Introduction
The production, development and survival of enterprises are inseparable from their investment and financial activities. In this chapter, the previous studies and researches on these activities of shipping emprises have been reviewed. According to the question of this research, before the analysis of ways and difficulties of shipping financing, the basic definition and forms of financing should be illustrated and classified. After that, the situations of the Medium-sized shipping enterprises in China have to be descried and meanwhile compared with the international environment. All of these reviews can help this research to find an optimal ways of financing in the Chinese shipping industry.
The sources of Finance
Initially, when companies are constructed, the initial sources of finance are usually provided by private individuals and ploughed-back profits. The other investors are not willing to take the risks without some form of guarantee. After the growth of the company, these initial sources become insufficient to fund the requited heavy capital investment. Thus, a need for finance from external sources arises. There are many different ways of raising finance. All the forms of finance can be described as short-term finance for durations up to one year; medium-term finance for durations of between one and five years; and long-term finance for durations of more than five years (A.D.F.Price 1995).
The other definition of sources of finance can be separated by issuing debt and issuing equity which also called debt finance and equity finance. The debt finance involved of bank loans, overdraft, trade credit, leasing and so co; the equity finance consists of issuing stocks (Bloomfield 2005). Simply speaking, Arnold (2005) defined that Debt is something that has to be repaid, generally, corporate debt repayments combine the regular interest with capital repayments over a period. In other words, if a corporate is partially financed by debt, they should repay the interest as well as the capital for a time regularly. The equity finance is a long-term finance and the companies issue the stocks which raising the funds from different stockholders. The stockholders purchase the shares in return of bonus (Jordan 2008).
Before discuss the sources of finance in shipping industry, the traditional and theoretical reviews have been studied first. According to the feature of the shipping industry which has a high intensive capital, the vast amounts of funds have to be used to operate the companies. The popular way of finance could be bank loans, shipyard credit, issue stock, issue bonds and finance leasing, the detailed which will be mentioned respectively in the next two sections.
2.1.1Bank Loan
This is the most common and popular way of finance. Pike and Neale (2009) explained that A bank loan is usually extended for a fixed term with pre-agreed schedule of interest and capital repayments. The period of bank loans is usually more than one year and applies the fixed or flexible interest rates. Rene (2007) has mentioned that the interest rate is based on the rate index, such as London Interbank Offered Rate (LIBOR) and plus some margin.
There are two types of bank loans which depend on the way of bank's anticipation. The first type is single bank loan. The loan provided by a single bank. The other is syndicate loan which is made up by a group of banks. This method can not only extend the amount of the loans, but also disperse the risks for the banks.
However, from the side of the commercial bank, due to the bad debts risk, before whether to lend the money to a company, bank need collect all the information about that company, such Credit risk analysis method which has been introduced by Grammenos (1977) is the five 'Cs'. They are Character, Capacity, Capital, Conditions and Collateral respectively. This method has been applies by many financial institutions and will be discussed more detailed in later section of this chapter.
According to the statistics, banks are providing more than 50 per cent of finance to Medium-Small sized companies now (R Pike and B Neale 2009 P377). That means banks are the most important source of finance for enterprises rather than other forms of finance sourcing.
2.1.2 Policy-related bank loan
Policy-related bank loan is decided by the central bank on the basis of the relevant examination of the enterprises to determine whether release the loan or not. It is mainly used in China which in order to support and promote the Chinese agricultural and rural economic development. The policy-related bank loan offers some preferential policies on loan size, duration of payback, interest rate and so on. On the other hand, it is different between the free financial allocations and the loans have to pay back with interests (OECD 2007). The shipping industry is one of the specific targets which need priority support from the government. It also can be called as shipyard credit and will be discussed later in this chapter.
2.1.2 Issue stocks
2.1.3 Issue Bonds and securities
2.1.3 Leasing
Pike and Neale (2009) use the definition from the international Accounting Standard Board:
A leasing transaction is a commercial arrangement whereby an equipment owner conveys the right to use the equipment in return for payment by the equipment user of a specified rental over a pre-agree period of time.
The equipment owner can be called as lessor and the equipment user is lessee. Thus, the lessee wishes to obtain the use of an asset, while the lessor can meet the lessee's requirement in return for a specified series of rental payment during a period of time. Leasing is an alternative finance method which used by many companies, especially for the small and medium-sized company.
