Due Diligence in Our Times
According to the International Chamber of Shipping, at least 90% of the world trade is carried by ships. Shipping continues to grow and evolve into the carriage of new cargoes and setting out new trading routes. It is supporting new environmentally friendly targets and trying to raise its profile and importance to the world.
Over the past decade shipping also had to deal with changes in the way it is financed. A number of the traditional banks/sources have left the industry but have been replaced with new banks and alternative new financing options (leasing, funds etc). Financing is there again, we hear, but? During this “transition period” what the loss of the traditional big lenders has also meant is a significant loss of the relationships built over many decades between owners and lenders which were based on an understanding over many generations of how the owner “runs” their vessels and business. An understanding of the ethos and culture between lender and borrower, that supports the risk assessment and comfort levels of the first and the allowance to follow their growth plans and strategies for the latter.
The value of that asset/s which are being invested in, is always the critical part of the agreement and as the market cannot be predicted with any sort of guarantees, both lenders and successful owners can only control the condition of that asset. The market in which these assets operate is highly volatile and sensitive to geopolitics, hence very difficult to predict. The industry has today got access to numerous data sources to assess and present these assets. This should quantify and qualify the relationship – at least that is what is assumed. It is in this new environment that effective Due Diligence is more critical than ever and can/should support both side in their discussions.
Nikos Benetis, Group Director of Financial Institution Advisory Services at LOC Group, described the situation:
“Following on from numerous discussions with both owners and lenders, effective and quality driven due diligence, both technical and commercial, can support successful deals between investors and owners.
Owners should view and embrace this due diligence as confirmation of their hard endeavours to maintain an effective and efficient management and maintenance system. It ultimately provides comfort to their lenders and prospective lenders that their assets are of high quality and can successfully operate in a competitive market. From the lender’s perspective an effective due diligence supports the mitigation of exposure risks, so they can start engaging proactively with their clients and build a quality driven and environmentally friendly portfolio. A good collaboration and understanding of respective cultures can thus become something that is actually data driven and recorded against annual office assessments and selective vessel inspections.
The Poseidon Principles initiative, launched in June 2019 by 11 leading lenders, It is a framework for assessing and disclosing the climate alignment of ship finance portfolios by creating common global baselines that are consistent with and supportive of society’s goals; to better enable financial institutions to align their portfolios with responsible environmental impact. This is a significant and positive step towards building new portfolios and collaborations between stakeholders that provides both lenders and owners with clear strategies going forward. These principles should be welcomed by owners and managers as it will hugely support the profile of the shipping industry against environmental related topics.
Based on both my previous experience and the due diligence work we have carried out at LOC over the past few years, condition assessment inspections of assets are very useful, but they only really capture the condition at a specific moment in time. Office assessments of systems, management and maintenance processes, followed by a possible inspection of the asset, provide a key negotiating point for owners and a true quality and risk management tool record for lenders. It provides a holistic approach and result.
More and more data sources are also becoming readily available which provide further insights into vessel operation and management quality. The challenge is interpreting this large quantity of information. It is becoming ever more important to have the correct expertise to interpret and present these ever-growing sources of to the relevant audience. We at LOC are striving to develop our services in this regard to reflect the changing landscape of the maritime industry. We have also carried out extensive work on the Poseidon Principles and have developed a solution that will support all the stakeholders (owners and financial institutions alike). Green and sustainable shipping is also a large part of the Due Diligence in our times and going forward.
With billions of dollars invested in shipping over the past decade, the successful loans will be those that are based on trust and understanding regarding the way owners run their business. With many new lender/borrower relationships being built around the new sources of finance, quality driven and effective due diligence can support and speed up the relationships based on sound and meaningful data.”
For any advice regarding LOC’s due diligence services please contact Nikos Benetis.