“DEEP DIVE INTO CHINESE LEASING”
Featured Speaker
Bill (Fangmeng) Guo
Executive Director, Shipping
ICBC Leasing
December 4, 2017
Nicolas Bornozis: Welcome to the Capital Link shipping podcast series. I’m Nicolas Bornozis, President of Capital Link. We have recently launched our podcast series as a means to educate and inform a broader audience on topics of critical importance to the shipping industry.As such, our podcasts aim to be informational and educational. Every week we host an exclusive interview with a C-level Executive and major industry figures. This is our sixth episode. I would like to welcome our featured speaker Mr. Bill Guo who is the executive director of shipping at ICBC Financial Leasing, the largest leading Chinese leasing firm. Today’s podcast is on the topic of Chinese leasing, and Chinese leasing is changing the face of shipping and ship finance. It’s a very interesting topic and we’re delighted to have Bill with us. Let me start the discussion by welcoming Bill. Bill, thank you for joining us today.
Bill Guo: Thank you, Nicolas. It’s my great pleasure to join this conversation with you, also with the potential audience. Thanks.
Nicolas Bornozis: Of course we’ve been working together for quite some time and I’m delighted exactly to have you as a leading industry figure to talk about the Chinese leasing which indeed is changing I think the face of shipping and ship finance. So let me go right into our conversation. With the departure of many traditional European ship financing banks or the diminishing of their portfolios we have seen a number of Chinese leasing companies stepping in to fill this void in the last few years becoming this way the largest financiersand at the same time ship owners in the world. Can you explain to us the difference between the business model of Chinese financial leasing firms and traditional ship finance banks?
Bill Guo: Sure. Actually, this question is being asked by others - I would say maybe the potential customers or maybe some I would say the curious parties in some times before and also actually by today as well. So I think the big difference compared between the leasing companies and also with the traditional banks, actually the leasing companies could helpthe customers really to rebalance their balance sheet for their shipping asset which means that some of the shipping I would say some of the companies they prefer to remove their shipping asset out of their balance sheet so they can use the leasing structure to sell and lease back their shipping asset but still continue to utilize their ship asset for many, many years. But for the traditional bank loans they can’t do that because they can only pledge their asset to the banks, but these ships they are on their balance sheets and also they have to put pretty heavy and I would say the loan structure into their balance and into their books. So making it short I think the leasing structure is more flexible compared with the bank structures. Of course we can provide higher leverage, and also we can do more flexible structure based on the customers need. So that’s why I think also kind of the good attractive features to really make lots of customers interested to start using the leasing structure in spite of those traditional European shipping companies. So that’s why now the results also tells the fact that we’re growing very fast, and in the past of five years, we keep the two digital growth every year.
Nicolas Bornozis: So Bill, we say that the Chinese leasing firms are becoming the largest financiers and at the same time one of the largest ship owners in the world. You’re a financial organization, in what sense are you also a ship owner?
Bill Guo: That’s a very good question and we also have the internal discussion to position ourselves into the shipping finance market. First of all, of course we’re the fund providers so basically as your first question so we also perform very similar like other banks so we provide the equity, we provide the money and the the loans to the customers but using the leasing structure. But also meantime we’ve also become the ship owner based on the customers’ requirement. For example so some of the customers like the cargo owners, they don’t really want to own the ships so they want to sell those ships off the balance sheet so they’re actually looking for other traditional shipping company also looking for the leasing company who’d like to own my ships as return I give you the lifelong leasing or maybe the time charter contract to ensure the ship I sell to you will be chartered back to us for many, many years. So from that perspective we have to become like the ship owner to perform those ships and based on the cargo owner customers and then their need. So that’s the typical situation for us to perform in both situation, on one hand we have to become like the fund provider but on the other hand we perform like the ship owners, and to really operate the ships and of course we’re also kind of the commercial certificate skills to the third parties but we’re running like the independent shipping company of course it’s still under our leasing I’d say our vehicles.
