CSR as Financial Advantage, or…

Karianne Tieleman at the podium delivering her speech

…Do lenders (or investors) take CSR in consideration when evaluating a potential shipping transaction?

Whilst the Recap of Capital Link’s successful 2nd Annual Shipping & Offshore CSR Forum: “CSR: Luxury or Necessity” is being prepared, we bring you the briefing of one of the best papers from the shipfinance point of view, delivered by Karianne Tieleman, Head of Risk & Portofolio Management, Energy and Transportation – ABN AMRO; these are the main points from her excellent slides presentation: 

The ship finance market faces several challenges.

• Volatile shipping industry is in one of the worst slumps; supply of ships exceeding demand in many segments;
• Significant order book, of which the majority is due to be delivered this year and next;
• Part of order book still require financing;
• Refinancings due on existing fleet (balloon payments);

How will this funding need be financed?

The graph below shows an estimate of how the existing fleet is being financed per year end 2011. .

Traditional bank loans (51%)

Public equity markets (18%)

Bond market (7%)

Private equity (19%)

Government (5%)

Banks play a large role in ship finance, but their role will be different going forward. Why?

Banks are exiting ship finance: 3 waves

First wave 2008 / 2009: financial crisis

• Government bailouts
• Forced Mergers; internal and national focus;

Second wave 2010 / 2011

• Scarce and expensive dollar funding

Third wave 2012 – …

• Credit portfolio related issues
• Basel3 and other regulation requiring bank to a/o increase capital base

Exit of banks may lead to: 

• Cancellations of existing orders and low pace of new ship orders;
• Active banks can pick an choose best deals;
• Ship owners to focus on other sources of finance;

Competition for limited available bank funding:

Banks that remain active in ship finance focus on:

• Acceptable ship finance structures;
• Smaller amounts;
• Club deals;
• Client appetite for other banking products;
• Relationship (financial and operational track record)
• Modern assets; (economic life and residual value in view of technological changes)

ABN AMRO also takes CSR items into consideration through an in house developed tool. This tool gives us better understanding of the sustainability issues that a company faces. In addition it deepens our knowledge of our clients business and gives us the ability to start a dialogue on CSR related matters.  Rightship database is consulted for each proposal and throughout the life of the loan.  ABN AMRO prefers to finance Green Award certified ships as these are considered safer ships.  ABN AMRO is a Green Award incentive provider and founding member of Sustainable Shipping Initiative.

Other sources of finance:

A recent study of Eurosif indicates that professional European investors are focused on CSR.
Sustainable and responsible investments strategies outgrow the market. During a timeframe (2009-2011) when European AuM increased by 3% all of the sustainable and responsible investments strategies have outpaced this growth. Although this figure cannot be translated in a direct appetite for CSR in shipping it is a clear indication that sustainability is important for investors.

Random checks at website of private equity houses that are believed to have investments in shipping indicate that sustainability is an integral part of investment decision making. Private equity interests that have a longer term focus on shipping are believed to have a focus on modern assets and are interested in the competitive advantage of efficient design of ships.

Conclusion

As shipping is in need for additional funding at a time that some banks are exiting this sector, it is important for owners to be able to sell their competitive advantage to lenders and other sources of finance.

Commitment to CSR can play an important role. There is a trend of banks and investors focussing more on responsible and sustainable investments.