Dede’s law and business series: A brief note on financing ship acquisition in developing countries- General (1)
By Foluke Akinmoladun
In identifying and assessing the ability of a shipping company based in a developing country to raise finance for its operations, it is important to highlight the issues that can arise from raising funds. In discussing these issues, the domestic and international markets need to be analysed particularly with respect to ease of entering into and raising funds in the market.
There are two principal ways in which a company can raise funds, and that is through equity, that is, selling its shares; and through debt, by borrowing money from a finance institution or issuing debt as bonds on the securities market. For equity financing, the investor is investing to own part of the business. For loan financing on the other hand, the lender is only lending the shipping company money to purchase vessels, fund its operations or working capital or fund a transaction on the behalf of the shipping company.
There are other ways such as off-balance sheet financing which is also referred to as operating lease. However, the application of this off-balance sheet financing has been limited with the introduction of IFRS 16 (International Financial Reporting Standards) which brought recognition of operating leases in the financial statement of a company through the use of ‘right-of-use’ asset and lease liability.
The major issues that a shipping company based in a developing country in raising finance will face, starts with how to assess the credit worthiness of the company and the performance of the company. To make any assessment on a company for any form of investing of funding, the financial statements of the company must first be analysed. The financial statements include the statement of financial position of the company, the statement of profit and loss and other comprehensive income, statement of cash flows and statement of changes in equity. These statements tell a financier, the assets and liabilities of the company, the level of profitability of the company the equity distribution and contribution of the company, the operational activities of the company and the liquidity (ability to cover short term liability with cash and cash equivalent assets) levels.
For a financier investing in the equity of the shipping company, there are various factors that they want to look at as this affects shareholders’ wealth and the sustainability of shareholders’ wealth. The main factor amongst other factors, is the earnings per share of the company. This shows the profitability of the company. The higher the earnings per share, the more profitable the company is. Other factors are price earnings ratio, dividend per share, regularity of share dividend payments and an analysis of the company’s statement of changes in equity.
For a financier loaning the shipping company money or investing in debentures and bonds of the company, looking at how geared the company is and the company’s current or quick ratio are important indices to analyse. Where the shipping company has a low quick ratio, this tells the investor that the going concern possibility of the shipping company is low and it will be a bad idea to invest in such company.
This is because a quick ratio, which is the shipping company’s current/short term (within a year) assets less inventory over the company’s short-term liabilities (liabilities due within a year), shows whether or not a company is able to continue in business and continue to meet its short-term obligations with its current level of liquidity. The other questions is what is the level of leverage sort, what kind of security will be required to secure the loan be it cash flow, choses in action or real property? What will be the repayment schedule and the finance cost that can be incurred based on the company’s statement of profit and loss and the statement of financial position.
An investor looks at various factors before investing in ship acquisition. Regardless, shipping companies do need funding from time to time whether it is for long term asset acquisition like an additional ship to a current fleet or financing working capital, that is funding the operational activities of a vessel.
Foluke Akinmoladun is the Managing Solicitor of Trizon Law Chambers Nigeria. She is a lawyer, accountant, mediator and arbitrator. Her work experience covers both domestic and international commercial legal matters and she belongs to the panel of neutrals of numerous arbitral institutions.She was a onetime Director General of the African Ship owners Association of Nigeria and is a member of the Presidential National Action Committee on Nigeria’s Implementation of the African Continental Free Trade Agreement (AfCFTA) (Transportation stream). She is also the secretary of the Lagos Chamber of Commerce (LCCI) Maritime Sector.
She can be reached at: Foluke.A@trizonlawchambers.com
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