Chinese leasing houses weigh options amid uncertain outlook
Leasing houses in China are alert to the growing uncertainties in shipping, but they are careful not to let such caution lead to any suggestion of a retreat, or that the lessor is just a fair-weather friend for its borrowers
Leasing houses in China are alert to the growing uncertainties in shipping, but they are careful not to let caution lead to any suggestion of a retreat, or that the lessor is just a fair-weather friend for its borrowers
JACK Xu, deputy head of shipping at CMB Financial Leasing, said his company is cautious about the impact from the ongoing viral pandemic, worsening Sino-US relationship and burgeoning anti-globalisation trend.
Yet he was also careful not to let such caution lead to any suggestion of a retreat, or that the lessor is just a fair-weather friend for its shipping borrowers.
“We did conclude new deals this year, including dry bulkers, tankers, containerships and also some gas carriers,” Mr Xu told the Capital Link forum.
“What we have done is to try to keep our commitment to the industry to stay with our clients, to go through this tough time.”
Striking such a delicate balance is, perhaps, a big task for all major leasing houses from China — an indispensable force in today’s ship finance arena — facing an increasingly murky outlook in shipping.
Part of the options being weighed by the Chinese shipping lessors is reflected in their drawdown, which refers to the accessed part of a credit line extended to their borrowers.
That portion of lending expanded by 25% from 2018 to $15.8bn in 2019, according to data compiled by Smarine Advisors, an expert in facilitating vessel leasing deals.
There was year-on-year flat growth for the first half of 2020, however, Lloyd’s List understands.
Mr Xu said his division’s drawdown had also palpably slowed in the six months.
Behind that anaemic growth is a combination of causes: slack market demand, the coronavirus disruptions and the higher dose of circumspection taken by the lessors.
They primarily lend via newbuilding projects, where funds are normally allocated in parallel with the shipbuilding instalments spanning about two years, and via sale and leaseback transactions for existing fleet, in which sellers often receive the payments en bloc.
The ordering appetite for fresh tonnage has been dulled for several years amid uncertainties about future marine fuels. Now the coronavirus backdrop has made it more difficult for vessel delivery, upon which a newbuilding owner usually draws the last but also the largest tranche of his borrowing.
“Sometimes, it is because the pandemic-hit yards lack the required workforce to complete the vessels on schedule,” said another shipping executive from a major leasing house.
“Sometimes, it’s the owners who want to push back the handover, owing to poor market conditions.”
In some rare cases, the lessors had to halt the credit line when their clients’ liquidity dropped below the level stipulated in the covenants, he told Lloyd’s List.
On the other hand, the leaseback deals are now subject to more stringent screening amid heightened market volatility and concerns about insufficient project cashflows, according to Bocomm Financial Leasing head of shipping Fang Xiuzhi.
“Risk control is getting stricter than before,” he said.
The extra caution exercised was showcased recently, when Chinese acrylic acid producer Zhejiang Satellite Petrochemical was seeking to sell and lease back six very large ethane carriers linked to US imports.
At least two large Chinese leasing lenders were approached yet turned down the offer, Lloyd’s List has learnt.
“Satellite Petrochemical is not deemed as a top-tier charter because it is privately-run and a newcomer to shipping,” said one person familiar with the matter.
“Also, the vessels will be used to import cargo from the US to China, which the lessors think contains high risks, given the current Sino-US relations.”
As a “natural response to uncertainties”, the leasing companies now preferred counterparties with a strong balance sheet and liquid assets, said Smarine director James Chen.
Yet at the same time, the quantitative easing policy prevailing in the developed economies has brought some western banks back to the shipping table with abundant funds in hand.
“The Chinese lessors are aware of the competition,” Mr Chen said. “They will achieve a balance between how to remain competitive and how to manage the risks.”
Maintaining that competitiveness sometimes requires bold innovations.
Bocomm Leasing recently made the headlines with a $650m contract signed with Shell for a dozen dual-fuel long range two tankers.
What makes the deal stand out is not just its environmental feature, but also an attached time charter agreement — rather than the traditional way of a bareboat charter — with the vessel user.
The lessor said it proved capability to offer tailor-made, packaged solution to its commodity and transport clients.
In fact, the deal has also further developed the lessor’s attributes as a shipowner, despite the tremendous extra efforts it must spend on commercial operations and shipmanagement.
“Chinese lessors have done time charters for dry bulkers and containerships before, but this is the first tanker case I’ve ever seen in the market,” said the previous leasing executive.
It was more complicated to operate and manage tankers for safety reasons, such as oil spill risks, the executive explained.
“But ship lessors definitely see the time charter between them and cargo interests as a trend. They are now more active in doing that, at least in the other two segments,” he said.
Like his colleague at CMB Leasing, Mr Fang at Bocomm Leasing is also a master of balanced speech.
He told the Capital Link audience that the challenge for his company now was to find enough good projects. Yet he then quickly turned to optimism.
Vessel supply was reined in while asset price was kept low, he pointed out. “It is still a good time for us develop our portfolio.”