Nicolas Bornozis: So, Bill, just to make sure I understand correctly legally speaking of course you are the owner of the asset because of the leasing structure. But do you also get involved with the technical and commercial management or is that the function that is done by the party that you’re dealing with?
Bill Guo: Actually, legally of course we own all the ships and but also for those technical management also commercial management it’s our duty to point out the right person, right party to operate the ships. So it’s our job to find the commercial managers or technical manager to operate the ships. So that’s why we have to become like the real shipping company and to operate the ships to meet with the customers and time charterers, and also maybe other I would say the field wave requirement contacts. That’s what we’re doing slightly different compared with other I would say the banks.
Nicolas Bornozis: So you explained to us the difference between the traditional bank financing and the Chinese leasing structure. If I compare now the Chinese leasing structure with several credit funds that we have seen coming up in the US and Europe and in Asia how do you differ from those credit funds?
Bill Guo: It’s different. So fundamentally we’re still owned by the Chinese banks. So for us, we can’t take too much risk. For us, we prefer maybe the big deal but I would say the more stable return, compared with other I would say the FD funds because there they prefer maybe like the short term but higher risk with higher return. But for us we’re 100 percent owned by the largest bank, ICBC Bank. So we have to really take care of each of the projects we invest that we are doing today. Of , we’re supported by the parent company also running our independently which means we have very strong equity support internally also from externally so we love the large project. That’s something make us especially different, especially I think for those global customers they need like the stronger partners similar like us to work with those and the larger deals. So that’s why in the past few years we already successfully closed some big deals in the market.
Nicolas Bornozis: I see. So Bill we talked about Chinese leasing in contrast to the traditional commercial banking, to the credit funds, now let’s move into the scene of Chinese leasing itself. We have seen there has been intense competition in this market with a lot of new entrants coming in. If I’m not mistaken I read some place that there are about 60 financial leasing firms in China and almost half of them have exposure to shipping. So some of the new entrants belong to shipyards so you see a flurry of new entrants into this market. What do you think is the impact of all of this competition, so many new entrants into the market? Is that a good thing to have so many capital providers and what are the risks and opportunities at the same time and challenges from this very rapid expansion?
Bill Guo: Yes, Nicolas. We also have some figures on my hand so maybe by the end of October this year and in China there’s over 4,000 leasing companies and maybe only 200 of them right now kind of really involved in the shipping leasing business. But if you talk about the real shipping leasing company maybe the active and the big ones is only 20, so 20 of them is the most active ones. As I said, I would say the larger one is come from the banking background, some of them come from shipyards, some come from maybe the third party who have some equity who already look like the shipping leasing structures are very attractive so they put money together and find some smart people who run these kind of leasing company. So for those and I’ve said about 20 active shipping companies and I have some different opinions for into new entry because and apparently the shipping leasing business would be very risky and without the industry background knowledge especially with the risk management skills from outside the commercial and also financial background, it’s very risky for them to run this kind of business. And but also meantime so far for those the major players of the shipping leasing companies they all are profitable, actually very profitable. So that’s the reason maybe back to your question there’s so many new entrants into the market because they smell the money, they smell the profit so they want to go to this market. But again, as I said before you know, it’s pretty risky because if you don’t really have the solid and dedicated team who really understand the shipping market, when the market goes down again, you’re losing lots of money. I think right now because when they’re arriving to this shipping leasing market I would say the market is already very soft. So it’s not like 2007- 2008 when the market was in the peak and we’re coming, the market is falling down of course you’re already losing money. Right now market is so low so they don’t feel the market and the impact, but I would say for the long term I don’t think that there would be room for so many Chinese entrants and the shipping leasing company to be risky then. Maybe only 10 maximum to be ready into the market and maybe eventually only consolidate together to four or five major ones to become the active players in this market. So hopefully someone will be listening to my suggestion or the kind of suggestion and also otherwise not to involve in this market too heavily if they don’t have like the solid team also enough people with enough knowledge or background about shipping finance.
Nicolas Bornozis: Very interesting. I have to say my numbers were quite off. So just to recap you have about 200 leasing firms active in the marketplace and out of them you said about 20 are involved with shipping and the major ones are about 10 and I guess most of them are owned by major institutions. Did I get it right?
