shipping sector; however, growth is currently hampered by muted enthusiasm from major local banks to operate active shipping desks, the Seatrade report said.

Recognizing the liquidity crunch in shipping, the Dubai Maritime City Authority was looking into creating a $1 billion investment fund to revive growth in the sector and help overcome the global downturn, Reuters reported in May this year.

“In terms of what it takes to get financing these days, you really have to be a top tier owner with a strong credit rating – but not everyone is a strong owner. The owners in the Middle East dominate the small and mid-tier space and it is these owners feeling the squeeze in the decline of traditional ship finance,” Tai said.

“The companies we see receiving finance from banks all demonstrate a strong track record of previous borrowing, contributions from owner and shareholder equity, and a transparent structure and a young fleet,” he added.