Shipping is one of the mostcost-effective methods of transportation of goods across the globe. The shipping industry plays a crucial role in the world’s trade and economy.The objective of this report is tostudy the different types of funds available to finance shipping firms. The financing of these shipping companies is crucial in the effectiveness and efficiency of these companies. The dynamic and unpredictable economic changes have, over time, influenced the types of financing of shipping firms. Bank loans have, over the years, been the leading funding source for most of the shipping corporations. This report, through its methodology, results, and discussion, explores different funding options available for funding shipping companies. The method examines the sources of data and theoretical framework while the results explore the different types of funds in-depth. In conclusion, the different types of funds explored are analyzed, and the best option for the company is selected and discussed as a recommended funding source to the Directors. In this case, financial markets (equity markets in particular) are sought to be the best funding option. This is because they are convenient, less risky, and consistent. Financial markets, specifically private and equity markets, allow for growth of the company and maximization of shareholders’ wealth.

2.0 Introduction

The shipping industry playsa critical role in global trade. Consequently, the world’s economy is highly influenced by shipping, as it facilitates and promotes international trade between various multinationals. Due to the capital intensity of the shipping industry, the choice of funding and capital structure is a crucial factor (Celik, Karlis and Nguyen 2018, p.11). Moreover, the shipping vessels are very costly; thus, the financing of this industry is very crucial. The financing decision of these companies plays a role in profitability and shareholder wealth maximization. Therefore, an optimal decision in terms of financing leads to huge savings and cost minimization in the part of the company. This report explores the different types of funds currently available to shipping firms. More so, a particular fund that will help in maximizing shareholders’ wealth. Further, capital structure is directly determined by the mix of funding sources, which also affect the firm value hence making financing decisions very crucial for any shipping company existing in the current competitive world (Alexandridis et al. 2018, pp.14-15). The current majorly utilized sources of funding in shipping companies are equity and debt. Consequently, this report seeks to look for the best way of financing the company and approaches to reaching optimal finance for the company. To arrive at an informed conclusion on the best funding option, different types of financing methods have been explored widely in the methodology, results, and discussion.

3.0 Methodology

The approach to use can be based on inductive or deductive methodologies. An inductive approach is based on empirical findings, which are compared to existing theories in the shipping world. Research can be administered using questionnaires issued to shipping employees to investigate widely about financial solutions, which are a deductive approach to fact-finding. In the recent past, banks have declined to issue financial assistance following the global financial crisis of 2020. The reduction in the financial portfolio has triggered financial constraints on shipping companies paving the way for financial barriers. Substantially, the shipping model at the center of the study has to consider other funding sources toembrace and executenew green technology. The shipping company can export credit as a mode of shipping finance and overcoming the challenges of an increased regulatory environment. Export credit narrows the gap between financial barriers and the enactment of energy efficiency, such as capital cost (Schinas, Ross and Rossol 2018, p.307). Research indicates that Extra Credit Agencies (ExCrA) agencies play a fundamental role in investment flow in the shipping industry. Consequentially, the shipping firm can be funded via direct credit to a foreign buyer, offering guarantee or insurance that acts as financial collateral that offers lenders extra comfort to finance the shipping project.

3.1 Choice of Method

The choice of the approach used in this report is a thorough analysis of publications from existing theories, textbooks, journals, and credible internet sources. These publications are analyzed by theoretically discussing the merits of debt versus equityfinancing in the on-off security exchange. A literature study of the various publications provides a theoretical framework of the types of funds currently available to shipping firms.

3.2 Sources of data

The primary source of data for this report is theoretical. This is from textbooks, existing theories, journals, and internet sources.

