In recent years there has been considerable discussion regarding the potential for shipping as an asset class in the ever-growing securitisation market. However, given the size of the shipping industry and the phenomenal growth in recent years of sectors such as LNG, there has been remarkably little activity. We believe that there are several reasons why this trend is set to change, and why we will see shipping grow as an asset class in securitisation.
What is securitisation?
Securitisation is essentially a form of balance sheet management.
The most common form of securitisation is a cash securitisation. In a cash securitisation, a portfolio of debts or underlying assets with a recognisable cash flow are sold by the originator to a special purpose vehicle who funds the purchase through the issue of debt securities in the capital markets. The special purpose vehicle’s ability to repay the debt securities is based upon the underlying cash flows of the debts or assets. The most common assets involved in cash securitisations are residential and commercial mortgages, leases, trade receivables and loans; although today almost any asset or debt can be securitised.
The other form of securitisation, which we believe will become increasingly common in the UK market, is a synthetic securitisation. Whereas cash securitisations move the assets entirely off the originator’s balance sheet, a synthetic deal only moves the risk of the loans off the originator’s balance sheet. This can lead to significant reductions of required regulatory capital for banks and financial institutions, in particular once these institutions implement Basel II and the Capital Requirements Directive promoted by The Basel Committee.
How is this relevant to the shipping industry?
Investor capacity in the capital markets is growing at a spectacular rate, driving tight pricing and an appetite for new classes of assets and structures. Shipping companies will be able to utilise this market to diversify their funding options, whilst banks will continue to use cash securitisations to churn their portfolios. The implementation of Basel II for banks in 2007 and 2008 will, in particular, drive an increase in synthetic securitisations and the transfer of the risk on all types of loans to the capital markets. For these reasons, we are optimistic that the trend of the next five years will not mirror that of the last decade.
To date we have seen a few securitisations in the shipping sector. Most recently, CMA-CGM (a French container company) securitised the financing of a portfolio of new vessels through the issue of several tranches of asset backed notes. This transaction offered CMA-CGM attractive pricing and allowed it to raise US$787 million in the capital markets. This transaction was the first public securitisation in the shipping sector of its nature in Europe.
A number of such securitisations have involved trade receivables. Trade receivables deals are quite different to a CMA-CGM type transaction as the debt is generally short term. The originator sells receivables owed to it by trade customers to a commercial paper conduit (vehicles established by banks and funded through the issue of short term commercial paper). The conduits purchase a variety of short term receivables and fund at a very competitive price. Various sectors of the shipping industry with a constant stream of receivables, such as ferry operators, cruise ship operators and cargo ship operators, are ideally placed to take advantage of these structures and their pricing. As they are private transactions between the originator and the conduit, disclosure is limited and not public, which can be attractive to many companies.
Another variant of a cash securitisation, where we have seen shipping activity, is in the whole business market. A whole business securitisation is a hybrid securitisation-secured loan transaction utilising a borrower/issuer structure. The cash flows of an underlying business are segregated from the remainder of the cash flows of such business and are used to repay a loan from the issuer which has been funded through the issue of notes into the capital markets. A whole business securitisation can offer the CFO of a corporate group an alternative source of very competitive funding. The Wightlink Ferry transaction is the only completed whole business securitisation in the shipping sector. However, we believe that certain parts of the shipping industry could utilise these structures to diversify their funding options. In particular, we are seeing these structures increasingly being used in both domestic and multi-jurisdictional acquisitions of assets as an alternative, and well priced, source to a company’s usual bank lines and facilities.
Finally, we have seen three synthetic securitisations of portfolios of shipping loans. HSH Nordbank has completed two transactions involving portfolios of shipping loans, whilst NIB Capital has completed one such transaction. In these transactions the bank enters into a series of credit default swaps to transfer the risk relating to the reference portfolio of loans off its balance sheet. The mezzanine swap is with a special purpose vehicle who issues credit linked notes into the capital markets. These notes take the risk on the first loss to these portfolios. The importance of these transactions for banks and financial institutions is that, through transferring the risk on a portfolio of loans, it allows them to free up regulatory capital and utilise it elsewhere. The banks keep the portfolio on balance sheet, but transfer the risk of the portfolio to the capital markets.
We believe that conduit financing of trade receivables will grow for shipping companies and that whole business style transactions will be of interest to shipping companies intending to acquire new assets who want to diversify their funding options.
Following implementation of Basel II, we also expect to see banks taking advantage of the regulatory capital relief offered by synthetic securitisation and moving the risk on their portfolios of shipping loans into the capital markets. Groups of loans that involve different classes of shipping tonnage can be utilised in these transactions and classes of ships such as LNG carriers and FPSOs, with their longer term charter coverage, offer ideal assets for both cash and synthetic securitisations.
Shipping securitisation will continue to grow, whether it be cash or synthetic. The shipping world offers an exciting class of assets to be financed in the capital markets, which continue to grow in capacity and appetite.