FINANCING SHIPS WITH EQUITY BY JIDE OKUNOYE ESQ When we talk of equity, we mean funds raised for a business

by selling stocks or retaining earnings and not in the legal sense of fairness. In this case, the shipping company is seeking for investors who will share in the ownership of the company and therefore share the risks and the profits as the circumstances dictate. There are four major types of financial structures used for raising equity. They are owner equity, limited partnerships, ship funds and public offerings. Owner equity is the business owners contribution to financing a ship acquisition. The money could be realized from his earnings from other ships, earnings from other investments or contributions from friends and family. All shipping companies finance at least part of their acquisitions from this source. This is a very important source of finance because all the other sources depend on it. It is pretty difficult to get other people to contribute their monies to support your ideas if you cannot put something down yourself. As such, sweat equity by which I mean the time and sleepless nights spent in bringing the idea into fruition, though important, is not enough. Public offering is another very important source of finance for ship acquisitions. Businessmen seeking to raise capital to finance ship acquisitions need not limit themselves to the Nigerian Stock Exchange in trying to raise finance. They are free to list their offerings on the leading stock exchanges around the world because shipping is a global business as such funds can be raised from any stock exchange around the world. Some of the leading stock exchanges that have been successfully used to raised funds to finance ship acquisitions are New York, Oslo, Stockholm, Singapore and Hong Kong. Each stock exchange has its conditions for listing a public offering. It is the duty of any businessman seeking to list shares in the exchange to find out what those conditions are and to meet them Its usual for businessmen to seek partners in their efforts to raise funding for their business ideas. Partnership structures are common in Nigeria, however their use

have been limited to the provision of professional services, such as legal and accounting services. When it comes to pooling capital to embark on big projects like shipping, the laws governing partnerships in Nigeria are just inadequate. Some countries have developed partnership structures specifically tailored to meet the challenges of ship finance and management. Two countries stand out in this class: Norway and Germany. According to UNCTAD Germany is the 3rd leading maritime nation in the world. It comes after Japan and Greece with an ownership of 9.50% of the world fleet. German ownership share of the world fleet exceeds the combined ownership of Italy, Russia, India, Turkey, Canada and Belgium. One of the reasons why the country is a leading maritime nation is the fact that its Kommandit Gesellschaft (K/G) limited partnership structure is one of the most popular source of ship finance in the world. The partnership is a legal entity in its own right separate and distinct from the individuals comprising the partnership. The major reason for the popularity of the system is the enormous tax advantages enjoyed by the partnership. The partnership has one general partner and one or more private investors as limited partners. The liability of the general partner is unlimited, while that of the limited partners as the name implies is limited. As no one wants to expose himself to the risk of unlimited liability, most KG partnerships have a limited liability company as a general partner. The KG purchases ships and charters them to shipping companies or forms a one ship company to manage each ship. The purchase of these vessels is financed by equity provided by the investors and usually covers 20 30 % of the investment. The deal will be leveraged by a bank loan to cover the remaining 70 80% of the vessels price and is often secured by a first ranking mortgage over the vessel. The model presented by the KG system is not new as it has been used and is being used all over the world, including Nigeria. A partnership is formed whenever two or more people pool resources together to raise capital. The same can be done in Nigeria. However, one of the reasons why Nigerian Law is not suitable for ship finance is the absence of tax incentives for shipping companies, unlike the case in Germany.

If $100 million is required to finance a ship for instance, the money can be raised as follows: the general partner provides 10% of the capita which is $10 million while the other partners together contribute another 10% amounting to $10 million. The remaining $80 million is leveraged by a bank loan. Nigerians wishing to take advantage of the unique benefits of the KG structure and others like it such as the Norwegian KS structure can contact companies who act as arrangers of this kind of financing. One of the leading arranger of the Norwegian KS structure financing is RS Platou Finans, with a branch office in Lagos. Another way of raising equity is by establishing a Ship Fund. A ship fund is an investment vehicle designed for the specific purpose of allowing equity investors to invest in merchant ships. The procedure for structuring a ship fund is roughly as follows. A registered company is set up in a tax efficient location (e.g. The Bahamas, Cayman Islands, etc.) and a general manager is appointed to handle the buying, selling and operating of the companys ships. For this service he is paid a management fee. Because ship funds are investment vehicles rather than shipping companies, in most cases the shareholders have the option to wind up the company after 57 years, thus ensuring liquidity if the shares prove not to be tradable. To improve the return to the equity investor, many funds raised debt finance, ranging from 5075 per cent of the purchase price of the ships. Obviously, the higher the gearing, the greater the risk/reward ratio for the equity investor. A prospectus is drawn up setting out the terms on which shares are offered for sale. This document may range in size from a few pages of typescript to a large glossy brochure. It sets out the business in which the company is to operate, its strategy, the market prospects, the terms on which shares can be purchased, administrative arrangements, control mechanisms and winding up arrangements. On the basis of this prospectus shares are sold by private placement to wealthy individuals or institutions, or in a few cases by public offering. Investment institutions have limited funds for high risk ventures of this type, so ship funds depend heavily on wealthy individuals who appreciate a good sales story. When sufficient funds have been raised, management purchases ships and operates the company according to the terms set out in the prospectus.