3.3 Theoretical Framework

3.3.1 Sources of Finance for Shipping Companies

3.3.1.2 Equity

The concept of equity means that investors have control in the company, and participate in profits and risks sharing. The two main ways used to raise equity finance for shipping firms include owner equity i.e., private equity and a public offering. In owner equity, the shipping companies finance their investments by retaining the corporation’s earnings or engaging the private resources of the owners. In a public offering, an offering of shares is made in collaboration with an investment bank that prepares a detailed prospect of the publicly issued shares for a particular stock exchange market. This prospect comprisesissuing the company’s comprehensive information. The success of the offering is achieved when a good number of investors are willing to buy the shares at the offered price. The willingness of these potential investors depends on the perception they have about the industry and the company’s management. Nevertheless,the success of the offering can never be guaranteed, and the offering can be withdrawn. The ability to satisfy the potential investors on the soundness of a company directly influences the success of the public offering of a shipping company’s shares.

3.3.1.2 debt

Research shows that debt financing has been one of the primarily used financing modes for shipping companies. Specifically, long term loans from the banks have played a crucial role in financing the intensive capital requirements in the shipping industry. Among the debt financing types used by listed shipping firms, corporate bonds issued in the capital marketsis rapidly growing as a predominant way of fundraising, if they have an acceptable credit rating. Credit rating determines the amount issued and the level of interest. For a positive credit rating to be achieved, a clear company structure and management are required. Once the rating is achieved, bonds can be issued through an investment bank. Commercial loans are the most common of loans offered to shipping companies. Alternatively, private investment technique can be used both for equity and debt. Here, the fund manager places funds directly with the firms in need of financing. The lender, who could be an investor, directly negotiates with the shipping entity and comes up with a deal that best suits both the lender and borrower. However, various challenges arise from this method namely;

Financial markets only offer private placement to investment-grade quality shipping firms.
The liquidity of the loan is also a problem because, after the transaction, the investor’s chance of adjusting the investment’s loan portfolio is significantly lowered.
Mishandling of information since the managers of the funds are the first individuals to handle the examination of detailed investment proposals.

Securitizing Investment: The term describes taking an exceptional investment and developing it consistently to meet unyielding standards in the financial market (Hultin 2004, p.210). Funding of ship can be done through securitizing investment, which involves money, capital, and equity markets. For example, the money market is the short term whereby a shipowner who has an overflow of cash and intends to maintain the cash liquid. Instead of banking the money with a bank, he prefers to invest the money either as a local or international investor in an issuing nation in shipping. The investor will opt to invest in the money market in anticipation of getting better returns compared to a bank deposit.

On the other hand, the capital market is long-term and takes the form of debentures or bonds as earlier mentioned. The bonds are highly standardized, making the bonds that are issued publicly easy to trade. Lastly, the equity market means that the firm must adhere to specific guidelines and persuade the shareholders that investing in the shipping firm is worth the risk. The security market and the banks are the intermediates in issuing regulations concerning legality, underwriting, and auditing (Appendix 1) (Theotokas 2018, p.43 and Bavoso 2013).

3.3.2 Theories

3.3.2.1 Miller and Modigliani’s Propositions.

The theory involves dual propositions based upon the assumption of the absence of corporate taxes, lack of costs of agency services, and the presence of an efficient market in the world (Paun and Topan 2016, p.359).One of the propositions states thata diverse capital structure does not influence the firm’s value and that all capital structures are similar to all stakeholders. Also, the capital structure does not affect the firm’s cost of capital.On the other hand, the second proposition alludes that the cost of equity is influenced by the firm’s required rate of return, debt or equity ratio, and the cost of obtaining the debt finance (Frank and Goyal 2008, p. 140).The general argument of Miller and Modigliani proposes that the reduction firm’s cost of capital cannot be achieved by substituting debt for equity finance.Thus, an addition of debt in the capital structure increases the risk of equity, hence also causing an increase in the cost of equity capital.In brief, the theory perpetuates that management cannot change the firm’s value by rearrangement of the securities of the firm (Syriopoulos 2010).

3.3.2.2 The Static Trade-off Theory

According to this theory, the benefits of debt are balanced with the cost of debt. Though the optimal capital structure for a company differs, the asset-based industries’ debt to equity ratio inclines approximately at two. The beneficiary influences the optimal capital structure. The stockholders are bound to benefit from variations in capital structure, only if such changes increase the firm’s value (Arvanitis et al. 2012, p.34). Since debt is tax-deductible, regarding corporate taxation, debt finance has a definite relation to the value of the firm i.e.; leveraged firm has less tax obligation in comparison to an all-equity firm. Also, since a leveraged firm value is the combination of debt and equity, it possesses a higher value than an all-equity firm. Profit is maximized and increased,as a tax deduction is allowed on the company’s earnings in the case of debt finance as opposed to the case of equity finance.Generally, the choice of diverse capital structures depends on the attitude of the firm/management towards borrowing i.e., debt finance.

