Shipping Bonds Issuance Momentum Explained

Faced with the lack of available funding, a growing number of shipping companies have taken advantage of the low interest rate environment and tapped the debt capital markets.

There are several reasons behind such a trend, according to shipping consultancy Drewry.

Among the main drivers of the increase in high yield bond volumes coming from the shipping sector is the scarcity of funds from the banking sector.

The regulatory pressures are forcing these institutions to increase impairments associated with shipping loans and thus more and more financial institutions are trying to limit their exposure to the highly volatile shipping sector, Drewry explains. Banks with a more diversified portfolio and stronger balance sheet are able to navigate through the downturn and continue to support the industry. However, banking exposure is declining and shipowners are required to adjust in the new environment.

Furthermore, the improving market dynamics, especially in the container shipping sector, have helped mitigate credit risk and can lead to credit rating upgrades. Year to date, large container shipping companies such as CMA CGM and Hapag-Lloyd, have issued five new lower priced bonds for an aggregate amount of USD 2.8bn equivalent.

Just this month, Hong Kong-based charter owner and manager of containerships Seaspan Corporation said it was planning to offer senior unsecured notes due 2027 in a registered public offering.

The company said it would use the net proceeds from the USD 80 million public offering to repay existing debt, in addition to other corporate purposes.

Moreover, containership charter owner Global Ship Lease (GSL) launched its proposed notes offering aimed at collecting between USD 360 million, which would be used to refinance debt.

Another factor contributing to the tapping of debt capital market is the low interest rate environment.

Clearly, the current situation provides an attractive context for shipping companies to refinance debt and push back the debt maturity profile.

“Persistently low interest rates challenge investors to hunt out yields and the high yield shipping bond market is a lucrative option. The average yield on dry bulk, tanker shipping and offshore bonds stands at 10%, 9.4% and 13% respectively. At the present time, the offshore sector offers the highest yields in shipping, although it also comes with the highest risk,” Drewry said.

Finally, the final argument in support of bond market attractiveness is the covenant-lite structure of the securities and their unsecured nature.

In the majority of cases, most shipping bonds are senior unsecured notes that lie at the bottom of the debt pecking order with incurrence covenants attached and not maintenance financial covenants.

According to Drewry, shipping companies prefer that type of financing as they usually don’t have to pledge any collateral while investors are compensated with higher coupons for taking unsecured risk on the company. On average, coupon stands at 5.6% and the average yield for investors at 6.2%.