China and Ship Finance: The Degree of Difficulty Increases

China and Ship Finance: The Degree of Difficulty Increases 14th Annual Greek Ship Finance Forum, 17 October 2012Kevin Oates, Marine Money Asia

China and Ship Finance: The Degree of Difficulty Increases Chinese Commercial Banks: Opportunities in Ship Finance • ▪ Not least due to their size, Chinese banks have the potential to fill part of the void left by withdrawing European banks • ▪ China is already home to at least four of the world’s largest banks by market capitalization

China and Ship Finance: The Degree of Difficulty Increases Chinese Commercial Banks: Opportunities in Ship Finance ▪ The profile of Chinese commercial banks in international ship finance has developed significantly over the past decade ▪ Chinese banks are no longer underrepresented in league tables. Bank of China, Industrial and Commercial Bank of China, Bank of Communications and China Construction Bank have become major ship lenders Ship Owners

China and Ship Finance: The Degree of Difficulty Increases Chinese Commercial Banks: Opportunities in Ship Finance ▪ Over the past five years, many shipping companies - including prominent foreign shipowners such as Bernhard Schulte, Mitsui O.S.K Lines, Norden, Pacific International Lines and STX Pan Ocean have tapped financing from the Chinese commercial banks successfully

China and Ship Finance: The Degree of Difficulty Increases Chinese Commercial Banks: Opportunities in Ship Finance ▪ Over the past five years, many shipping companies have tapped financing from the Chinese commercial banks successfully

China and Ship Finance: The Degree of Difficulty Increases Chinese Commercial Banks: Challenges in Ship Finance But to many, the progress made by Chinese commercial banks in global ship finance is simply not fast enough ▪ Common grouses suggest that loan appraisals tend to be overly cautious, bureaucratic and time-consuming ▪ While Chinese banks may have financed a number of foreign shipowners, their clients are still largely limited to some of the biggest and best-known companies, who can still obtain keen terms from the international banking market ▪ Lending activities to the shipping industry are also mostly confined to bilateral corporate lending structures. Club or syndication deals among Chinese commercial banks are uncommon

China and Ship Finance: The Degree of Difficulty Increases Chinese Commercial Banks: Challenges in Ship Finance ▪ Managing risks and volatility in ship financing remains a challenge to many Chinese lenders. They continue to rely on Western banks to structure transactions Source: Bloomberg, “China’s Shipyards Fail to Win Orders as Greek Owners Shun Loans”, June 8, 2012 Dr. John Coustas, President of New York listed Danaos Corporation, described the loan appraisal process of Chinese banks as “time consuming and painful” Safe Bulkers is one company who has not sought Chinese financing because of the costs

China and Ship Finance: The Degree of Difficulty Increases Chinese Commercial Banks: Challenges in Ship Finance But to many, the progress made by Chinese commercial banks in global ship finance is simply not fast enough ▪ The series of interest rate hikes since 2010 have eroded some of the pricing advantagespreviously available to Chinese banks ▪ Another dampener to the Chinese banks’ appetite for shipping lies in their continual struggle with USD/RMB exchange rate and the opportunity cost of capital ▪ Dollars have become costlier from an internal treasury prospective as they must buy dollars with RMB reserves. This is made worse, given that Chinese banks have suffered a savings flight in recent months

China and Ship Finance: The Degree of Difficulty Increases Policy Banks Take the Lead: China Exim Bank ▪ With the mission to support the local shipbuilding industry, China’s two state-owned policy banks - China Exim and China Development Bank (“CDB”) have remained committed to extending financing to foreign shipping companies (either as participating as a lender or an issuer of standby letter of credit or guarantees)

China and Ship Finance: The Degree of Difficulty Increases Policy Banks Take the Lead: China Development Bank ▪ Like the Chinese commercial banks, they are equally prudent and cautious in selecting their counterparties and in determining their commercial terms

China and Ship Finance: The Degree of Difficulty Increases Key Takeaways ▪ Broadly speaking, commercial Chinese banks have not participated in global ship finance in a big way and their willingness and ability to finance foreign buyers is still very much dependent on the availability of export credit cover ▪ Apart from export credit cover, Chinese commercial banks prefer to work with reputable international banks in extending financing to foreign shipping companies. Such collaborations allow Chinese banks to leverage on the shipping expertise and relationships that their western counterparts have with the borrowers ▪ But in reality, club/syndicated deals involving collaborations between commercial Chinese and Western banks remain fairly limited

China and Ship Finance: The Degree of Difficulty Increases Key Takeaways ▪ There is a mismatch in expectations between owners and bankers. Owners are optimistic that more liquidity will be available for shipping in the latter half of 2012, but anecdotal evidence suggests otherwise. Chinese banks may have better USD availability than western banks, but they remain very cautious of industry fundamentals ▪ Chinese banks’ rise in the share in ship finance is largely in line with the growth of the country’s shipping and shipbuilding industries. They have no plans to grow into major ship financers. Moving forward, their appetite for ship financing will be severely tested in the current shipping downturn

China and Ship Finance: The Degree of Difficulty Increases