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The case for regulatory-driven diversification in Ship Finance

A decade ago, we all knew of at least one shipping company that felt safe receiving its debt financing from a single source (a behaviour that was, unfortunately, encouraged by some bankers), and eventually experienced immense pain when some key-lenders abruptly withdrew from ship financing.

Back at that time, sourcing finance from a handful of different – typically European – banks (as opposed to, from a single one), was considered a sound approach to funding diversification, since the key driver for a Bank’s approach to lending was its own business policies and individual circumstances.

That was then. Next, the banking crisis happened. And then the shipping one followed… Both led to (a) an increased regulatory attention to bank-lending towards the shipping industry; and (b) the regulatory framework being the dominant parameter shaping each Bank’s business activity.

One unsurprising consequence of the above was that (European) bank lending, when it came to shipping, became much less abundant. A second, and initially less anticipated, change was that the approach of lenders, regulated by the same regulator, became significantly more homogeneous. A shipowner friend recently confided to me – half-seriously, half-jokingly – that “if I remove the bank logos from the term sheets I receive, I cannot really tell which-one sent me which.” This is mostly the result of the tighter regulatory framework under which European banks are operating and, jokes aside, highlights the need for regulatory diversification.

Given the importance that debt capital has for an industry as capital-intensive as shipping is, no shipping company can afford all of its lenders to operate under the same regulatory framework. Were it to do so, the result might be that next time something important happened, its lenders would be highly likely to change their views about their shipping exposure at the same time and in the same way. It is like operating a VLCC in high-seas, with no internal bulkheads limiting cargo shifting around: you don’t want to be on it when the wind starts blowing hard…

Thankfully, the alternative financiers, who flocked-in during the last few years, are a crowd made-up by highly different animals. We can hence observe “blocks” of lenders, each defined by the main regulator they operate under, with their respective members behaving in a correlated way. European banks are such a block, with a couple of sub-blocks, defined by the risk-rating model each bank uses to rate its obligors.

Another block are the Chinese financial institutions, another are the Japanese, each having different local regulatory frameworks and/or adopting global ones (like Basel IV) at a different speed than their European counterparts. An additional regulatory diversification bonus comes from the different local central banks’ monetary policies and the impact these have on respective lenders’ balance sheets and capacity to lend.

There is, of course, the block of lenders that are completely untouched by lending regulatory frameworks, such as the various credit funds: their activity is, of course, also contingent on market realities, views, models and limitations but – and this is the key issue here – these are different from the ones traditional financiers have.

The optimal mix of funding sources is a moving target, given the constantly changing finance scene, and also it differs from company to company, depending on parameters such as fleet size, corporate structure, or employment profile (but also some more nuanced ones like specific industrial relationships). A ship-finance specialist, whether internal or external to the company, can be the key for keeping this mix as-close-as-possible to optimal at all times.

Some might argue that the above approach is an expensive one: “I have a financier who provides me with a very competitively priced product, and I feel comfortable with him” or “Why start a new relationship with a geographically/culturally distant and/or more expensive lender?” are comments sometimes made.

In a nutshell, the answer is that diversification, even at some cost, works like an insurance policy. For an industry that has grown up having insurance at its heart (who can imagine shipping without it…) the concept of paying what could appear to be a ‘premium’ to hedge against a known and accepted risk (that of lack of financing), but which could pay-off in multiples later on, should not be that strange.

The ship financing scene is trying to find again its balance, while overall volatility in the finance world is increasing. Seeking regulatory diversification of funding sources might prove to be an efficient way to avoid “déjà vu all over again” as dear old Yogi Berra would have put it…

Dimitri G. Vassilacos is a Partner at Ship Finance Solutions (SFS), a boutique financial consulting firm specializing in the shipping sector. Prior to that he had assumed a variety of positions during a 20-year-long career in the banking sector, including Head of Greek Shipping at Citibank and Manager of the Shipping Division at National Bank of Greece.

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Moore Stephens and BDO merger could pile pressure on big four

The big four accountancy firms are expected to come under pressure from a new rival following merger talks between BDO and Moore Stephens.

In a move designed to create a fifth firm capable of advising FTSE 100 firms, the new business would be larger than Grant Thornton, which has struggled to break into the lucrative market for advice work with Britain’s top corporations.

Talks between the two sides are understood to be advanced, though it was unclear over the weekend whether both sides would be ready to make an announcement this week.

