By Foluke Akinmoladun
Private placements are typically “buy-and-hold,”-long term investments so the shipping company would benefit from having a long-term relationship with the same investor throughout the life of the financing.
Additionally, it is typically faster to issue a private placement versus a corporate bond in the public market because the issuer is not required to expend time and resources creating a prospectus and registering with the necessary Securities and Exchange Commission in the country.
Private placements also help diversify a company’s sources of capital and capital structure. Since the terms can be customized, private placements can complement existing bank debt versus compete with it, and can allow a company to better manage its debt obligations. Diversification of funding sources is particularly important during market cycles when bank liquidity may be tight.
This is where private placements play an important role in ship financing be it in acquisition of ships, fleet expansion, clearing debts, expanding operations or any other capital investment to increase productivity, private placements can be a quick way to acquire adequate financing.
Another motivation for shipping companies to consider raising finance through a private placement is that shipping companies do not attract large numbers of institutional or retail investors in public offerings. There are two main reasons for this, historically shipping company owners have been reluctant to cede significant ownership in their companies regardless of the financial situation of their company and secondly because the equity/securities markets did not really understand the shipping industry and its risks and rewards. This might be the case if the company’s market sector is currently considered unattractive, or there are only a few analysts covering the company.
Private placement transactions are negotiated confidentially and this is particularly helpful for shipping companies as the resulting change in shareholding structure and funds realised are information accessible to a limited number of people or companies. This will enable the ship owner continue to run its business without the burden of disclosure documentation in a public offering. Secondly they can be publicly still be seen to hold controlling shares even if that is not the case and thus continue to leverage on its relationships to continue in business. If customers of the ship owner such as charterers and shipbrokers get to know that ownership structure has significantly changed, they may not want to continue with such shipping company. This is because they may not trust the business acumen or risk appetite of the new owners.
With private placements, public disclosure requirements are limited, compared to those found in the public market. Thus, the shipping company would not be burdened with the level of disclosure or rendering of accounts to shareholders as with a public offering.
Capital raised from private placement is also commonly used to support long-term initiatives versus short-term needs, such as working capital. Thus, a private placement allows for tailored terms and structures to meet the specific financing needs of the shipping company issuer.
Examples of recent maritime Private Placement Debt issuances are : Tanker Co’s investment in chemical tankers, to the tune of $80m for 10years; LNG Vessels shipping company investing in support vessels for $60m with a 15 years tenure; Offshore drilling’s investment in a drilling ring with a private placement of $410m with a 5 years tenure and Nordic Maritime company for support vessels with a 10 years tenure for 58m Euros.
In conclusion, shipping companies that are looking into long-term investment can consider private placements with debt securities and/or equity shares. The main consideration is the financial objective of the shipping company and how it intends to continue to operate in the market in the short, medium and long term.
Foluke Akinmoladun is a lawyer, accountant, mediator and arbitrator. She is the Managing Solicitor of Trizon Law Chambers and can be reached at: Foluke.A@trizonlawchambers.com