3.3.2.3 The Pecking order Theory

This theory forecaststhat the decision to borrow debts externally as a mode of funding is determined by the firm’s deficit in its current financial resources. Therefore, the need for external financing, as opposed to the goal of attaining optimum capital structure, drives thevariations in debt to equity ratio (De Jong, Verbeek, and Verwijmeren 2011). Firms’ debt-equity decisions when the static trade-off theory and the pecking order theory di. A firm is likely to issue stock only if it was initially overvalued, and if the firm issues debt, it was more or less undervalued.So, in this case, timing is crucial in that is it during debt or stock? This theory has two rules. The first rule states that the company will use its capital to fundnew investments. On the other hand, the second rulealludes that the company issues the safest securities by issuing debt before convertibles. Consequently,a firm will utilizepresent earnings before the debt issue. Moreover, a firm always issues debt beforestocks issue. Based on the above arguments, the company chooses its leverage based on financial need; thus, most profitable firms will use less debt as they generate money that is specifically for investments. This theory proves that a company has the option of generating profits, which some can fund future investments, which makes the company independent of capital markets (Frank and Goyal 2008, pp. 150-154).

4.0 Results

4.1 Types of financing for shipping companies

The funding of shipping corporations has evolved over the decades. Financing has moved from charter backed finance in 1950-1960, asset-backed finance in the 1970s to financing asset play in the 1980s and corporate financing, and subsidized credit in the 1990s (Hultin 2004, pp.14-16). Fundraising of capital for shipping companies is very vital as it enables effective working capital management, acquisition of shipping vessels, and refinancing of liabilities to pursue investment plans (Daniel and Yildiran 2019).

According to the studies of Syriopoulos (2010) and Balaska (2017), the methods being mainly usedto raise funds for shipping companies include, as mentioned above, are equity and debt. Further, the author elaborates on some of the classifications of equity financing that includes public equity (IPOs), retained earnings from either sales or operations, private funding, and seasonal equity offerings (SEOs). Additionally, he states that debt finance involves bank loans, bond issues, private debt, and shipyard financing. Additionally, other options of source financing that are available to shipping institutions are leasing, securitization, mezzanine finance, hybrid finance, among others. The sections below elaborately discuss these types of funding available to shipping firms.

4.1.1Funds from savings

Initially, there is the money that is invested, which is from corporate or personal savings. Investors commit funds to the firm to be entitled to a share of the expected higher profits due to the additional investment. In this case, we see the selling of shares on the stock market so that the investors to vet their money back.

4.1.2 Private placement of debt or equity

Funds are directly placed with the firm that needs financing. The process involves a negotiation between the lender/investor and the firm for common ground on the terms of the funding. The arrangement is for both equity and debt. The managers of the fund are tasked with the role of analyzing the investment proposals and theinvestment’s liquidity. Upon completion of the placement, the investor’s capacity to adjust the investment is very low. In practice, the private placement market is available to investment-grade quality shipping organizations only (Hultin 2004, p.19)

4.1.3 Financial markets

Financial markets are institutions that participate in the buying and selling of packaged investment funds under a common form of securities. These securities are packaged and processed uniformly according to prescribed standards making their purchase and sale easy. This means that security markets are strictly regulated. Financial markets are divided depending on the security traded into money markets, capital markets, and equity markets.

4.1.3.1 Money markets

Money markets involve trading of short debt with a lifetime of one year or less. The market comprises network banks and other financial institutions dealing in creditworthy and sufficiently standardized financial debt instruments. For example, in the case of a shipowner with a cash surplus and the goal to maintain the liquidity of funds, it can opt to buy commercial papers from the money market as opposed to depositing the funds into the bank.