The news comes at a critical moment for the industry, which has come under increased scrutiny in parliament following a series of scandals at companies such as BHS, Carillion and Patisserie Valerie.

The government called for a comprehensive review of Britain’s auditing industry earlier this year. The business secretary, Greg Clark, said it was “right to learn the lessons and apply them without delay” as he ordered the inquiry into competition within the industry where Deloitte, PwC, Ernst & Young and KPMG audit 98% of the UK’s largest listed companies.

Following Clark’s concerns, the Competition & Markets Authority (CMA), led by former Tory MP Lord (Andrew) Tyrie, began an investigation into quality and choice in the audit market last month.

A separate inquiry has also been launched into the audit industry by the parliamentary business committee, chaired by Labour’s Rachel Reeves.

Reeves has described the market as “broken” and is due to take evidence next month.

The big four have been hit with a series of fines following criticism of their work. The Financial Reporting Council, which overseas the auditing industry, fined PwC £6.5m in June over its auditing of collapsed department store chain BHS.

But the FRC only rebuked KPMG, the auditor of collapsed construction giant Carillion, after finding “a deterioration in the quality of the audits that we inspected to an unacceptable level”.

Accountancy firms have been accused of using their auditing arms as the springboard for lucrative advisory work fees, in breach of conflict of interest rules. The firms have denied any wrongdoing, but have failed to dispel the suspicion that senior audit professionals are compromised by the need to generate advisory income from their clients.

The merger of BDO and Moore Stephens is believed to have been approved by the equity partners in both firms. BDO employs 74,000 people worldwide, including 3,500 in Britain. It reported UK revenues of £456m last year. Moore Stephens has more than 2,000 staff and revenues of £181m. The companies merged their operations in South Africa in 2010.

The combined group would be bigger than Grant Thornton, which had UK revenues of £500m last year.

BDO, whose audit clients include the private equity tycoon Jon Moulton’s Better Capital, is the sixth-biggest accountancy firm by revenues, according to Accountancy Age.

It is led by managing partner Paul Eagland, who has called for a shake-up of the audit market in its submission to the CMA review. It said a cap of 80% should be imposed on the market share of the big four for FTSE 350 audits within three years.

BDO also attacked the FRC as weak, saying the regulator had “done much to undermine public confidence and trust” in the industry.

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City veterans launch new corporate finance boutique

A former board member of investment bank Zeus Capital is today launching a corporate finance boutique alongside a senior executive from Nex Exchange.

The new firm, Guild Financial Advisory, will advise companies on initial public offerings (IPOs), fund raising, deals and corporate governance.

Its chief executive Ross Andrews previously spent eight years with Zeus where he was a main board director, advising on deals such as online fashion retailer Boohoo’s initial public offering in 2014.

Andrews told City A.M. that he was planning on using the experience and contacts he had built up in his career for the benefit of his new clients.

“I had a 30 year plus career in the financial markets in London, advising companies on IPOs, fundraisings and acquisitions and over that time I have built up an immense contact base and some strong long-term relationships,” he said.

Andrews said he was launching the firm in response to a demand for independent corporate finance advice.

“It occurred to me the more I spoke to people – there was a gap in the market for providing independent corporate finance advice to ambitious growing businesses and companies and that is what I want to do,” he said.

“The dynamics in the London market are changing,” Andrews said. “You have a mid-market tier, which clients want to use for big transactions but for the smaller transactions they want independent advisers who can provide them with good, solid advice who know what they are doing with a different cost structure to the mid-market.”

Andrews is founding the firm alongside Nex Exchange’s managing director of markets David Battle.

Andrews said the business would work with a network of independent consultants who would be able to provide specialist advice on a deal-by-deal basis.

“Those independent consultants will be able to bring specialist transactional and sector knowledge to the team and they will have the benefit of executing their deals with regulatory support, marketing support and access to other expert consultants,” he said.

Andrews said he was not worried by about a possible impact of Brexit on the market, arguing that London would still be a key business and financial centre whatever the outcome of the current negotiations.

“London will remain a key financial centre wherever we get to. It has over decades been a pool of long term-capital for companies and I don’t see anything changing as a consequence of Brexit,” he said.

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Driving ambition in green finance

The transition to a clean, low carbon and resilient economy is a multi-billion pound investment opportunity and we want UK businesses to take full advantage of it. The UK has long been regarded as a leading global financial centre, with a world leading stock market featuring nearly 80 green bonds listed on the London Stock Exchange. We are determined to cement the UK’s position as a global hub for investment in clean growth.

