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Chinese leasing firms give vital lifeline to industry

And it's no longer just the simple plain vanilla sale-and-leaseback
Tuesday, April 25, 2017 - 05:50

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"You will see the leasing houses particularly the big ones like ICBC focussing more on the end users and higher credit quality but in return they will have to lower their margin expectations; you have to switch margin for security," - James Lorentzen, finance company NorthCape's managing partner

THE shipping finance sector has seen its fair share of troubles recently, especially in certain segments such as the offshore market. However the financial industry keeps finding innovative ways to keep money flowing through.

A recent trend has been the increasing number of leasing companies linked to Chinese banks that have offered sale and leaseback structures for shipowners to finance newbuildings.

For example ICBC Leasing, part of the largest financial group in the world, which came into existence just 10 years ago in 2007 in the throes of the global financial crisis when funds were drying up, has grown from none at all to 268 vessels in its portfolio with a value of around US$6 billion.

International Far Eastern Leasing, a unit of Sinochem Group and which counts KKR as one of its investors, is yet another Chinese major player in the leasing market which entered the fray around the same time.

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These are all huge companies with large financial institutions backing them and while they also do leasing deals for other types of capital assets such as aircraft, they have helped to bring a critical flow of new funds into the ship finance market.

Yet another type of leasing company that has started to make inroads into the shipping market are those that are attached to either Chinese shipping firms or shipyards. For example, after the merger of China Shipping Group and China Cosco, subsidiaries such as Cosco Shipping Development Co have emerged as budding players in the ship leasing market as well.

These smaller companies have their niche as well, taking up lower value deals that the bigger players may ignore because they are too small to be worth their while. These would typically involve transactions of US$100 million or less on perhaps just a few units of second-hand ships.

"We've seen big growth," said finance company NorthCape's managing partner, James Lorentzen, with Chinese leasing companies now making up about 20 per cent of the finance allocated for shipping in 2016.

Mr Lorentzen also noted the increasing sophistication of the Chinese leasing companies. "The structures that you can do in the leasing market in China today are limitless and it's no longer just the simple plain vanilla sale-and-leaseback, it's part ownership and a lot of different kinds of structures that are available today," he said.

Allaying fears that these are just tools to prop up the Chinese economy, ICBC Leasing Shipping Department manager Tang Wenwen said there need not have to be a Chinese element for the deals to be approved. "We have done many deals without the Chinese element and we are quite open on that point," she reiterated.

Ms Tang conceded however that "of course we do have a responsibility to help the Chinese shipowners join the international deals and if there is a Chinese element we do have to join in".

Looking ahead, Mr Lorentzen said that as the Chinese leasing companies come out of their aggressive growth phase they will start to focus more on quality assets while dealing with some of the issues of quick expansion such as those now being seen in the offshore market.

"It's a cyclical business, you're going to see problems and how the leasing houses deal with those problems, is going to determine how willing and able they are going to be to do further deals going forward," he said.

They will also need to strike a balance between greater security and lower margins. "You will see the leasing houses particularly the big ones like ICBC focussing more on the end users and higher credit quality but in return they will have to lower their margin expectations; you have to switch margin for security," he pointed out.

Mr Lorentzen also noted that for the smaller leasing houses to try and take market share they will have to offer a unique proposition compared to the major players. "For them to grab market share, they have to do things a little bit differently. We've seen them do high leverage against higher margins because they need to make their returns," he said, adding that they would not be able to fund themselves as cheaply as the big players which are part of big banking groups.

Other niches include the offshore sector which most financial companies are wary of now as well as smaller deals which may not interest the big players. "There's niches just as there are in the traditional banking market, for these guys to take market share," Mr Lorentzen concluded.

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