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BWMS financing: don’t bank on the bank

Tue 16 May 2017

BWMS financing: don’t bank on the bank
Raymond Ko (Marstrat): Shipowners must “actively deal with this challenge” (credit: Marstrat)

Finding the money for ballast water management programmes may need some innovative thinking

Across the globe, shipping companies will invest billions of dollars in ballast water management systems (BWMSs) over the next few years. Even for small companies, the cost will run into millions with more to follow once the equipment goes into operation.

Maintenance, consumables and fuel are the most obvious operating costs, but there will also be other costs, such as crew training, that will add to the financial implications of meeting ballast water management requirements. And for those who fail port state control inspections, there will be costs associated with delays, not to mention lawyers’ fees and fines.

Unlike most investments, buying and running a BWMS is not generally seen as bringing any commercial benefit. And without any tangible return, many owners are finding that traditional sources of finance are lukewarm to their requests for backing. One unnamed shipowner expressed the views of many when asked about financing BWMS installations. It “is almost impossible – owners have no money for it,” he said.

He was responding to a survey carried out by the accountant and consultant Moore Stephens as part of its regular Shipping Confidence Survey, published in December 2016. Its research had included a question that asked respondents what they considered would be the most important source of funding for the installation of BWMSs.

In its summary of their replies, the firm reported that 21 per cent of respondents felt that shipowner equity (shareholder funds) would provide the source of funding.  Next came bank finance at 19 per cent, BWMS manufacturers at 15 per cent, shipyards at 12 per cent and other non-bank finance at 10 per cent.

Commenting on the report’s findings at the time, Moore Stephens partner for shipping and transport Richard Greiner said that in the current downturn companies “will need access to finance and to other resources to meet the challenges which lie ahead” and identified one of those challenges as “the ongoing regulatory environmental compliance programme,” such as meeting ballast treatment requirements.

In September last year – immediately after Finland ratified the BWMC, setting it on its year-long journey towards entry into force – the shipbroker Gibson predicted that the costs associated with compliance could result in some tankers being withdrawn from service. “The requirement for vessels to fit a BWMS at their next drydocking after September 2017 will create an additional and significant cost that will need to be recouped in the market,” the broker noted.

It is not just individual ships that could leave the market: some small- and medium-sized shipping companies may not be able to survive the financial impact of installing ballast water management systems (BWMSs), according to the marine finance consultant, Alan McCarthy.

Speaking to BWTT in November, he said that, with a lack of financing and funding, “it is going to be really quite tricky” for such companies. “Over the next two or three years we are going to see some quite profound impacts and changes on that sector of shipping.” Given the traditional ownership structures in the small-to-medium sized company sector, “no matter how passionately you feel about shipping if it is going to take away your family’s wealth you will stop doing it,” he said.

He had earlier addressed a seminar organised by the UK Chamber of Shipping, where he said that most large shipowners are funding installations out of cashflow and equity, but the poor state of the markets means that, for small- and medium-sized owners, “your equity went a long time ago.”

Shareholders are “the hardest people to convince to put more money into a business,” he said and, as for banks, financing equipment installations is not traditional shipping finance. In preparation for his presentation he had spoken to a few banks “and I have not found one that is even thinking of doing it.”

If traditional sources of funds are not readily available, what other options are there? The Geneva-based Ocean Assets Initiative considered this in a newsletter in January. The organisation’s mission is “to help finance solutions for healthy oceans and coastal communities” and its founder, Michael Adams, acknowledged that, “with slower growth and some credit rating declines, debt solutions will not be cheap for many in the industry.”

He advocated that companies looking to finance ballast water management programmes should consider the green bond market, which he said would be “a perfect channel with a growing appetite for this kind of issue.”

Green Bonds were created to fund projects that have positive environmental benefits and offer investors tax benefits. The principles behind them were updated in June 2016 and, at the time of writing in mid-March, the International Capital Market Association (ICMA) reports on its website that “recent activity indicates that the market for Green Bonds is developing rapidly.”

The Climate Bonds Initiative monitors the Green Bonds market and records on its website that, globally, US$81 billion of Green Bonds were issued in 2016, which it expects to rise to US$150 billion this year.

Another approach was advocated in January by Raymond Ko, managing partner of the Dutch consultancy firm Marstrat. Mr Ko specialises in maritime finance and addressed the Royal Association of Dutch Shipowners in December specifically on the question of funding retrofit BWMS installations.

He urged his audience of shipowners to “actively deal with this challenge” by engaging with shipyards and suppliers. But he did not exclude banks from the equation: although “from a credit perspective, banks might not see valid reasons to leverage further on a vessel,” he said, “they have a clear interest in their security vessels being compliant and therefore marketable.” They also have an interest in supporting sustainable shipping, he said, so a combination of funding could be a solution: bank facility increase, seller’s credit and owner’s funds.

He also discussed subsidy and guarantee schemes, such as those available through the European Investment Bank, but those “have proven challenging in the past given availability and size, even for the stronger owners.”

 

Learn more about Green Bonds on the ICMA website

 

SHIPOWERS’ FUNDING EXPECTATIONS FOR BWMS

Shipowner equity        21%*

Bank finance               19%

BWMS makers            15%

Shipyards                    12%

Other non-bank           10%

* percentage of respondents expecting this to be their most important finding source

Source: Moore Stephens