Shipping Finance Credit Risk Analysis

Definition

Shipping Finance Credit Risk Analysis is a Credit Risk Analysis tailored to the requirements of Shipping Finance lending.

EBA Requirements

When assessing the creditworthiness of borrowers in the case of shipping finance, in addition to the general provisions on the creditworthiness assessment set out in Section 5.2.5 and Section 5.2.6, institutions should apply the specific criteria set out in this section. In particular, institutions should assess the following:

• the vessel’s earnings to costs (operation expenses, including insurance, wages, maintenance, lubricants and interest cost) ratio;
• the ratio of the vessel’s current age to its expected useful life;
• characteristics of the borrower’s fleet in relation to the global fleet population (the size of the new build activity, the number of vessels laid up, the number of vessels scrapped for each segment and the age of the vessels will determine over-tonnage and influence freight rates);
• vessel valuations with or without haircut (if those are included as a repayment source), to reflect selling costs, the time value of money and uncertainties regarding the liquidity and marketability of the asset, unless single valuations are not possible if vessels are operated as part of a larger fleet with widely different types of earnings.

Institutions should also consider other factors, such as the supply and demand in the market for the type of vessel in question, present and future trade patterns for the type of vessel in question, the necessity for the loan to be non-recourse or have guarantees, or have a long-term charter with an acceptable end user, and if the ship owner can provide other securities, such as assignments of charters and insurances, charges of shares and cash collateral or mortgages of other assets, such as real property and sister vessels.

In the case of loans to shipbuilding, institutions should establish that the borrower:

• has a plausible business plan, including a rationale for the development and a projection of all associated costs verified by an independent expert;
• has access to builders, marine architects, engineers and shipbuilding contractors;
• has obtained or is able to obtain in the future all necessary permits and certificates for the development, as the project progresses.

See Also

• EBA Guidelines on Loan Origination and Monitoring