Bill Guo: That’s right. Yes, it is so.
Nicolas Bornozis: So all the other firms, out of curiosity, where do they source their capital especiallythe smaller ones. I mean how do they come up with capital to deploy?
Bill Guo: I think I would say besides the banking background the leasing financial leasing they have set up their own leasing company so using their own equity to support theEuropean customers and in return those European customers would order ships into those shipyards. So this kind of motivation to boost the shipyard continues to take out some equity to boost their own leasing company to develop the new books and the new ordering from the customers. That I would say, I think it’s a short term solution because talking to top senior executives of those shipyards they also realize that they don’t have enough, say risk management people that can really deal with the potential risk for this kind of business. So this may be for the short term, for the long term they will remove this and the leasing business and from their shipyard put them into more running independently, maybe go into IPO or other capital market less running independently and then take back the initial I would say the equity investment and for those leasing company then leave those leasing company to run alone. So today I would say for the top twenty and these leasing company maybe and ten of them come from the more banks background and another ten would come from shipyard or maybe equipment all this and other maybe third party and the equity providers or these kind of things for your reference.
Nicolas Bornozis: So now if we look at the typical transactions can you describe to us a typical transaction in terms of amount, then interest rates, covenants and do you finance new buildings and second hand ships or you have a preference for one over the other?
Bill Guo: We could do both. Actually, we could do both and for the new building also for the second hand. They’re two different types of business. As I explained to you, the first one for the cargo owners. So the cargo owners, they do own those ships before so they want to sell their ships to us and build their book value which means they need 100 percent financing for those ships then do the sales lease back in return they give us a long term chartering back for those ships. For those ships, we can do pretty long leverage and one percent also we could do leasing structure, as I said lifecycle, 15 years, 17 years, even 20 or 25 years. But because of we know those ships a strategic business for them they can’t leave those ships otherwise they can’t run the business and be stable because they own those cargoes and they need to ship their cargo from one place to another place to sell their cargoes. So those are the requirements needed for the ships it comes from their inside, so then that will be changed. Another model I would say is to follow the traditional and the shipping companies so those shipping companies more like the tonnage providers, so they provided their ships to the cargo owner or maybe it’s for the trading company so those in the shipping companies we have to be more cautious. Of course a shipping company running for many, many years they have pretty good track record also they’re financially okay but we can’t do 100 percent financing for those people because they’re not from the whole chain - they’re just in the middle. So they’re not I would say the initial cash flow come from so we have to be very careful to look at how the cash flow looked through. And for those customers we maybe provide maybe of course compared with a bank loan we provide higher ones so maybe 70 percent sometimes even 80 percent but we can’t provide them 100 percent. So in all time we may be do some of the pretty high leverage but right now we have to look at them and select different compared with cargo owners ship companies. That’s two different types of business just for your reference. Of course then about the new and second hand doesn’t matter, if the new one we base on the construction price with the shipyard to do the calculation. If it’s the second hand we have to do the valuation based on the market price. So we have used in the global and the third party evaluation and agent to do the valuation for those ships and based on the evaluation we decide what’s the percentage to leverage for those ships. Nicolas Bornozis: I see. So are Chinese leasing transactions more expensive if I compare them to the traditional bank financing and what is the typical time it would take to close a deal?