Two types of Leasing (Arnold 2005):
Operating Lease
The lessee only commits to rent the asset for a short period. This is because of the lessee does not expect to use the asset for the entire life, maybe it is just for a specific job in a limited period. The lessor has to find an alternative lessee or sale the asset in the second hand market, also the lessor retains all the risks and responsible for the repairs, maintenance and insurance.
Finance Lease
The finance lease is different between the operating lease which the lessor expects to recover almost the full cost of the requirement. The lessee pays the capital sum plus interest to the lessor for the right to use the equipment in the primary period, after that, the lessee pays a very small 'normal' rental payment. Under this situation, the lessee has to take the risks and responsible for maintenance, insurance and repairs, no cancelation or termination allowed.
There is a very important advantage of leasing which is taxation deduction.
(Arnold 2005)
2.2 The sources of Shipping Finance
Ship finance which has been summarized by S Harwood (2006) that is all about a bank or some other lender advances money to a shipowner to assist the owner to build a new ship; buy a second-hand ship; convert, repair or alter a ship; or refinance existing indebtedness secured on a ship. However, due to the characteristics of shipping industry and also compare with the other industries, the international financial institutions appear to be extremely cautious. Therefore, the shipping enterprises should consider not only on their credit capability, but also their current liabilities, profit revenues, cash flows and must have guarantees.
Pan (2006) also defined that shipping finance is that the enterprises use its own credit capability to gather the funds in the financial markets by selecting the different forms of financing (such as bank loans, issue bonds, leasing, etc). The most efficient way is to choose the most optimal way of financing from the variety forms which have the lowest cost and can minimizes the risks.
J Lu, M Zhang and MH Li (2001) have summarized the few features of the shipping finance-these are the main reasons why it is difficult to finance shipping industry:
High Capital intensive: because of increasing the size of the vessel, it is much valuable. And normally, the amount of the investment may take more than 10 years to payback.
Many forms of finance: there is no shipping enterprise can buy the vessel use their own founds. Bank loans, equity financing, finance leasing, Government subsidies are all have the advantages and disadvantages.
High Risk: the risks are come from politics; economic influence; financial market, shipping market and so on.
Finance category
Type of Finance
Typical Features
Equity
Owner Equity
Finance provided by owner from own funds and retained earnings
Limited partnership
Funds provided by partners
Ship Fund
Shares in company bought privately by individuals or listed on stock exchange
Public Offering
Shares sold by subscription on public stock exchange
Mezzanine Finance
Private Placement
Debt with high interest rate and possibly equity rights
Senior Debt
Bond Issue
Security issued in the capital market
Commercial Bank Loan
Loan provided by bank, large loans may be syndicated between several banks
Shipyard credit
Loan provided by government or agency to assist domestic shipyards
Private Placement
Debt finance arranged privately with pension fund, insurance company etc
Lease
Finance Lease
Long term tax effective finance based on sale of ship to company which uses depreciation benefits. May be leveraged
Operating Lease
Table: Summary of source of finance for shipping enterprise Source: Stopford 1997
Figure: Percentage allocation chart of sources of shipping financing
Source: Stephenson (2006)
The figure above is the source of shipping finance around world. As can be seen from the chart, the sources of shipping finance are bank loans, shipyard, ship mortgage, KG/KS partnership, bonds, stock and leasing.
Stephenson (2006) collected is from the DVD BANK Ordinance relating to the financing sources of information than the whole world is currently processing a major financing source, shown in Figure 2.2, just to Bank-based Bank contact credit loan and shipyards as high as 75%, followed by a ship mortgage loans 10%, and then future is the Bank issued bonds and equities, and KG / KS system 度 holds 5 percent respectively, and finally it is the right for shareholders and tax rental profit and 3% share, respectively.
As the major banks accept public deposits, not specific in comparison to other financing methods have access to more capital, but relatively it has neither the will to make Bank undertook a high risk business, so far, or large-scale maritime Bank enterprises are mainly financing financing source. Therefore, compared to small and medium sized shipping company or a fund-raising at the Bank demanding the securities and bonds, financing channels, it is difficult to obtain the excellent financing conditions. Therefore, apart from 了 outside the Bank in order to KG / KS-based financing system 度 lease, not only to allow foreign shipping enterprises to small and medium scale in the original stable income is below to obtain additional financing source, more able to expand fleet increase the competitiveness of national shipping.
