Ship Finance Fundamentals
The Relationship Between Freight Markets and Debt Capacity
Summary
Freight rates drive operating receipts and cash available for interest, amortisation and capital expenditure.
Why this matters in ship finance
Shipping loan capacity can shrink sharply when rates fall at the same time as ship values, reducing both earnings and collateral headroom.
The concept
Debt sizing uses stressed net TCE earnings after vessel operating cost, maintenance, overhead and reserve needs. Advance rates may also be constrained by ship valuation, not simply by the projected base-case debt-service coverage.
How it is used in practice
Model freight distributions or multiple market regimes, include fixed/variable charter mix and test covenant headroom and refinancing at maturity.
Practical issues
Using current spot rates for a multi-year facility without cycle stress creates false precision. Forward freight prices are not unconditional expectations.
How ShipFinance.ai uses this concept
Link freight paths directly to debt-service coverage, LTV and probability-of-shortfall outputs.
Key takeaways
- Debt capacity is regime-dependent
- Rates and asset values may move jointly
- Stressed cash flow limits leverage
Primary legal, rule and scholarly sources
- Schinas & Kewitsch (2015), Loans and Risk Management Considerations, in BK3 - scholarly chapter
- Schinas, Grau & Johns (eds.), The HSBA Handbook on Ship Finance (Springer, 2015) - scholarly reference, not legislation
- EBA/GL/2020/06 - Guidelines on loan origination and monitoring (in-scope institutions; supervisory guidance)