Bill Guo: Actually, I want to correct this point. We are in terms of the price, actually we’re not as expensive. The reason because of right now, I think there should be less European banks that would like to get into the shipping finance market. As a result actually in the past I would say six months and in general the price difference compared with the Chinese leasing company against maybe European traditional banks, the difference becomes smaller and smaller. And especially if we lower our leverage from 8 percent to 6 percent, we actually are very competitive compared with the European bank loan offers. So it’s no big difference, and really can do that. Because first of all, all these major Chinese leasing companies, they all get independent ratings so which means we can raise the funds from the bond market to get the chip money, you know, US dollar chip money from bond market so we can use this money to finance the project. And if you really ask the price so we can offer maybe floating ones or fixed ones, so we always use the banks, the offer other kind of standards so again the banks will leverage. So if we provide the similar leverage compared with the banks, the price may be similar in the price. If the banks give libor plus 200 we also offer you libor plus 200, and maybe a 1-2 percent handling fee. If based on the 6 percent, but if you said okay, I like maybe higher leverage and I don’t mind to pay higher one then the price can increase very sharply from libor plus 400 or 300. It really depends on the credibility, because we have our own business model, and also the mathematic calculation. So we’d really need your financial result to do all these kind of calculations and decide the final offer to you - the customers. So roughly I can say we can do something similar like the banks and bank loan, but also
we can do something by providing higher leverage with a little higher price. Again, we are more flexible in both sides.
Nicolas Bornozis: And it’s also very interesting that as we hear the bank lending is becoming more difficult given the market regulations and so on. Whereas you are in a growth mode so clearly I think there is a difference in terms of the business strategy here. Now can I ask you how big is your portfolio and if you can give us a little bit of an idea of its composition of shipping sectors and geography?
Bill Guo: Yes, okay. Coincidentally I just got the whole picture because today is the tenth anniversary for the ICBC Leasing. So I just got maybe the ten years and the performance result for the shipping portfolio from the 2007-2017 - so this year. So I can say by the end of 2017, actually by the end of November of 2017 right now our portfolio is already reached 10 billion US dollars. Of course from maybe 100 million in the 2007 growing to become 10 billion US dollar in 2017 in ten years, so you can see how fast our portfolio growing in the past ten years. So we’ve grown very fast, and so personally I’m very proud of that to see such big growing. Also we have very healthy I would say the whole portfolio which means our default ratio is much, much lower compared with other banks, below one percent I would say.
Nicolas Bornozis: That’s great. So what about in terms of geography I mean you no longer finance just the Chinese clients I think ICBC has aggressively expanded into the Asian and European markets in the last few years. So how is the geographic breakdown of your portfolio and what are your next growth markets in terms of business?
Bill Guo: Yes, so among 10 billion US dollars so 20 percent actually come from China, maybe surprising to the audience and because they thought about the Chinese leasing company majority customers should come from China but actually not. So only 20 percent of the business come from China customers including the COSCO also the China Merchants which are the two largest shipping company. Another 80 percent all come from overseas. I would say geographically structured, Europeans are our major customer place so 50-60 percent is come from Europe, and then 20 from China, then another 20 from I would say the Asia Pacific. Only 10 percent come from maybe I would say America so including North America and the South America. So we need I would say the potential come from the North America and the US, Canada also Mexico such big continental and we don’t have much business growing there as far as more potential for us. It’s very difficult for us to grow that area. The Europeans, a very traditional market, we still put a lot of effort there and we meet the customers many, many times every year to see all the customers. But this market competition is very tough, so in general, we still focus on the Western countries as overall I would say our strategy in 2018.
Nicolas Bornozis: Interesting. Now in terms of your competition you say your competition coming primarily from other Chinese leasing firms or from other credit providers whether they may be banks or credit funds or is it everybody?
Bill Guo: I think that maybe, recently I think the competition – you talk about it two or three years ago I would say the competition come from the European banks, the other credit providers. But I think recently especially in the past I would say 12 months, I think the competition is more internally which means we have to compete with the Chinese leasing companies, and they have very similar structures with us. Of course they’re smaller, but they also get their parent bank support, which means they have the very similar I would say the cost structure as we have compared with us. So in some deals we have seen the I would say competition internally in China so we have to sometimes work not together, but we have the talks. We have I would say sometimes talk with each other say okay, what’s your feeling about these customers and how we can do this. Because if you look at maybe by the end of this year, we can see this year’s and the shipping finance, what kind of percentage, how much money come from the Chinese leasing companies, how much money comes from the overseas. I’m saying if we talk about the new investment, I would say the new money into the market, I’m pretty sure maybe more than 50 percent, more than half of them come from the Chinese market which means that China already think about the new money investment in the 2017. So which means there are lots of competition I would say come from the mass market come from the Chinese leasing company. And that’s why, I’m back to original question that’s why there’s still lots of newcomers entering this market because they still see the potential, the profit, from this market.
