Sustainability of Ship Finance Industry

The Ship Finance Industry has blossomed over the last few decades. Reasons for this include increasing trade and globalisation, the attractiveness of the shipping related markets as hedging tools, and last, but perhaps most importantly, a recovery effect. The 1980's was a disastrous period for all involved as the glut of newbuildings caused freight rates to sink and capital repayments to stall. The next two decades saw enormous corrective growth.

There is a telling factor with regards to the sustainability of the ship finance industry that will determine its future viability as a money-making investment area. This factor is the continued applicability of the German Kommandition Geselschaft (KG) Model in Germany and perhaps the transfer of its use to other countries in the face of increasing global economic complexity.

There are two reasons why the KG model is so significant. Firstly, as new-building orders have risen hugely in the last few years and these ships are now starting to be delivered, there could easily exist the fear that a repeat of the 1980's situation will soon be at hand. At that time ship were fully financed with only the ship itself as collateral. A balanced and responsible way of financing vessels could be the most important antidote to a catastrophe. Secondly, the KG model is going to matter because the world economy is becoming more volatile. The nominal gold price is reaching record highs, signifying not just a devaluation of the dollar, but also massive uncertainty.

The ability of financiers to see the merits of the KG system and the willingness of banks to experiment with the model or adaptations of the model will prove important in the next few years. The economists and investors of the world are watching closely as the ship finance industry attempts to regain its traditional, glamorous position as long-term investment haven.

This short article is based on thoughts from a thesis by Petrus JC Swart. To request the complete thesis or extracts of it, please contact Mr. Swart at the following e-mail address: pjcswart@yahoo.com. Mr. Swart is an MBA graduate from Kuehne School of Management and Logistics (formerly Hamburg School of Logistics) and wrote his Master Thesis on Ship Finance.