Pacific Basin mulls JBIC export credit – interview
Hong Kong-based cargo ship operator seeks to diversify its sources of funding by accessing JBIC-related export credit, gaining cost savings and access to longer tenor debt, says CFO Andrew Broomhead.
Pacific Basin Shipping plans to tap the export credit market as it looks to shore up financing for the purchase of brand new vessels, hoping to ride the wave of global economy improvements.
Many of the commercial banks specialising in ship finance are European-based as they are historically accustomed to servicing the industry. However post-2008 financial crisis, these financial institutions have exited Asia or have stepped back from offering assistance in ship finance.
“The shipping cycle has been bad and the banking market has been difficult, so banks have been reticent about wanting to lend,” said Andrew Broomhead, chief financial officer (CFO) at Pacific Basin, one of the world’s leading dry bulk shipping companies, to Asiamoney PLUS on August 20. “However, we have been in a pretty fortunate position coming from this global downturn having sold a few ships. That puts a lot of cash on our balance sheets and banks are a little bit more willing to lend.”
Of late, financial institutions have been willing to extend loan tenors from five to as long as seven years. Despite the improvement in bank liquidity since the financial crisis, Pacific Basin has been looking at alternative forms of financing like export credits.
Export credits are loans that are used to finance the export of goods and services for which an official export credit agency in the creditor country provides guarantees, insurance or direct financing.
On August 16, the shipping operator secured its second 12-year post-delivery export credit agency (ECA) financing for two vessels, which will be part of its new build fleet and is scheduled to deliver by end-2013.
The facility, which amounts to US$50.9 million, has been arranged with Japan Bank for International Cooperation (JBIC), with Citibank Japan (Citi) participating as co-financing lender. Citi’s portion will be secured by insurance from Nippon Export and Investment Insurance (Nexi).
“Export credits can only be related to new builds. You can arrange a facility for a vessel that is to be completed next year for example,” said Broomhead. “If you get a commercial loan you have to pay a forward start swap rate. There is definitely a tangible and material saving in the rates between export credit and commercial loan.”
ECA-backed financing can be approximately 0.5%-1% cheaper than bank commercial loans, estimates Broomhead. Also, besides being a cheaper form of funding, they are also long in duration.
“The tenor for 12 year money – which is amortising flat over a full 12 years – is very attractive, especially in this environment where cash flows tend to be a bit tighter,” he added. “Getting fixed interest rates at a time when everyone is expecting interest rates to rise is also very attractive.”
For example, Pacific Basin’s US$50.9 million 12-year ECA-backed loan is about 0.5%-0.75% more expensive than its April US$85 million facility with the same maturity, which was used to purchase four newly built bulk carriers.
However, there are challenges to obtaining ECA-backed financing, warns Broomhead. It took Pacific Basin between six to nine months to secure the facilities.
“The Japanese government still has to take a view on the credit of the company that is borrowing,” he said. “We spent a lot of time working with the ECA, trying to get them to understand our company, to get them comfortable that we are going repay the 12-year loan.”
Rising rate environment
In a rising interest rate environment, Broomhead notes that it is very conducive for the company lock-in the low costs of funding. As a result, Pacific Basin to tap additional sources of financing in the coming months – both ECA-backed as well as straight bank loans.
“We like to have at least 50% of our debt exposure in fixed rates as a general policy. We’re doing these ECAs now at fixed rates because that makes sense,” said Broomhead. “We would still like to continue putting more fixed rates on.”
“The next stage will be to look at traditional commercial loans in the second half of the year, because we are looking to acquire more second hand ships,” he added.
Pacific Basin holds a total of 246 vessels as of July 22, 2013, up 59 units from December 31, 2012. The company has purchased 27 dry bulk vessels and long-term chartered another nine year-to-date. However, it did not specify the number it hopes to obtain in the coming year.