Nicolas Bornozis: So when I look at the market now, and you are targeting a number of clients. Can I ask you what are the most important considerations from your end in terms of selecting a client and also to take a step further what are the most important considerations in terms of structuring a deal with somebody. So how do you pick your clients and once you find the client what are the most important elements in structuring a deal with that client?
Bill Guo: Since we have a very strong support from our parent company, ICBC bank and also we have pretty good budget every year and so we prefer to target the large customers, and I would say the global shipping company, also maybe like if you talk about the container shipping company maybe the top five, top ten is our target customers. And if you talk about like a dry bulk, besides the top of players in the European customers, also we are targeting for this the cargo owners like Vale as we already mentioned, BHP, FMG – those big ones also maybe like Cargill, those kind of customers. We look at the big customers in general including the LNG ships also the chemical ships as well. So those customers is our ideal customers. If you talk about how we evaluate who would be the right customers, because our whole team has banking background, so first of all we have to look at their financial performance, the result. So for those publicly listed companies, it’s pretty easy for us to really penetrate their performance because also their data published is available so we can easily access their data to understand how they’ve been performing in the past few years. And for those latest smaller shipping company of course we’re still interested, especially for those niche markets because in the niche markets they perform very well. So we’re also interested in have business with them. But again, the sizes make sense, and if the size is too small even if the customer is very profitable they have very limited resources to target every customers and in every geography and in every country. So we’re sometimes we have to give up some of the customers and really make our choice to pick up some of the maybe the better, or not the better one, maybe the bigger one or maybe the larger one customers. So that’s where the internal mathematics do the calculation so put customer size, the potential, also I would say the vessel types, also the financial performance results all put together with the calculation then pick up the right customer for us.
Nicolas Bornozis: We talked extensively. Thank you by the way for this very detailed reply. You talked extensively during our discussion today about dealing with the cargo owners and that’s a very clever strategy actually because if you control the cargo you control the trade flow, you have need long term for transportation and so on. So it’s very obvious why this strategy is a very good one. If I can go back to the transaction you did with Vale that was a groundbreaking transaction and if I’m not mistaken this one is going to start happening in the first half of 2018. So how is this transaction coming along and apparently you’re pursuing a lot more transactions with cargo owners. If I breakup cargo owners on one side and tonnage providers on the other side which one is the biggest one in terms of portfolio right now for you or in terms of market development potential?
Bill Guo: Yes, for the Vale one actually we closed the deal in the end of December 2015 and the official new building contract started in early of 2016. So you’re right that the new ship we’re going to deliver in the first quarter of 2018 for this 400,000 dead weight Valemax ships. And really I think those ships have already shaken the market very well and there’s about 30 new ships to be delivered in 2018 which means next year. So the impact maybe and the capeships also and the new CUFmax and this kind of ship market is very successful deal and also is I would say the first deal we’ve done with the cargo owners directly and by ICBC Leasing. So this deal actually ready to motivate our internal top management and to do further with other outside cargo owner customers that’s why we’re slightly to remove our focus from I would say tonnage providers to the cargo owners. And of course right now, our portfolio overall tonnage providers they will take the larger portion but I think gradually in the coming two or three years with more direct talks with cargo owners. I hope eventually it will become 50:50, which means 50 come from the cargo owners and another 50 come from the tonnage providers. So we can keep the good balance and into these two different sectors and two different customers. And that’s our whole strategy and also it’s also including whole segmentation, not just the dry bulk but also for the liquid also gas, also for container ships as well. So we try to use the strategy to cover all the different segmentations.
