GIEK is featured in the Berne Union’s autumn 2019 edition of BUlletin
Norway has a proud maritime history. For more than 150 years, its maritime sector has contributed to world trade, economic growth and maritime innovation. The maritime cluster ranging from shipyards, equipment producers and marine service companies to financial institutions and ship-owners are significant components in the value chain.
The guarantee portfolio of the Norwegian Export Credit Guarantee Agency (GIEK) reflects the nature of Norway’s export. The bulk of exposure remains within the offshore industry. However, a transition to new markets is supported by guarantee cover to ship-owning companies holding leading positions in niches such as hybrid ferries, expedition cruise and fish carriers for sea-farming.
Sophisticated shipbuilding is capital intensive and well suited for cross-border transactions. The sector is strategically important to shipbuilding countries and historically cared for by official credit support schemes. Hence, buyers have reason to expect attractive financing to tag along with newbuilding orders. The Norwegian official support scheme offers credit risk cover by GIEK and funding provided by Export Credit Norway or by Norwegian and foreign commercial banks.
Export Credit Guarantee Agency financing is a powerful tool in a competitive business climate and represent significant source of capital to global shipping.
Restructuring of the shipping industry
Following challenging years in the offshore sector and being in the midst of heavy restructuring stories, it is encouraging to see the Norwegian shipyards taking a confident and improved position in niche markets such as arctic cruise ships, “green” LNG-ferries and advanced fishing boats. Norwegian yards are successfully creating new grounds for future growth. A green shift in the shipping industry is also making room for new suppliers to join the game such as manufacturers of batteries for electric propulsion and scrubber technology applicable for reducing sulphur oxides emissions.
ECA financing is important to the shipbuilding industry
GIEK’s buyer credit guarantee is a key factor to shipbuilding in Norway but also to the sale of Norwegian equipment placed on foreign-built vessels. Ship finance is a specialised financial category in which a limited group of commercial banks with a global customer strategy offer long term reasonably priced lending. Loan facilities are asset backed, secured with ship mortgage and a parent guarantee. However, financing of new ships has changed in the past ten to fifteen years and ECA finance is now an essential source of finance to global ship finance.
Banks shrink their shipping portfolios
Loan volume for syndicated marine lending were estimated by Dealogic to be about $ 60 billion in 2018, a significant decrease from similar volume of more than $ 100 billion in 2007. A number of the ship finance banks that historically dominated the market, particularly the European banks, have gradually exited shipping by selling shipping portfolios or allowing existing loans to amortise without taking on new business. Although the reduced ambitions were triggered by the financial crisis and substantial losses made by these banks in the shipping industry, other factors have affected the desire of the banks to shrink their shipping portfolios. These factors include the increasing regulation faced by the European banks and particularly because of the increased capital adequacy requirements of the Basel III and Basel IV. The banks that remain active in the shipping market are selectively lending only to existing customers and large shipping conglomerates.
Ship-owners turn to ECA-finance
Following the substantial reduction in financing from traditional banks in the past decade, ship-owners have increasingly turned to alternative financing sources. This is particularly the case for small to medium-sized ship-owners, as well as high-volume segments like offshore and cruise where capital restrictions make lending particularly expensive. Ship-owners have become increasingly interested in ECA structures and the export credit agencies are presently providing a stable supplemental source of finance to the shipping industry. According to KPMG, ECA financing accounted for approximately 10 percent of the shipping and offshore-related debt finance before the financial crises, while the share increased to more than 33 percent in 2015 amounting to around $ 15 billion of annual new business. There is every reason to expect ECA financing to remain an attractive source of capital. The same is the case for other alternative sources of finance such as the Chinese leasing market, a sector of improved significance to global shipping.
GIEK on par with the largest offshore banks
Based on existing maritime portfolio and support to the shipping industry for more than two decades GIEK ranks among the major ECAs in ship finance. In the segment of Merchant Vessels and Offshore, ECAs in the “top three” shipbuilding countries (Korea, China and Japan) play a major role in global ship finance market. The same is the case for cruise and ferries where four European countries dominate the market. Norwegian offshore shipping and technology have taken a leading position on the world market and GIEK has supplemented this high-volume segment with financial capacity. Despite reduced demand for new credit to offshore vessels, GIEK still has a significant offshore vessel portfolio and ranks on par with the largest offshore banks in terms of exposure. Today GIEK manages a maritime portfolio of $ 9.4 billion, which according to Marine Money in size compares to top 15 of the largest commercial ship finance banks set out below (right).
