Ship Finance: US Public Equity Markets

Abstract

Since World War II the shipping industry, one of the most capital intensive, has utilized a wide spectrum of capital sources for fi nancing the acquisition of newbuilding vessels and the sale and purchase of second hand vessels. A shipping company ’ s decision on how to fi nance its replacement and/or growth plans is very important to the success of the project. In shipping fi nance there are three main categories of capital sources: equity fi nance, mezzanine fi nance and debt fi nance. In the case of equity fi nancing, shipping companies mainly use the following types: the owner ’ s private equity; the company ’ s retained earnings; and equity offerings, public or private. The main types in the case of mezzanine fi nance are: preference shares; warrants; and convertibles. Finally, in the case of debt fi nancing shipping companies mainly utilize: bank loans; export fi nance; bond issues (public or private placements); and leasing. Grammenos (1989) suggests that the dominance of bank fi nance (Grammenos 1979, 2010b ) and capital markets as sources of fi nance for shipping companies may be explained by the pecking order theory of capital structure (Myers 1984, 2001 ; Myers and Majiluf 1984 ); one has to take into account, however, the specifi c conditions of the shipping companies. According to the pecking order theory, in an extremely compact form and at the risk of oversimplifi cation, a company prefers to fi rst use internally generated funds and safe debt that is reasonably close to default risk free to fi nance positive net asset value (NPV) projects. By doing so, the company avoids the cost of fi nancial distress and maintains fi nancial slack in the form of reserve borrowing power. In the case where external fi nance is required, the company will issue the safest security fi rst, for instance debt, convertible bonds and then equity. 1 Hence, a close relation can be detected between how shipping companies seek fi nance and the pecking order theory. Ship Finance: US Public Equity Markets