Nicolas Bornozis: Very, very interesting because I think given your strategy here I think that will have an impact on the overall global shipping scene because now we’re going to see more and more attracting of the cargo providers vertically integrating forward through the financial structures that you’re offering. So that I think your activity clearly has an impact not only on the financial end but also on the operating end. If I then we’re reaching the end of our discussion now, do you have an opinion in terms of our market segments, any particular segments that you’re more bullish or bearish on?
Bill Guo: Yes. And so far back to your first question, to see the difference between the banks I would say compared with the leasing company so we also have to and I would like to rephrase that because we do see our strength, we do see our position differently compared with the traditional banks. We would like to utilize our strength ready to target the right customers in the right segmentations. So back to our strategy, we really want to work with those cargo owners. So for those cargo owners right now I’d say the majority in the dry bulk market also maybe in the liquid because for the minors for I would say the cargo and the traders also can accommodate, they’re ready to utilize I would say the dry bulk. For the coming years we will have to put a lot of effort really into this dry bulk market, and to talk with the cargo owners to see their demand to see what they like and also we can provide tailor made solution really to get new ships, the VLCC ships or maybe the Cape ships even for CUFmax doesn’t matter. We like to order new ships based on their requirements, based on their need. And that’s the kind of strategy right now we’re working on, so beside that for the liquid maybe MR and all those ships also we can talk with those big oil company also and the chemical company also we have to see what they’d like to have. So we also can provide those ships and based on their need. Another thing we can also see that join with the pool who rent ships to offer the service to the customers. And for the LNG ships so far I think we have to do very traditional leasing structure because we don’t have like so far the capability to really operate those ships. And we prefer maybe and more like the banks to offer the equity for those and the shipping company who run the ships at current stage. So again the focus for us right now for the coming years I think in the dry bulk would be the top of the line I would say and try to get more connection links with the cargo owners to provide the more flexible tailor made solution to them.
Nicolas Bornozis: Bill, we had a very long discussion and I appreciate that you took the time to really take us through the ins and outs of Chinese leasing and also I wanted to congratulate you for the tenth anniversary for ICBC Leasing. You’ve done an amazing job clearly and I think your presence in the market has impact. Reaching the end of our discussion is there anything else that I can ask you. You have really transformed ICBC leasing from a traditional credit provider into an integrated maritime financial service provider and as you described you’re providing tailor made solutions for clients all over the world. Before we close our discussion anything else you’d like to add in terms of your strategy going forward?
Bill Guo: I think already spent in good detail and maybe just one more comment about this. People also think about we’re the Chinese company, we’re very I would say domestic focused but actually we’re very international, which means we really spend a lot of time to talk with our overseas customers potential customers also potential partners. So talking about partners so we also maybe like the joint venture structures so anyone who has maybe the shipping background would like to work with us, we’re more than welcome to be approached and to talk together to offer, the like what I said integrate the maritime solution to our customers because majority of our strength background come in the banking background or the finance background. We feel lacking enough of maritime knowledge so we like to cooperatively working with others together not just independently along but together to offer a service to other customers. So that’s kind of the message I would like to deliver to the shipping companies you shouldn’t be worried about us, you should think let’s work together to see how we can to really bring the new world.
Nicolas Bornozis: Absolutely. Bill, I think we can close our discussion. We had as I mentioned a fairly long discussion. But I thought that it was a very interesting discussion because exactly it was very detailed and you were very methodical taking us through every step of the strategy, the profile of ICBC Leasing, the ins and outs of the leasing structures and so on. So I’d like to thank you very much for your insight and for the discussion we had. I’d like to thank also the audience that is going to be listening, it’s a longer podcast than usual. In closing besides thanking Bill I would like to mention that this podcast is available on Capital Link’s website at www.capitallinkpodcasts.com and also it is available on iTunes and Google Play. Again, Capital Link aims to bring you weekly podcasts on critical topics for the shipping industry discussing with industry leaders and decision makers and today we were very happy to have with us Mr. Bill Guo. Bill is the executive director of shipping at ICBC Financial Leasing, the largest leading Chinese leasing firm. And now I will bring it to a close and thank you to everybody for being with us.
Bill Guo: Thank you, Nicolas, thank you everybody.
End of interview
