Ship Financing Case Study

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SHIPPING FINANCE
1 INTRODUCTION
Ship financing involves acquiring capital from financial markets for the purposes of running a shipping company. The capital raised is used in the acquisition of ships and for the daily operational expenses of the shipping agency. As generally acknowledged, shipping is a high risk and volatile business and makes huge demands on the capital of any business. This means that for a shipping company to remain competitive, increase their fleet, and be sustainable, they have to seek alternative means to raise funds.
Nevertheless, the peculiar features of shipping such as unpredictable revenue stream; unstructured nature of the corporation; and the lack of transparency in how the organization is administered, makes
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This type of lease is used by smaller firms and for short periods. It is more popular for use with container vessels. Most risks remain with the lessor and issues of maintenance is carried out by the lessor. At the end of the lease period, the asset reverts to the lessor and in situations where the agreement would have to be terminated by the lessee, before the agreed date, appropriate compensation is payed to the lessor.
2.1.1 ADVANTAGES OF OPERATIONAL LEASING
RISKS: This type of lease leaves most risks with the lessor. Environmental, technological, social and technical risks which are commonly associated with shipping, is a major huddle which can be avoided (by the lessee) under an operational lease arrangement.

TECHNICAL KNOW-HOW: The lessee in this case does not need to have technical knowledge in how the equipment (ships) operates, and would not have to make any expenses to that effect. In the case of a leased container vessel, the lessee does not have to employ a crew or run a shipping department to manage the
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OPTION TO ABROGATE: Since the period of lease is usually short, the lessee can easily opt out of the contract and the process of doing so is less cumbersome as compared to if the contract were finance lease.

2.1.2 DISADVANTAGES OF OPERATIONAL LEASING
HIGHT COST: Since the lessor remains in charge of the ship, overtime, operational leasing costs may be very expensive because the lessee is made to pay for charges such as taxes, insurance and risk premiums etc.

DIFFICULT TO BUILD EQUITY: Unlike financial leases where the lessee has the option to buy the vessel at the end of the contract, operational leasing hardly allows for this. This may be due to the short period which most of the contracts cover. Meaning the firms using operational leasing may find it difficult to build equity. To put it differently, operational lease payments are treated as expenses rather than as equity payments towards an asset.

MARGINAL TAX BENEFITS: The tax benefits under an operational lease may be marginal. In such a situation, there is no added tax advantage that can be derived from leasing

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