The current dislocation within shipping combined with the withdrawal of European banks from maritime finance has created an opportunity for yield-hungry investors, says EnTrustPermal.
Speaking to InvestorDaily, EnTrustPermal managing director Svein Engh said direct lending is a good alternative to fixed income — and conditions are currently perfect in the maritime sector.
Mr Engh, who is the portfolio manager of the EnTrustPermal Blue Ocean Fund, said European banks have withdrawn from the shipping finance market since the GFC due to regulatory pressures.
In 2008, he said, European banks financed 82 per cent of shipping deals and non-banks financed the remaining 18 per cent.
As of 2013, the ratio of bank to non-bank has fallen to 60/40, Mr Engh said.
“Asset-backed lending is something banks are pulling back from. The reason why shipping is being hit particularly hard is that most debt capital has historically come from those banks,” he said.
As a result, an opportunity has opened up for non-bank lenders like EnTrustPermal, Mr Engh said.
“There is a lot of competition within large public companies — the rest of the market is completely under-served by the banking side,” he said.
“So that’s created a huge void in terms of debt capital funding, and that has driven the pricing and structuring of loans in that market that makes it very appealing to the Blue Ocean Fund.”
EntrustPermal is looking to invest at the bottom of the shipping industry cycle in order to minimise the risk for investors, Mr Engh said.
“When you’re lending to the sector the main issue you have to be careful about is to be too aggressive at the wrong end of the cycle (ie the peak),” he said.
“Whereas if you invest equity, you have to be very focused and you are very dependent on investing at the right time (at the bottom) and exit close to the peak. That’s a much trickier prospect than lending into the sector,” Mr Engh said.
Legg Mason head of sales Beau Titchkosky said the Blue Ocean Fund has received “soft commitments” from institutional investors in Australia that will go into a Dublin-based investment vehicle.
“In a global environment where real yields are so low [this fund provides] equity-like returns for fixed income-like risk,” Mr Titchkosky said.