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Shipping experiences times of change

Shipping experiences times of change

Costas Constantinou

Interview by Costas Constantinou, Managing Partner at Moore Greece and Global Maritime Leader at Moore Global, in the ELNAVI magazine.

The modern chartered accountancy services are not limited to audits or the accurate keeping of accounts like it was traditionally. It’s much more vast and expanded into several areas such as advisory on corporate finance, development of specialised software, management consulting and compliance advisory.

With almost six decades of experience and knowledge in serving the needs and requirements of the shipping industry Moore Greece can assist shipping companies with the upgrading of their governance structure and the adoption of responsible and ethical practices in order to ride on top of the wave of change.

In the interview that follows, Costas Constantinou, an inspired and visionary personality, Managing Partner of Moore Greece and Moore’s Global Shipping Leader, explains how important it is for a shipping company to take proactive steps in addressing the ESG requirements and the Poseidon principles and describes Moore’s tools and solutions that optimize and simplify strategic decisions.

- Do you believe that the beginning of the market recovery in most shipping sectors will have a positive impact on the general health of shipfinance and the provision of financial services?

Α recovering market almost always increases both demand for new tonnage and sale and purchase activity. In addition, the decarbonization process that the industry is going through will also increase capital requirements and therefore additional finance will be needed.

The global financial system is in a better shape today than it was ten years ago. There is a lot of liquidity in the world looking for profitable projects and it is therefore inevitable that some of it will be allocated to the increased needs of the shipping industry.

After a long period of inactivity, the forthcoming boom should be very good news to everyone as it will have a positive knock-on effect on a number of services revolving around finance such as legal services, accounting, auditing, and consulting. I will not be surprised if foreign banks and other finance providers, almost all of which left Greece after the 2008 financial crisis, will start returning in one way or another to be closer to their shipping clients.

Whether this is going to be sustainable remains to be seen, as it is usual -during periods of euphoria- for both finance providers and finance seekers to be easily blinded by the booming numbers and make many mistakes. In a cyclical industry like shipping, the good times do not last forever and when the downturn comes, the effect of these mistakes unfortunately falls on everyone - not just the ones that had made the mistakes. So, it is very important for financing to be extended in a prudent and sustainable manner as long-term stability is needed by all of us operating in a rapidly changing environment.

- Do you agree that shipfinance institutions should adhere ESG sustainability standards in financing the transition of shipping to carbon neutral operations? Describe the role of the accountants sector?

Whether we agree or disagree on the incorporation of ESG criteria in the banks’ lending decisions, is not important. What is important is that 28 of the world’s leading banks have already committed to the Poseidon Principles and more will follow suit. In addition, the European Commission is going to make funds available to finance “Green” projects and a fair proportion of this will be allocated to the shipping industry. It is inevitable that ESG criteria will be imposed as the banks themselves will be accountable to their central banks and shareholders for the application of these funds and adding ESG to their usual financial criteria will help them towards this requirement.

Auditors will certainly play an important role in this new environment. They are trained professionals in providing assurance services so, once both the ESG criteria framework(s) and the appropriate assurance standards are determined and harmonized across jurisdictions, we will see them in this new role more frequently. We don’t know when that will be – it will not happen overnight but it will be a lot faster than the harmonization of accounting standards in the past, so everyone should start preparing in order to be ready when these concepts crystallize.

We know however, from our long experience with the maritime community, that shipping companies have always operated having in mind their responsibilities towards the society and the environment and have ALREADY significantly upgraded their Governance structures, so I do not believe that the ESG criteria will be anything that will trouble a well-managed company. The bigger problem they will face is how to define, measure, record and publicize what they already do and what they plan to do in the future on ESG.

Also, we have to remember that private shipping companies operate with very little human capital ashore – so they will need assistance from professionals who fully understand the processes and operations of a shipping company and not use anything generic that will come as an additional compliance burden and will make day-to-day operations bureaucratic.

For all shipping companies, I believe that building a sustainable ESG profile for their stakeholders to place value on, is more about their ability to consistently demonstrate a robust internal control environment that supports responsible and ethical business practices and less about the metrics.

- Do you agree that when certain specific criteria are fulfilled the flexible and creative small cap shipping companies should be assisted by the financial institutions to take advantage of a broad range of debt products and equity capital to achieve expansion plans?

Choosing the right mix of capital is paramount to the sustainability of a company. I am not convinced that flexibility and creativity is confined to small companies, but I do agree that flexible companies can be more creative in their funding. Unfortunately, most financial institutions do not take into consideration the “character” of a company and will try to sell whatever financial product they need to promote at that specific moment in time.

