DNB is Norway’s largest bank and one of the world leaders in the ship financing sector. Kristin H. Holth, the institution’s Executive Vice President and General Manager for the Americas, finds herself at the helm when it comes to make-or-break decisions for a fleet of shipowners. Here, Ms Holth reveals the bank’s key considerations when evaluating prospective loans.
DNB is without question at the vanguard of the ship-financing sector. The shipping specialist – which boasts dedicated offices in New York, London, Singapore, Athens, Bergen and Oslo – manages a portfolio approaching USD 15 bn, or around 7% of the bank’s total loan book. Of this funding stream, 3.5% has been poured into the cruise arena.
In a climate of continuing economic uncertainty, Ms Holth believes the firm can maintain its market position through a blend of sober judgments, judicious risk management and solid relationships.
“We build deep-seated and long-lasting relationships with our customers,” she says of the bank’s approach to conducting business. “By becoming a long-term partner, we can develop a greater understanding of their businesses and, when it comes to lending, that helps us make good, robust investment decisions.”
Like any other banking sector, careful assessment of potential borrowers is paramount. Their ability to make money is usually one of the prerequisites for them being able to borrow it from the bank in the first place.
“The customer’s financial capabilities are often amongst the first things that are assessed,” Ms Holth candidly admits. “That means their equity standing, the cash buffers they have and the company cash flow.
“In the shipping sector in particular, the quality of cash flow is absolutely vital.”
Money talks, of course, but it is not the only factor that has a say at DNB:
“A key parameter for us is also the evaluation of the senior management team,” Ms Holth continues. “We have to have, or build, trust before we go into business together. The financial strength of the company is important, but it can never override the people and skills that stand behind it.
“Size is also important,” she adds, “especially within the cruise sector.
“This is due to the economies of scale at work here and the size of a firm – its resources and capabilities – very often impact upon how well it can handle tough times.
“Small companies have less of a financial and managerial buffer if accidents occur in what is an increasingly challenging business environment.”
As cruise operators will be well aware, it is not only the business environment that presents a challenge.
Recent years have seen an explosion in environmental legislation, with a focus on the environmental performances of ships and how ships impact on the marine ecosystems they inhabit – this covers everything from their sea and air emissions
to their ability to cope with major maritime accidents.
A failure to adhere to the rigorous standards set by the IMO, EU and other regulatory bodies can result in strict financial penalties, which can in turn impact heavily upon a borrower’s ability to meet its repayment commitments.
How have lenders reacted to this growing legislative trend? Are environmental factors now increasingly on the radar when it comes to making lending decisions for the cruise sector?
“Yes,” is Ms Holth’s unequivocal response. “This issue has been garnering attention over the course of the past year and is unquestionably important.
“We think it is now a factor that will affect a company’s ability to both borrow and get access to other sources of capital. Bearing that in mind, it will certainly impact upon our model for evaluating the different companies.”
In terms of accidents, DNB is looking to ensure that it does not have any with its own investments.
“Small companies can have major problems if there is an incident upon one of their ships – not just in terms of their set-up when it comes to tackling the issue itself, but also with respect to the damage it can do to their cash flow.
“For us, it’s important that the company’s enterprise risk approach addresses environmental and accident considerations in a realistic manner. There has to be a system in place for proper risk assessments and mitigations – something that ensures the company can manage in the unwanted occurrence of an accident.”
Ms Holth concludes: “By focusing on strong companies that are the best in their sectors – with quality assets, good financial records and management that we know and trust – we can be secure that they are set up to handle the bad times as well as the good and whatever surprises and events might be in store.”
Safety and security, it seems, are equally as important to the financing sector as they are to cruise ship operators. Take care of your investments and everything else is plain sailing.
Text: Alan Johnstone
Date: 20 March 2012