With a price tag in the millions and traditional sources of ship financing harder to come by exhaust gas cleaning systems (EGCS), commonly known as scrubbers, represent a tricky-to-fund line item on the books of many shipowners and operators.
To fill what the European Investment Bank (EIB) said is a ‘financing gap’, scrubber financing has begun to come through new lending models, and many are designed specifically to support environmental regulations.
“The Bank received a clear signal from the market that there was a financing gap for the greening of shipping fleets,” EIB vice president Pim van Ballekom said when announcing a €150M (US$172M) investment plan in partnership with Dutch bank ABN Amro in 2017.
“By allowing the EIB to take more risk, the Investment Plan for Europe enabled us to create a new instrument to support shipping companies in complying with the European sustainability standards,” Mr van Ballekom said.
EIB’s mission is, essentially, to offer long-term lending for initiatives that support European Union (EU) policy goals, and it has backed several environmentally-focused funding initiatives for shipping to date.
EU-based funding and the uptake of environmental lending
The €750M (US$860M) European Fund for Strategic Investments (EFSI) Green Shipping Guarantee Programme (GSG) was set up after numerous discussions with Dutch counterparts from the public and private sector.
GSG is supported by the EU's Connecting Europe Facility Debt Instrument and the EFSI and is designed both for general fleet renewal and retrofitting ships with sustainable technologies.
In June 2016, EIB loaned ferry operator Finnlines €50M, the majority of which went to finance the Finnish company’s retrofit of more than 20 vessels with exhaust gas cleaning systems.
As noted above, in 2017, EIB and ABN Amro bank signed their agreement to support investments for greening the European shipping fleet, and the facility saw its first EIB contribution on a newbuild construction project in January 2019.
In a similar move in February of last year, Dutch multinational bank ING signed an agreement that will see it contribute €150M, with matching funds from EIB, to a facility supporting ‘green’ investments in the European shipping market.
And while the EIB is Europe-focused, some lenders are offering to finance scrubbers for shipowners outside of the EU.
In 2017, Norwegian Government-owned Export Credit Norway began to offer financing to international vessel owners who purchase equipment from Norwegian suppliers.
“Money is tight and access to reasonably-priced capital is a challenge for many players in the international shipping and maritime industries at the moment,” Export Credit Norway’s director of lending Olav Einar Rygg said at the time.
Outside of Europe entirely, Quantum Pacific Shipping made headlines in December 2018 by booking a US$40M ‘green loan’ – the first issued in the Asia-Pacific region to fund purchasing and installing of scrubbers on its fleet.
Lender BNP Paribas said it made the loan only after a rigorous third-party assessment by Vigeo Eiris, a group that analyses the environmental and sustainable credentials of companies.
Traditional funding and the trouble with scrubber security
Equally notable to the new environmentally-focused financing models filling a lending gap to find ways of helping shipowners to meet regional and global emissions regulations are the pitfalls in traditional lending models when it comes to financing scrubbers.
As corporate finance and maritime legal experts Watson, Farley & Williams explained in their briefing on the 2020 global sulphur cap, “there does not currently appear to be a ‘one size fits all’ financing solution which is quick and easy” for retrofitting scrubbers on an asset finance basis.
Additionally, language in many charterparty agreements do not explicitly assign cost obligations for shipowners and charterers and “might give rise to difficult discussions”.
However, perhaps the biggest difficulty surrounds the question of the security a lender receives in exchange for financing scrubber retrofits.
Mortgages, for instance, can become fraught with complexity.
If a ship already has a mortgage, the brief said, an additional scrubber-related mortgage would require the consent of the initial mortgage holder, resulting in ‘challenging and time-consuming’ negotiations.
A vessel that does not have a mortgage but needs one to afford to retrofit scrubbers would not be able to get a mortgage without expressly agreeing security terms for the scrubber financier in addition to the mortgage lender.
The low resale value and complexity of removing scrubber systems make using them as security problematic, the report concluded.
Creative funding from scrubber manufacturers and shipowners
In response to these financing challenges, some scrubber manufacturers have gotten creative.
In 2016, Pacific Green Technologies Marine (PGTM) and UK shipowner Union Maritime signed a unique deal to finance scrubbers.
PGTM agreed to allow Union Maritime to pay for the scrubber over the course of several years based on the money Union Maritime saves by using heavy fuel oil (HFO) in emissions control areas.
At estimated savings of US$2,700 per day using HFO fuel versus low-sulphur fuel and with a guarantee that the Union Maritime scrubber-fitted vessel will operate for 145 days a year, the US$2M scrubber will be paid off by 2022.
If the arrangement is successful, Union Maritime has agreed to buy another 10 scrubber systems for its fleet from PGTM.
More recently, shipowners, too, have taken creative steps to facilitate scrubber financing.
In October 2018, Newport Shipping Group bought 100 scrubbers from Chinese scrubber manufacturer Puyier with options to buy another 100.
Newport Shipping stockpiled the units to offer shipowners guaranteed ‘turnkey’ retrofit slots and deliveries within eight months. By the end of October, the group said it had binding letters of intent or contracts in place for almost all of its first 100 units.
Norwegian tanker group Frontline made a move in August 2018 to make its company more profitable by taking an ownership stake in a scrubber manufacturer.
Frontline chief executive Robert Hvide Macleod said at the time that a 20% acquisition of Feen Marine Scrubbers shares gave his company the ability to source a large volume of the exhaust gas cleaning systems at a good price. And he noted Frontline was looking for more investment opportunities.
Ultimately, with IMO’s sulphur cap less than a year from implementation, and fuel price differentials expected to increase, offsetting the cost of a scrubber still looks like a short-term proposition. And financing for scrubbers is available, but shipowners eager to follow the scrubber compliance pathway may need to look in unexpected places to find it.
Financing options for scrubber retrofits will be discussed in detail during Marine Propulsion & Auxiliary Machinery’s Americas Sulphur Cap 2020 Conference in Houston, Texas in March 2019. Book now to reserve your place.