4.1.3.2 Capital markets

These types of markets are characteristic of trading in long-term debt e.g., bonds or debentures. In this case, the bondholder is entitled to a repayment of a specified amount upon maturity. The amount paid includes interest that reflects the credit rating of the issuer. The rate of ease in trading of publicly issued bonds is directly related to how highly standardized the bonds are. Capital markets avail funding via debt financing by the issue of both corporate and high yield bonds. However, the small size of companies and volatile earnings and asset values are some of the problems that challenge the use of public equity.

4.1.3.3 Equity markets

These markets, through its function of equity shares trading, allow creditworthy firms to finance their capital by offering their shares to the public through the stock exchange market. For an investor who buys the traded securities, he/she attains ownership interest in the public company (Balaska 2017, p.15).

Concerning public equity financing, the company has to adhere to all the regulations and guidelines outlined in the market to succeed in offering shares in the stock exchange. Additionally, the firm has to persuade the shareholders of the worthiness of investment in the offered shares. Hence, every stock exchange has set procedures for an initial public offering (IPO) of shares. Generally, this procedure involves the decision to go public, which stock market to trade in (local or international), evaluation and selection of the intermediary company to assist in the issue of stock i.e., underwriter, decide on the IPO logistics like pricing, creation of a prospectus, and then the offer is made. Lastly, the last step is in the allocation of the purchased shares and stabilization of the shares in the stock market.

4.1.4 Financial institutions

Different types of banksalso provide funds by lending loans to shipping companies. Currently, there are four categories of bank loans available that shipping firms can choose from, namely:

Mortgage loans
Corporate bonds
Shipyard credit
Mezzanine financing

Companies need to offer security to receive these loans. For instance, mortgages have the ship as the collateral, whereas for corporate loans, the security is the company. The lending of funds by the shipping company exposes them to the risk of losing the collateral to the lenders in case of default.

5.0 Conclusion

In terms of the funding source for shipping companies, the management needs to put in place strategic plans that will ensure the company sustains competitive advantage, effectiveness, and improved service delivery through enhanced performance (Theotokas 2018, p.1). With a rapidly changing economic environment, a company needs to have a convenient, cheap, and timely way of financing that offers access toa capital structure that is flexible, competitive, effective, reduces financial risk,provides the uninterrupted operation, and progresses viable growth. It is also significant to mention amidst the volatility of the shipping industry, that the best option of financing for this company, should be able to achieve financial risk mitigation and avoid any liquidity problems that may arise from poor financing decisions (Basak and Akkartal 2015). In this case, I would suggest equityas the best source of investment funding. Currently, the company has been doing well over the last couple of years. The profit margins are high, and there is a significant amount of money that can be channeled to fund future investments. Therefore, this is an indicator that equity markets are best suited. The basis of an increase in equity will be on the firm’s proﬁtability in a situation where there will be enoughretained earningsto fund future investment decisions. The firm’s dividend policy directly affects equity market funding, as it dictates how profits are distributed to the shareholders.Additionally, through issues of Initial Public Offerings or Seasoned Equity Offerings, equity markets enhance their equity funding.Through the issuance of securities, capital markets play theintermediary role of providing funds required to financeinvestment venturesand sustain the growth of the business. Capital markets also provide a device for equity and bond securities valuing and trading. This is crucial to this company as it will help in the company’s growth, image, and reputation in the competitive business environment.

In summary, the suggestion of equity finance as the best option as a listed company in the stock exchange includes the following:

Shares or securities offer more permanent funding, with no fears of not being able to pay it back.
Since there is no legal obligation to pay dividends, the company is not threatened with liquidity problems or issues.
Through the stock exchange, the company can raise more substantial amounts of capital in comparison to other financing methods like debt.
The sale of shares enhances the creditworthiness of the firm, thereby increasing its rating of bonds, reduces the cost of debt, hence it improves the firm’s ability to acquire debt finance in the future.
In the current economic hard times, occasioned by COVID-19 outbreak, equity finance would be preferable as acquiring debts might be challenging to repay amid the depressed economy (Salman and Munir 2012, pp.1-2).