This is where good advisors worth their weight in gold come into play, as they can understand the real needs of the company and match them to the most suitable financial product of the market. One of the side effects of banks leaving Greece is that there are now many highly qualified and experienced professionals, who used to work in these banks and who can skillfully advise smaller companies, which may lack the technical expertise to assess their funding options by so themselves.

- While a number of banks have exited the shipping market the active banks have been interested to acquire ongoing shipping loan portfolios. Can you explain your institution’s strategy on this matter?

Moore is obviously not a financial institution. From our discussions with our clients we understand that banks are beginning to understand that shipping loan portfolios can be very attractive investment-wise, especially as a part of a long term loan investment strategy. The reason is that, if the lenders can see beyond the inevitable variability caused by the shipping markets fluctuations, reputable shipping companies demonstrate admirable stewardship and resilience.

And while this is not attractive for aggressive investments funds or lenders with investment horizons that span over just two or three years, it is particularly attractive to active banks who have been in this market for a while, understand the shipping business cycles and value the skills of reputable Greek ship owners to ensure that the loans they have granted will be safe over the medium and longer term.

- Are you involved in alternative sources of financing such as highyield bonds, convertible debt, ECAs, equity capital and operating leases as well as preferred equity structure? What is your company’s involvement in helping medium sized shipping companies to optimize the new financial tools?

Although, as I said before, we are not a firm involved directly in finance, we can certainly help a shipping company decipher all these alternatives and help them decide what is most suitable for them – not just in terms of pure numbers but in terms of how it fits with their strategy and culture. We have seen many times in the past financial deals that appear solid in terms of numbers to become catastrophic for both parties as both have different expectations of the transaction.

Shipping companies, especially small to medium ones where they are run as a family enterprise, should be very careful in choosing the right finance product for their profile. It is not just the spread or the repayment schedule – it is all of the financial and non-financial covenants as well as the reporting requirements that the companies need to evaluate in reaching a conclusion on the most beneficial deal.

Because of our almost six decades of experience in serving these kinds of companies, we can assist them in doing so very effectively.

- What are your institution/organisation’s future plans in a continuous unstable and turbulent shipping environment?

We are indeed living in times of change. I would not call them turbulent as the forces of change move in a very powerful but predictable way. Shipping is feeling the effect of these forces being applied to its counterparties and these counterparties (charterers, banks, insurers etc.) are transferring the pressure they feel to the shipping industry.

A shipping company cannot stay hidden any longer as it is no longer the “invisible link” of the supply chain. A company should take proactive steps to ensure that it is riding on top of this wave of change and it that it remains active so that it can thrive once the wave passes and what we see now as “new” becomes the new ‘now’. These steps involve the whole organization and not just the technical departments.

Accounting, legal, crewing, human recourses, IT must adapt and new functions like marketing and communications must be introduced as the word that the shipping company will be operating in the next few years will be very different to what it is now. It is not just the regulations and compliance that create new requirements – it is a whole new area where all stakeholders require more transparent and responsible management. So, the new generation of the shipowners will certainly do business in a different way than their fathers and grandfathers and we – having gone through all these changes before - are ready to help them in this transition phase and beyond.

To assist the new generations of shipowners in ensuring that they do not make costly, in terms of money and time, mistakes, we have developed a range of tools and solutions. They are all are completely tailored for shipping and shipping only and are optimized to work effectively and seamlessly within shipping operations.

We started a couple of years ago by developing a proposition for shipping companies to handle the complexities of GDPR which as well received by the shipping community. Then, Moore Maritime Index - MMI, a fully interactive database that helps shipping companies understand better their cost and income behavior is another example where we applied our shipping specific experience and knowledge to improve the established concept of benchmarking, in running costs and TCE rates.

Other tools have been developed with our like-minded business partners, where we combined our shipping specific experience with our partners’ technical excellence: Through our collaboration with SQLearn we are introducing online training courses on IFRSs, which will be very shipping specific so that we can help finance departments handle the accounting issues in an effective way.

Similarly, we have collaborated with ATC to bring to the market an accounting software which has some amazing and unique capabilities that will help companies resolve once and for all the burden of financial reporting and reporting in general.

We are extremely excited to have all these and many more projects in the pipeline. All of them aim for the next generation shipping companies’ owners and management to be able to make sense out of the noise of the data overload and the complexities of the environment, in a very direct and cost efficient way.