Since setting up the Green Finance Taskforce, the government has been taking concrete steps to strengthen our green finance capability. The government and City of London will co-fund a new Green Finance Institute that will act as the focal point for future UK green finance activity. The government has also announced changes to pensions regulations so that trustees will have to set out how they consider the financial risks and opportunities arising from climate change.

And the government has now committed to build on the Green Finance Taskforce report by publishing the UK’s first ever Green Finance Strategy in Spring 2019. This will set out the steps we are taking to attract the investment we need into our clean economy and to cement the UK’s position as a global leader, including:

  • supporting developing countries through their low carbon transition
  • integrating green principles across the financial services sector

Raising awareness & increasing engagement in Green Finance

As part of Green GB Week there will be a dedicated Green Finance events programme with activities spread across the week. The aim of these events is to raise awareness of the green finance agenda and the role of financial services in unlocking investment into environmentally and socially-beneficial technologies and infrastructure in the UK and internationally.

These events will reach a broad audience including consumers and young people, as well as organisations across the financial sector including regulators, insurers, pension funds, asset managers, legal firms and retail banks. The official Green Finance Day agenda (today Wednesday 17 October) includes:

  • a Market Opening at the London Stock Exchange with a speech from John Glen, Economic Secretary to the Treasury
  • a full day programme at the Tate Modern coordinated by HSBC, including sessions on women in sustainable finance, greening your pension fund, integrating climate risk into investment decisions and building capacity in emerging markets
  • a Climate Resilience Summit led by Willis Towers Watson

On Friday 19 October, during Green GB Week, the Financial Conduct Authority will lead a half day workshop on supporting green finance innovation, and BNP Paribas will host a careers event to highlight different finance career opportunities to students interested in sustainability.

Catalysing investment in Clean Tech

The government will be investing up to £20 million alongside at least £20 million from private investors in a new venture capital fund called the Clean Growth Fund. It is only through innovation, nurturing better products, processes and systems that we will see the cost of clean technologies come down. This new fund will aim to catalyse the market and leverage private sector funding to ensure these innovative clean technologies can bridge the valley of death and achieve impact at scale. On 17 October, we published a Request for Proposals for fund managers.

Boosting investment in green infrastructure

BEIS is working with the Infrastructure and Projects Authority to explore how best government could produce meaningful data setting out which infrastructure projects can be considered ‘green’. This would increase transparency, illustrating the government’s commitment to leading by example in tackling climate change, and showcasing the opportunities available to investors looking to place funds in green projects.

The government will host a national conference followed by at least 5 regional workshops – bringing together local authorities, cities, investors and civil society to help build partnerships to start delivering the pipeline of projects currently being developed at local level. This will help connect investors and the wider finance sector to local projects, and increase the role that regions and local players can have to boost the development of green infrastructure. The government will be working in partnership with UK100, Leeds City Council and more to set up this ambitious programme of work, which will be delivered throughout 2019.

Supporting consistency & comparability in the sector

The British Standards Institution (BSI) will be developing two new UK-led, internationally relevant, PAS (Publicly Available Specification) documents in Sustainable Finance to increase confidence in, and understanding of, sustainable investments and activities. A new Strategic Advisory Group chaired by Peter Young, Trustee and Chair of the Green Purposes Company, has been established to provide strategic direction for BSI’s wider Sustainable Finance Standardisation Programme. This work was commissioned by ministers in the Clean Growth Strategy and is being co-funded with the City of London’s Green Finance Initiative.

BSI will also be leading a new International Organisation for Standardisation (ISO) Technical Committee to develop international standards on Sustainable Finance, informed by the UK-led PAS work. This demonstrates the prominence of UK thought leadership globally, and will contribute to meeting the objective we set out in the Industrial Strategy to become the standard-setters in green finance.

Global leadership & building capacity in emerging market economies

UK leadership on green finance is further demonstrated by the new UK PACT (Partnering for Accelerated Climate Transitions), a £60 million BEIS-run technical assistance programme to share UK skills with partners around the world. The first UK PACT projects strengthen collaboration between the UK and China on green finance, with a focus on harmonised standards for green bonds, analysis of green asset performance, advice on TCFD implementation and supporting the set-up of a new UK-China Green Finance Centre.

