Finance could dry up for owners who don’t go green

Houlder’s Strategy Consultant, Sean McLaughlin, recently spoke to Lloyd’s List’s David Osler about the looming impact of CII and EEXI on financing options, with shipowners now eagerly seeking means to improve environmental vessel efficiency through retrofitting in order to secure finance from preferred institutions.

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‘If you look at the pricing of debt being based on the level of risk, it is a natural consequence that the cleaner owners receive access to better-priced debt. Those who don’t fit into that category will pay more, and in time not get it all,’ says Sean McLaughlin.

Shipowners who do not run environmentally friendly vessels are already paying more for their finance and could soon find themselves unable to borrow at all, a prominent engineering consultancy has warned.

This will inevitably leave many enjoying bubble rates with a judgement call on whether to take vessels out for retrofitting now or face consequences later, according to marine engineering consultancy Houlder.

“CII is more of a challenge, in my view, than EEXI. EEXI is a process to go through and check, while CII is checking what is really happening. There’s the challenge of consistently getting better,” said director Sean McLaughlin.

But at a deeper level, there has also been a change of attitude on the part of the industry.

In the past, shipowners consistently used the argument that shipping’s carbon output per tonne-mile was far lower than any other transport mode, implicitly questioning if there was really any need to get greener.

But Mr McLaughlin said he attended the maritime sessions of the COP26 climate change conference in Glasgow last November. Revealingly, every operator who contributed from the floor was critical of the IMO’s greenhouse gas reduction strategy of halving emissions by 2050 from a 2008 baseline, typically lambasting it as lacking in ambition and being too slow.

This represents a big change from even five years ago, when the industry thought that all it had to do was comply with IMO stipulations.

Shipowners are being influenced by what is happening in the market, including the conditions laid down by ship finance providers, and the wishes of their customers.

“One way or another, the regulation side of it will start to catch up with the commercial push. But the very size of the IMO and the need for broader consensus mean that it is less likely to be the driver for change,” Mr McLaughlin added.

For those out to improve the environmental performance of their ships, there are several ways of going about it.

One Houlder study for ferry customer found that the introduction of automatic docking, using AI and magnets, would mean less time spent in port.

That, in turn, would enable the company to maintain the same schedule at slower steaming, with potential saving of 20%-25% in fuel.

That is obviously attractive in financial terms alone, but also from a sustainability perspective. The key point here is that the saving was found on the quayside, not the vessel itself.

Dynamic positioning vessels are frequently equipped with spinning reserve as a safety measure, with 30%-40% of the capacity of the main engine and generator but doing no actual work. Spinning reserve can often be replaced with batteries, again with big emission savings.

A lot of the answer will come with better collection and use of data. There is, of course, absolutely no shortage of data on a vessel, but the challenge is getting it from device to bridge and then from bridge to the office.

Attitudes vary. Ardmore, for instance, believes officers on the bridge need the data most rapidly, as they can make any changes immediately necessary. The office can always analyse it later.

One incentive for owners will be readier availability of finance. There are reasons bankers offer better terms to cleaner owners, although these flow as much from the self-interest of the bankers as environmental concern.

“While I applaud the Poseidon Principles for their positive environmental impact, I’m realistic enough to know what the reason for doing it is.

“If you have an owner who does not recognise the commercial risk of not having environmentally compliant vessels, they’re not recognising one of the biggest risks they face.

“If you look at the pricing of that debt being based on the level of risk, it’s a natural consequence that the cleaner owners get access to better-priced debt. Those who don’t fit into that category will pay more, and in time not get it all.”

Compliance represents more of a challenge to smaller owners than Maersks and MSCs of this world, who need to find mechanisms to manage their risk. That could involve the use of external consultancies with greater specialist knowledge than in-house technical teams.

Mr McLaughlin foresees a time when the availability of debt finance to those who are not taking enough steps to clean up their vessels will dry up, although that will not happen in the next year, particularly with shortages in some segments right now.

That will pose a dilemma in some instances, at a time when some ships are getting paid more than their book value for a 180-day charter.

“If you’re a bank, you’re protecting the quality of your loan book by protecting the earning capacity of the assets it is secured on.

“And if you must take five years off the operating life of your fleet of 100 vessels, you’ve taken 500 years of income out of your balance sheet.

“Perhaps some of the challenge for operators of older vessels is, can they sacrifice six weeks or two months of bubble charter rates for making improvements now, or should they leave it to next year?”

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