Guidelines for GIEK ship finance support
For buyers’ credit financing of new ships, the guidelines for GIEK follow the general understanding of OECD (SSU). Main terms include the following:
- Debt financing of up to 80 percent of the sales contract value
- GIEK can guarantee up to 90 percent of the total credit facility (100 percent in case of pure political risk)
- At least 30 percent of the GIEK guaranteed volume must consist of Norwegian goods, services or value creation
- Up to 12 years tenor and linear repayment with quarterly or semi-annual payments
Risk sharing with commercial banks
Final terms reflect specific credit risk and market conditions relevant to the case. In assessing credit risk, GIEK emphasises collateral, contract robustness, earnings potential and the experience of the operator. The «classical» model for financing of a vessel built at a Norwegian yard is that GIEK guarantees about 70 percent of the underlying term loan disbursed by either Export Credit Norway or a commercial bank of which the latter covers the remaining risk. Pari passu term implies GIEK to require the same security and covenants as the commercial bank in a transaction. Consequently, the commercial bank shares, on equal and pro rata basis, all proceeds from securities in case of default under a loan. The pricing of the guarantee will likewise be pari passu with GIEK sharing risk premium and fees equally with the banks. The lower coverage compared to many other ECA’s is a test to confirm marketable terms which commercial banks can endorse. In many ways, this type of structure can be characterised as a “standard” club deal with the ECA adding additional capacity in the commercial transaction.
An alternative model is financing of «parts of ships» which means that volume eligible for GIEK guarantee cover is calculated from contract value of Norwegian equipment delivered to a foreign yard. Instead of guaranteeing for a certain percentage of the vessel contract as in the classical model, GIEK guarantees for a certain percentage of the amount of the Norwegian equipment. To facilitate the process and in order to increase the loan amount and thereby the Norwegian export, GIEK has accepted financing of parts of ships in a series of new-buildings in exchange for security in one or two of all the vessels.
This bundling principle improves efficiency and adds attractiveness to the GIEK guarantee. The principle also applies to other forms of transactions. In the retrofit segment, i.e. in relation to installation of scrubbers on a whole fleet, GIEK may provide guarantees for corporate facilities to investment grade debtors or GIEK may step into existing asset backed facilities being granted a pro rata share of the existing ship mortgage value.
Credit lines / framework agreements as a tool to boost export
Another angle is the concept of guaranteeing for credit lines. Through a framework agreement we accept drawdown of a credit line over a certain period for purchases and services from several exporters. GIEK recently issued a new framework guarantee to Petrobras and we see the interest of this structure also elsewhere in the market.
Risk sharing with commercial banks at this level has served GIEK well through the downturn of the cyclical offshore market. It has secured a common understanding of risk and equality of GIEK’s position among peers. The high degree of risk sharing with the commercial banks can also be regarded as an alternative to reinsurance in the private market.
GIEK’s credit evaluation process
As part of our internal due diligence- and work process, GIEK will review the loan documents and provide our comments into the bank syndicate. In shipping- and offshore transactions this is often based on LMA standard. Often GIEK’s transaction will be regulated in accordance with Norwegian law and jurisdiction, however, it is not uncommon to see UK-law or NY-law among others. Lately GIEK has participated in French tax-lease transactions and we have also been approached with suggestions of Spanish tax lease.
Focus on sustainability
GIEK has a strong focus on due diligence of sustainability and social issues in relation to yards.s. We have a good process for valuation of labour and health and safety conditions with several yards in various countries in Europe and Asia. In agreement with the ship owner the yard will commit to an evaluation and then to follow the resulting action plan. Practically such an action plan will be a condition for GIEK’s guarantee, either documented in the loan agreement or through a separate side letter from the yard to the ship owner.
Solid experience in work-outs
In the past years GIEK has gained solid experience in various work-outs in the offshore sector. We have been part of steering committees in finance restructurings through US Chapter 11 and in Brazilian debt settlements. Having the Norwegian government in the back and thus allowing GIEK to keep a long term view of a transaction even if it is in distress, has been useful in the process of reducing losses under GIEK’s guarantees and in seeking sustainable solutions for all parties.
ECA financing of new vessels is available from most shipbuilding countries and Norway is no exception. As banks shrink their shipping portfolios / loan volumes, ECA financing becomes more important to the shipbuilding industry. The Norwegian official support scheme assumes risk sharing with commercial banks. The banks are important partners to GIEK and help us supporting Norwegian exporters within an acceptable risk level and with satisfactory guarantee income.