This is how Pareto Bank assess the financing of new shipping projects
Av Julie Jacobsen, 06. august 2021
At Pareto Bank, we understand the importance of obtaining financing commitments quickly. To provide competitive financing terms to our clients, in line with the current market conditions, the team makes an assessment of a wide range of risk factors. Short decision lines, an experienced team, and a hands-on mentality ensure a quick and efficient process which is key to our clients.
Pure ship financing
In contrast to traditional shipping banks, Pareto Bank’s primary focus is lending. The trend among the international shipping banks over the last couple of years has been to focus on the large corporate clients, where a wide range of the bank’s product portfolio can be applied. Alternative products, also known as “cross-sell, are less capital intensive and in a world of increasing capital requirements, this is a way to increase the risk-adjusted return on capital per client. At Pareto Bank, however, we provide loans, it’s that simple.
For many of the smaller players in the shipping segment, a requirement of recourse financing – where the facility is partly or fully guaranteed by a holding company or key investor – can be a deal-breaker. The vast majority of the structures we do at Pareto Bank are however non-recourse.
We aim to keep a flexible approach where each transaction is tailormade to meet each client’s needs. In conjunction with short decision lines and a quick credit process, this enables Pareto Bank to provide our clients with the predictability they need in a refinancing or vessel purchase situation.
This begs the question: What other assessments are we making when we conduct the dialogue around a new ship financing?
It is a requirement for Pareto Bank that there is a Norwegian link in the financing structures we do. A Norwegian link can be through the ownership with a Norwegian key investor or a majority stake held by Norwegian investors, alternatively, it could be through Norwegian counterparts such as Norwegian charterers, etc.
Experienced and competent clients
Shipping markets are highly volatile, and it is not uncommon to see strong fluctuations in both the short and long term. Therefore, it is crucial for us that our clients have a good understanding of, and experience from shipping markets, as well as a long-term perspective on their investments.
Shipping is a highly cyclical industry, and it is a crucial part of the risk assessment to look at the current market conditions as well as the market outlook. A thorough market assessment helps us get a better understanding of where we are in the cycle, and is used in the process of finding a suitable financing structure.
Contract coverage and counterparty risk
Another factor that is important when it comes to financing ships, is whether the asset is sailing in the spot market or if it has secured a fixed contract, either a bareboat- or a time charter contract. If a vessel has a long-term contract, a thorough assessment of the charter counterpart is necessary as there is always a risk that in an economic downturn the charterer may not be able to honor its commitments. Contract coverage and counterparty risk also have an impact on what level the minimum cash requirement is set. For a vessel sailing in the spot market, and thus is directly exposed to market fluctuations, the minimum cash requirement will naturally be at a higher level than for a similar vessel with a long-term contract to a strong counterpart.
The vessel’s condition
As Pareto Bank provides first priority financing of vessels, it is important to know the condition of the vessel, where is it built, its age, design, etc. Is the vessel well-kept and maintained? Has extensive wear and tear contributed to reducing its condition and attractiveness for potential charterers or future transactions?
The secondary market for the vessel
We also look at current sales in the secondary market for similar vessel types and assess the liquidity of such vessels. A well-functioning secondhand market is preferable to Pareto Bank as this makes the process of selling a vessel in a potential default situation easier.
LTV - Loan-to-Value
Since shipping is a highly cyclical industry, the market value of a vessel will fluctuate with the general market fluctuations. LTV is calculated by dividing the loan amount by the current market value of the vessel, measured as a percentage. Pareto Bank generally prefers seeing LTVs of 55% or lower, providing a buffer should the market change for the worse. In cases where the vessel has secured a long-term contract or the facility amount is partly or fully guaranteed by a reputable counterpart, higher LTVs can be considered, however always dependent on the strength of the charter party/guarantor.
The repayment profile is decided on a case-by-case basis and depends on a wide range of factors including the age and scrap value of the vessel and the general risk in the specific project. An older asset with less time left of its economic life will naturally require a steeper loan amortization profile than a more modern asset with many years left of trading. Also, the vessel type is key when deciding the repayment profile as the average scrapping age of different vessel types fluctuates quite a lot.
Smooth Credit Decision Process
As a bank, it is crucial to make a thorough assessment of the risk factors associated with a financing project. Frequent and open dialogue with our current and prospective clients ensures a smooth and efficient credit decision process which is beneficial for all parties involved.
We always aim to find a financing structure that is suitable to our clients as well as satisfactory to our requirements as a lender. Through short decision lines and our ability to tailor each transaction to our client's needs, we can quickly provide indications of the terms and conditions of the financing that we can offer.
The Shipping & Offshore team at Pareto Bank is looking forward to hearing from you regarding your next investment decision.
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Om Pareto Bank
Pareto Bank ble børsnotert i 2016, og Pareto AS er bankens største eier. Banken har en forvaltningskapital på rundt 20 milliarder. 2022 var bankens beste år noensinne med et resultat etter skatt på kr 555,5 mill. Pareto Bank har en god kapitalbase og solid plattform for videre lønnsom vekst.
Vi er spesialisert på eiendomsfinansiering, bedriftsfinansiering og skipsfinansiering. Banken har en særlig sterk posisjon innen finansiering av boligutviklingsprosjekter. I tillegg tilbyr vi en rekke forskjellige finansieringsløsninger til mellomstore bedrifter. Innen shipping retter vi oss mot norske rederier, eiere og det norske prosjektmarkedet. Vi bygger alltid vårt arbeid på faglig kompetanse og bruker vår kunnskap til å skreddersy løsninger. Vi er ubyråkratiske og får ting til å skje. Raskt, ryddig og tett på.