Cargo ship operator Pacific Basin plans to access the export credit market in the next 18 months as it seeks to extend its repayment maturities.
In the past, the company would be able to obtain commercial bank loans for an average tenor of 10 years, which amortise over a seven-year period. However, as overall liquidity has continued to tighten in financial system, banks have shifted to offer loans with tenors of around seven to eight years, which amortise over a five-year period.
This does not bode well for Pacific Basin, which seeks to meet debt repayments over the next few years. But the company has managed to look into an alternative source of funding: export credit.
“At this day and age, the cheapest source of funding available to any corporate that is acquiring capital goods is export credit,” declared Andrew Broomhead, chief financial officer (CFO) at Pacific Basin to Asiamoney PLUS in a telephone interview on September 27. “Traditional banks now are not so enthusiastic on lending money and one of the aspects of that is the shortening of tenors.”
Export credits are essentially 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.
The financing element – as opposed to the guarantee or insurance element – can be extended by an exporter (supplier’s credit), or through a commercial bank in the form of trade related credit provided either to the supplier, or to the importer (buyer’s credit), according to Organisation for Economic Co-operation and Development (OECD).
Additionally, Pacific Basin notes that it will be able to get export credit financing – which is governed by the OECD – for up to 12 years. The ship operator’s low gearing level of just under 15% at the moment increases its likelihood of easily securing these additional facilities.
“The fact that you are spreading your repayment period over 12 years is very attractive and the interest rates that are charged on those are also very favourable in the current market,” noted Broomhead. “Although commercial banks tend to be much faster in terms of negotiation and documentation process, any company borrowing [commercial bank loans] has to pay a little bit more on its principal payments now than before.”
Pacific Basin’s capital commitments and loan repayments between now and 2014 are about US$430 million, and will be met in quarterly installments.
Broomhead adds that the interest rate of a 12-year export credit is similar to a five-year ordinary bank loan, hovering around the 5% level.
Increasing fleet numbers
Although Pacific Basin has been actively looking into additional sources of funding, the company has enough financial firepower to support its business. In addition to its US$650 million of cash available at hand as of the end of June, the company also recently issued a US$123.8 million convertible bond.
“This is our third convertible bond. We are a regular participant in that market. One of the reasons for that is partly the recognition that straight secured commercial bank financing is not as prevalent as it was,” shared Broomhead. “So from our point of view, it makes sense to diversify sources of long-term funding for the company.”
The bonds were launched with a coupon of 1.875% and an initial conversion price of HK$4.96, according the company's official announcement published on September 20. They are due to mature in 2018.
Certainly, a mountain of funds would come in handy should weak trade and too much freight capacity bring discounted assets to the market. The price of secondhand Handysize and Handymax vessels – both of which Pacific Basin specialises in – has sunk to levels last seen in 2004, notes J.P. Morgan.
“We are pretty well cashed up at the moment after that last convertible. Having access to prompt money is quite a key element in this volatile environment,” said Broomhead. “In this volatility, apart from being a threat, it can present a few opportunities for corporates if they are prepared to access those moments.”
“For us we are at the stage of where we are looking to invest in ships as second hand values have come down,” he added. “It’s facing a downward pressure because there are many shipping companies that do not have the luxury of having cash balances like we have and effectively struggling with their banks to meet loan covenants. That will continue to weigh on the valuation of vessels.”
Pacific Basin, which is expecting 14 new vessels to be delivered in the next few months, currently has 34 owned vessels and 126 chartered vessels. In 2006/07 it was the other way round when the company had a much higher proportion of owned vessels. It began selling and chartering the ships from 2007 onwards to help capitalise on high steel values.
With five-year-old Handysize vessels costing about US$16 million, Pacific Basin can theoretically afford another 48, more than a quarter of its existing operating dry bulk fleet.
“It’s a cyclical industry and therefore, you would need to position yourselves to be either owning significant amount of steel when it is cheap and probably looking to sell that when it gets expensive and move towards a chartered model,” said Broomhead.
Pacific Basin invests its cash balances in accordance with its board approved treasury policy. As a shipping company that is looking to invest its cash into dry bulk vessels when the purchase opportunities arise, the company needs to ensure that a large part of its cash balances are readily accessible.
The vessel operator therefore has shied away from investing in longer-dated investments, which should be held through to maturity.
“We have deposits with a range of staggered tenors up to one year with a range of investment grade banks,” said Broomhead. “We achieve an element of yield enhancement from utilising a portion of our cash in currency linked deposits. But for us, it is very important that we use currencies that we actually need in the company because the volatility is such that you can effectively get knocked out of a yield enhancing dual currency investment.”
Given that the shipping industry is primarily denominated in US dollars, a bulk of Pacific Basin’s cash is placed in dollars, followed by the Australian dollar and the euro. The company is able to obtain annualised rates of between 4%-8% on a deposit.
Additionally, Pacific Basin does not take positions in equity or even government bonds.
“It is partly because of the tenor and some of these instruments are not principal protected,” said Broomhead. “All this is part of the risk-reward equation.”