2.2.1 Commercial Bank loans
Stephenson (2006) mentioned that syndicate loan is the main type of bank loan that the shipping enterprises to build the new vessel. The advantages of syndicate loan is reduce the risks for some of the banks, however, the costs of shipping enterprises is relative high.
Credit analysis
2.2.2 Shipyard credit
Government should provided variety of financial subsidies for shipping industry which allow the shipping enterprises apply the credit loan with some conditions. The advantages of this finance approach which has a fixed interest rate, low cost. This mode may be help shipping enterprises on the aspects of credit loans, accelerated depreciation, interest rate subsidies, tax policy and duration of payback and (OECD 2003).
Different governments have different ways to handling shipyard credit. For example, in Japan, government bank doing the credit analysis and release the loans. Or, there is a third party to provide security for the shipping companies in order to defuse the risk of the shipyard, for example, UK's Export Credit Guarantee department which act as an agency to carry out credit analysis and the loans issued by a commercial bank (Stopford 1997).
Leasing:
The rise in shipping the new modes of financing is a financing lease, the specific workflow is by the lessee to negotiate the buyer's identity and shipyard ship, tonnage, marine equipment. Terms such as the construction schedule is by the bank or a financial institution acting as the lessor to the shipyard to pay shipping price of all property of the lessor. By the lessee responsible for operating, with a crew member on a regular basis to pay rent to the lessor, the lease expiration of the period, the agreement contains a buy-back provisions, the lessee can be a very low nominal prices to the lessor that 裡 bought the ship. In this way the effective é™ low 了 lessor risks, not the lessee to pay rent on time, the lessor's rights could be conducted so that the ship back, in the back of the debt burden of the lessee, the lessor's benefit payment is also not will be lost.
Source of finance
Advantages
Disadvantages
Bank Loan
Vast amount of cash flows, the transaction cost relative low for the syndicate loan
Interests rates high, Strict security guarantee, high margin for different credit rating
policy
Stock issue
Different investor can be involved
Bond and security issue
In order to avoid the risks and problems, it is necessary to analysis the company's value, financial performance and accounting report before the enterprise is going to do finance. The method of analysis the financial health is the ratio analysis. The financial ratios are very simply and quick, so it has been applied by many financial institutions and many enterprises in different business.
The ratios have been categorized by D Watson and A Head (2007), Atrill and Mclaney (2005) below:
Liquidity ratio: the liquidity ratios show the survival of the business. They can tell whether the sufficient liquidity can meet the obligations.
Current ratio: the current ratio illustrates the liquid asset of the business to the current liabilities. The higher the ratio, the higher more liquid. That means the business have more ability to pay the liabilities.
The calculation is: current ratio = current assets/current liabilities
Financial gearing: the financial gearing is represents the relationship between the different sources of finance which contribute to the business. The level of the gearing assesses with degree of the risks. This ratios especially use when making the finance decisions.
Gearing ratio: the gearing ratio is measures the long-term loans to the long-term capital structure (share capital, reserves and long term loans). The indicator shows the percentage of debt finance to the total amount finance which could avoid the debt risks.
Interest cover ratio: this ratio measures whether the profit can cover the interest payable. The calculation is :
Interest cover ratio = profit before interest and taxation/interest payable
The higher the multiple, the higher the level of profit coverage and this means business have more ability to payback and lower the financial risk.
Profitability: The profitability ratios can provide the degree of business success in creating wealth.
Gross profit margin ratio: this ratio is measure the gross profit to the sales revenue. This ability of achieve more net profit then the other company in the same industry, thus this will lead less risk for the business.
Net profit margin: this ratio relate to the net profit before interest and taxation to the sales revenue. The efficiency of this ratio is measure the operational performance of the business. The higher the ratio, the less the risk.
Return on capital employed: this ratio measure relationship between net profit and the average long-term capital. It compares the capital invested with the profit. This higher the ratio, the better the business performance.
Return on ordinary shareholder's fund: the ratio shows the availability of the net profit can cover the shareholder's capital plus reserves. The higher the ratio, the less risk of the company.
Efficiency: the efficiency ratios measure whether the resources have been used efficiently.
Average stock (inventory) turnover period: this ratio represents the opening and closing stock levels to the total cost of the sales. The result is shows how many days the stocks can cover the cost. The more days, the better of the business.
Sales revenue to capital employed: this ratio examines whether the capital investment can generate the sales revenue effective or not.
