Financial Challenges From Regulation
Determining the added cost of regulation
on ship operations
Alan McCarthy
24th June 2015
Regulations, Regulations……
“Regulations grow at the same rate as weeds”
Norman Ralph Augustine, Chairman of the Review of United States Human Space Flight Plans Committee
“If you have ten thousand regulations you destroy all respect for the law”
Winston Churchill
“The problem is that agencies sometimes lose sight of common sense as they create
regulations”
Fred Thompson, Chairman of the International Security Advisory Board at the United States Department of
State
“Regulations about environments are going to get tougher and tougher”
Carlos Ghosn, Chairman and CEO, Renault
Clean Air
FLEET
Clean Marine
Wartsila Closed Loop Scrubber System
• US legislation requires the ballast water treatment system (BWTS) to be
type approved by the USCG. Currently, no BWTS has such type approval.
• USCG published the first list of 9 accepted “IMO” type-approved BWTS as
Alternative Management Systems (“AMS”) – May be used for up to 5 years
Constant Improvement and Upgrading of Regulations
For Example:
We Have Had:
• STCW; Standards of Training, Certification and Watchkeeping
• MARPOL; International Convention for the Prevention of Pollution from Ships
We Will Have:
• ECDIS; Electronic Chart Display and Information Systems
• Unified Requirements; On Containership Design and Construction
Cost of Compliance is one thing;
Cost of non-Compliance is another
What About Financial Regulation?
A ‘regulation’, less well known outside of the financial markets that has
had, and will continue to have a significant effect on loan capital costs
That has arisen as a result of various financial crises:
• Asian debt crisis of the late 1990’s, and
• The Global Credit Crisis of 2008, post Lehman Brothers
BASEL II
and its offspring
BASEL III
How has it come about?
The requirement for Banks to maintain Capital Ratio of 8% has been around for
a long time
After the Asian Debt Crisis in the late 1990’s it became apparent that banks had:
• Not precisely defined their ‘true’ capital
• Not been fully aware of the risks to their capital structure that certain loan and
investment structures posed
Leading to the development and adoption of Basel II
Developed by the Basel Committee on Banking Supervision
‘International Convergence of Capital Measurement and Capital Standards’
BIS II – June 2006
How has it come about?
The main pillars of bank capital structure defined by the Bank for
International Settlements (BIS) in Basel, Switzerland to ensure that
banks had adequate capital to cope with cyclical financial crises
Tier 1 Capital was re-defined so that ‘unusual’ capital instruments
were not counted.
Individual loan assets within defined sectorial classes were to be
individually ‘risk weighted’ to assess the level of capital to be applied
against it
The higher the risk, the more capital to be applied, the greater the
cost to the bank – thus the customer
How Well Did it Work?
BASEL III
The Basel II Framework remains in place, but has been tightened with Basel III
What it Means for the Shipping Borrower
First in the queue for money:
• Large Corporations with Consolidated Structure
• Independent, consolidated financial statements
o Financial strength, liquidity, leverage
• Transparency of revenue generation
o Time charters
• Asset quality
o and critical mass
• Best in class corporate governance
• Country & Political risk
• Quality of counter-party risk
What it Means for the Shipping Borrower
First in the queue for money, (contd):
• Resilience to market risk
o Requires
− more analysis of markets, trends
− less exposure to residual value (Exposure at Default)
• Rigorous due diligence
The Impact
• Fewer lenders
• Reduced capacity for those that remain active
• Concentration on ‘top tier’ borrowers and ‘trophy’ projects
• As banks chase limited number of ‘rated’ borrowers, pricing reduces
− 300 basis points plus in 2012, now at under 200 bps
• But mid-size and smaller cap companies struggle to find loan capital
• Flight to Private Equity has been both expensive and transient
• Pricing for mid-cap remains stubbornly high – 300 bps and more
• New institutions looking for 450 – 500 bps, maybe higher
• The cost of money over time (Time Value of Money – TVM) shortens
tenors
The Impact on Environmental Matters
• Bank financing for retrofitting will be difficult
o Where financial savings are identified (lower fuel costs) that can
be recaptured and used for loan repayment – OK, some banks
considering
o Emissions controls – some progress
o BWTS - ?
• Whatever emerges, Banks must still apply BIS risk analysis