Shipowners have little choice but to fit ballast water treatment systems, while deriving little income – or do they?
The fitment of a ballast water treatment system is an investment that is a legal requirement and offers little upside potential, other than that not having a ballast water treatment system fitted would impact the second-hand value of the vessel. Not surprisingly, many owners regard the investment as dead money.
The shipowner is faced with a range of finance options. The first is to pay with cash from company funds, which after years of poor freight markets is an unlikely option for most owners, no matter what the sector. The next option is the bank, which for a newbuilding or for a series of newbuildings is a viable option. The traditional shipping finance bank is aware of the peaks and troughs of the shipping cycle and the external inputs that can cause unexpected but necessary expenditure, be it the prevention of pollution using double-hulls on tankers or the current concerns about emissions above or below the waterline. In the case of ballast water treatment system retrofit, this is likely to be treated on a case-by-case basis and fall under the category of corporate finance.
An owner may find there is a strong case for refinancing a vessel that is already under a secured loan with the bank. The loan documentation is already in place, and the ballast water treatment equipment installation can be rolled into the Special Survey drydocking and scrubber retrofit, if required. In addition, the scanning, engineering and retrofitting costs can be rolled into the loan.
For larger shipping companies and those in the public markets, there is another way to finance the purchase – invest in a ballast water treatment company. This fulfils several requirements. First, it shows to shareholders that management has a plan to meet the IMO BWM convention deadline. Second, the investment in the ballast water treatment system manufacturer could prove to be a smart move, and if demand soars, that investment could be a cash cow. Third, the investment secures the shipowner a supply of ballast water treatment systems.
An example of a deferred payment plan on maintenance and BWTS retrofit on a five-year old, 52,000 DWT LR tanker
Owners that have gone down this route include publically quoted Scorpio Tankers, which in 2018 agreed a contract for 55 Ecochlor ballast water management systems and became a minority investor in Ecochlor. Scorpio Tankers environmental compliance director Ole Christian Schroder said that the systems will be fitted to 55 tankers that had been delivered without any units on board.
Ecochlor chief executive Steve Candito said the company was “honoured to have been selected by Scorpio Tankers as their BWMS compliance partner and welcome Scorpio Tankers as a shareholder in our company.” The statement did not say what proportion of the company Scorpio Tankers had acquired or the amount paid.
But in general, shipping banks and the public markets have been sparse sources of capital since the financial crisis that started in 2008. In the last decade, alternative investment management funds, or private equity as it is often known, has made a foray into the ship finance arena. There are three basic reasons for private equity to take a stake in a company. The first is ‘distress for control’, which is buying the company’s debt and taking over. The second is structured equity, providing funds in exchange for equity at a later date via warrant options and other instruments. The third approach is direct equity investing: buying a substantial stake in the target to support a management team that presents an opportunity in a ‘dislocated industry’. To support these processes private equity would need support from the shipowner’s clients, which suggest this financing of ballast water treatment systems steps into a complex multilateral arrangement between the owner, private equity, charterers and possibly the ballast water treatment system supplier.
An equally complex financing method that has produced a remarkable result was to bring together the loans and assistance available through third parties. In an example in 2019, Dutch bank ING and the European Investment Bank (EIB) signed a EUR110.4M loan agreement to finance Dutch shipmanagement company Spliethoff’s Bevrachtingskantoor for the retrofitting of 42 vessels in its fleet with exhaust gas cleaning systems and ballast water management systems.
The EIB loan is supported by the European Fund for Strategic Investments (EFSI), the main pillar of the Investment Plan for Europe, as well as the Connecting Europe Facility (CEF). The loan is part of the ING and EIB EUR300M Green Shipping partnership signed in 2018, to support sponsors of green and sustainable projects in the maritime transport sector with advantageous financial terms. The EIB will contribute EUR49.5M to a EUR110.4M ING Bank arranged facility to finance the installation of both exhaust gas cleaning systems and ballast water management systems on 17 vessels, exhaust gas cleaning systems on five vessels and ballast water management systems on 20 vessels.
EIB vice-president Vazil Hudak stated: “Our joint programme with ING shows that greening the transport sector makes business sense, other than just being important for the environment. The support from the European Commission helps to make the maritime transport sector easier to finance for the Bank, a good example of cross-European teamwork.”
Spliethoff Group chief financial officer Michel Fransen said: “We have been installing scrubbers on our fleet since 2013 and are very happy with the results so far. Scrubbers are a very environmentally friendly solution to comply with the 2020 regulations. LNG or hydrogen may have the potential to become even better alternatives in the future, but only in the longer term. The investment in scrubbers also safeguards the interest of our shareholders against uncertainties in fuel availability and pricing.”
ING Shipping global head Stephen Fewster said: “Sustainability is an important strategic priority for ING. As a bank, we make the most impact through our financing. Therefore we are very proud to partner with the EIB to provide financing to Spliethoff to support their transition to a more sustainable business model while also meeting increasing environmental standards.”
Where the owner is unable to take advantage of such schemes, then sometimes the supplier of the BWMS is a potential source of credit. Supplier’s credit is a well-established source and some of the providers of ballast water treatment equipment are part of large, sometime publicly quoted, conglomerates with access to funds at a far lower cost than most shipowners. The question here would hinge on the creditworthiness of the purchaser. Shipping companies are, sadly, rarely investment grade, and it would depend on how comfortable the supplier would be in taking on low-grade debt.
An intriguing finance option is offered by Newport Shipping, whose chief risk officer Colin Manchester spent 30 years with Royal Bank of Scotland, which before the financial crisis was the biggest financial supporter of the Greek shipping community. Newport Shipping is a provider of comprehensive drydocking services for shiprepair work, including the purchase and timely delivery of owners’ extras (spare parts, paint supply), specialised maintenance, and equipment upgrades (BWTS, scrubbers). Newport Shipping operates through a network of 12 shipyards with 28 docks capable of handling all vessel sizes and approximately 2,100 dockings annually across the Atlantic and Pacific trading zones.
The Newport Shipping finance offer is a deferred payment plan for up to 60% of the payments on a drydocking and associated work, which releases working capital. In addition, the company provides a single invoice for all work, making it a one-stop shop for the owner’s needs.
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