As such, equity finance offers the best prospects for the company’s projected growth by not only providing less risk but also creating a healthy financial system, that can be used by the company to obtain other forms of finance in the unforeseen future like debt.

6.0 Appendix

6.1 About us

S-Shipping Companyis a public company listed on the New York Stock Exchange.The firm ships cargo in a safe manner to the environment and human lifemanages the vessel, crew the vessel with able seafarers, handle, issue claims regarding the shipments transported and manage the payment accounts of their employees, as well as the disbursement, accounts for port expenses.

6.2 Vision

To generatea successful business for our investors and counterparts. Good business comes from good personal relation

6.3 Mission

To empower and enable our customers and shareholders to focus on their businesses through convenient, dependable, fast, and secure transportation services.

6.4 Source of Finance

Table 1: Borrowed Funds (Theotokas 2018 p.44)

Borrowed funds
Ship finance Institutions/Sources	Markets	Investors
Commercial banks are giving loans to a maximum of 10 years. Colossal loans are syndicated.	Money markets as instruments of short term debt.	Entities with excess cash invest in short/ long term
Mortgage banks give bonds to finance tax.	Capital Markets trade long term bonds offered by firms.	Private investors.
Merchant banks issue equity, private placement, and issuance of bonds.	Equity market trade in shares offered by organizations.	Investment manager Insurance and pension funds Trust funds
Finance institutions issue loans from their funds.	Equity finance offered directly to the lender. Private placement

References

ALEXANDRIDIS, G. et al., 2018. A survey of shipping finance research: Setting the future research agenda. Transportation Research Part E: Logistics and Transportation Review, 115, pp.14-15.

ARVANITIS, S. et al., 2012. Dynamic approach of capital structure of European shipping companies. International Journal of Economic Sciences and Applied Research, 5(3), p.34.

BALASKA, M., 2017. Initial public offering of shipping companies (Master’s thesis, Πανεπιστήμιο Πειραιώς). Pp. 11-15

BASAK, A.A. and E. AKKARTAL, 2015. Implementation of ship finance systems in the world and a future study for Turkish maritime industry.

BAVOSO, V., 2013. Financial Innovation and Structured Finance: The Case of Securitisation. SSRN Electronic Journal.

CELIK, G., S., T. KARLIS, and H.O. NGUYEN, 2018. A critical review of the literature on firm-level theories on ship investment. International Journal of Financial Studies, 6(1), p.11.

DANIEL, L. and C. YILDIRAN, 2019. Ship finance practices in major shipbuilding economies. OECD Library

DE JONG, A., M. VERBEEK. AND P.VERWIJMEREN , 2011. Firms’ debt-equity decisions when the static trade-off theory and the pecking order theory disagree. Journal of Banking & Finance, 35(5), pp.1303-1314.

FRANK, M.Z. and V.K. GOYAL, 2008. Trade-off and pecking order theories of debt. In Handbook of empirical corporate finance (pp. 140-154). Elsevier.

HULTIN, D., 2004. Financing sources for shipping-A case study at Wonsild & Son. Available from: financing sources for shipping.doc [Accessed 26 May 2020]. Pp. 14-16,19

PAUN, C. and V. TOPAN, 2016. Capital structure in the global shipping industry. Panoeconomicus, 63(3), p.359.

SALMAN, A. AND N. MUNIR, 2012. Choice Between Debt and Equity and Its Impact on Business Performance. International Journal of Organizational Innovation, [online] 5(1), pp.1–2. Available at: http://www.researchgate.net/publication/281859052

SCHINAS, O., H.H. ROSS, AND T.D. ROSSOL, 2018. Financing green ships through export credit schemes. Transportation Research Part D: Transport and Environment, 65, pp.300-311.

SYRIOPOULOS, T.C, 2010. Shipping finance and international capital markets. The handbook of maritime economics and business, pp.811-849.

THEOTOKAS, I., 2018. Management of Shipping Companies. 2nd Edition. New York: Routledge. Pp. 1, 44

FUNDING OF A LISTED SHIPPING COMPANY

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List of Tables

1.0 Abstract