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London loses top financial centre ranking to New York

London has been replaced by New York as the world’s most attractive financial centre, a survey has indicated, as Brexit prompts banks to shift jobs out of the city to keep access to Europe’s single market.

Britain’s decision to leave the EU poses the biggest challenge to the City of London‘s finance industry since the 2007-2009 global crisis, since it may mean banks and insurers lose access to the world’s biggest trading bloc.

New York took first place, followed by London, Hong Kong and Singapore in the Z/Yen global financial centres index, which ranks 100 centres on factors such as infrastructure and access to quality staff.

London‘s score fell by eight points from six months ago, the biggest decline among the top contenders. The survey’s authors said this reflected the uncertainty around Britain’s departure next year.

“We are getting closer and closer to exit day and we still don’t know whether London will be able to trade with all the other European financial centres,” Mark Yeandle, co-creator of the index, said.

“The fear of losing business to other centres is driving the slight decline and people are concerned about London’s competitiveness.”

Since Britain voted in 2016 to leave the EU, some of the world’s most powerful finance companies have started moving staff from London to countries that will remain in the bloc to preserve the existing cross-border flow of trading.

Financial services firms, which account for about 12 per cent of Britain’s economic output and pay more tax than any other industry, potentially have a lot to lose from the end of unfettered access to the EU.

About 5,000 roles are expected to be shifted from London or created in the EU due to Brexit by March, a Reuters study published earlier this year found.

The head of the City of London predicted in July that 3,500 to 12,000 financial jobs would go because of Brexit in the short-term and more might disappear later.

Asian competitors are closing in, with Hong Kong only three points behind London, the survey found.

Many London executives have warned the biggest threats to London are not from other European centres but from global competitors, such as New York and Hong Kong.

The rankings, which are based on nearly 2,500 respondents working in the industry, provide a twice-yearly guide to the relative performance of financial centres globally.

The number of banks saying they plan to set up new EU subsidiaries after Brexit has picked up in the past year. Most major US, British and Japanese banks said they would build up operations in Frankfurt, Paris or Dublin.

Other European centres moved up in the global rankings. Zurich rose to ninth place from 16th six months ago and Frankfurt to 10th from 20th, while Amsterdam climbed to 35th place from 50th.

“London and New York have long vied for the top spot of this index and the uncertainty around the future shape of Brexit is likely to be a factor in their latest switch in positions,” said Miles Celic, chief executive of the lobbying group TheCityUK. “In a competitive world we cannot afford complacency.”

A Bank of England official expressed optimism on Wednesday about the future.

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GBP/USD – British Pound Unchanged after Carney Testimony

The British pound is showing little movement in the Tuesday session. In North American trade, GBP/USD is trading at 1.3427, unchanged on the day. On the release front, Britain posted a deficit of GBP 6.2 billion, below the estimate of 7.2 billion. This marked the first deficit after a string of three straight surpluses. British CBI Industrial Order Expectations disappointed with a reading of -3, missing the estimate of 2 points. This was the first decline since October. In the US, the Richmond Manufacturing Index jumped to 16, well above the estimate of 9 points. On Wednesday, the UK releases a host of inflation indicators, led by CPI. The Federal Reserve will release the minutes of its May policy meeting.

Bank of England Governor Mark Carney testified earlier on Tuesday before a parliamentary committee, but his remarks have had little impact on the British pound. Carney acknowledged that growth in the first quarter was weak, blaming “temporary and idiosyncratic factors”, such as massive snowstorms which hampered economic growth. The BoE has forecast growth in Q1 of just 0.4%. As for monetary policy, Carney was subtle, saying that “interest rates are more likely to go up than not, but at a gentle rate”. The bank balked at a rate hike earlier in May, due to weakening inflation and a spate of soft economic data. BoE policymakers are unlikely to raise rates before August at the earliest.

After weeks of an escalating trade war between the US and China, there was a breakthrough of sorts on Sunday. The US dollar has posted gains after Treasury Secretary Steven Mnuchin announced that the two sides had made significant progress and the trade war was being ‘put on hold’. Just last week, the White House sounded pessimistic about a deal being reached with China. The two economic giants have imposed stiff tariffs on one another in recent weeks, worth billions in trade. These moves had raised fears of a bilateral trade war between the two largest economies in the world. The respite in tariffs means that the US can sit down with the Chinese and discuss the US trade deficit with China, which President Trump has long complained is a result of a non-level playing field with China. In addition to the trade deficit, the US wants to discuss technology transfers and cyber theft.