Increasing Dry Bulk Shipping Market Efficiency by Securitization of New Build Capacity

The objective of this thesis is to introduce a method of securitizing dry bulk shipping companies or vessels. The general structure and nature of securitization has been based on the mortgage-backed securities. This method uses segmented tranches based on future charter incomes. The thesis analyzes the market dynamics of the dry bulk shipping market and identifies problems therein. This is done by using the four shipping markets as determined by Stopford. Each of these markets will be summarized and its market dynamics explained. The dry bulk shipping market is highly cyclical in nature and freight rates are volatile. This volatility along with the market dynamics and cyclicality are shown to be due to a number of factors. One of the factors is that the investment in new build vessels tends to follow the freight rates in a pro-cyclical manner. This is partly due to the overinvestment in new capacity when times are good that lead to long periods of overcapacity. The market specific dynamic is theoretically addressed by the introduction of securitization. The thesis then enumerates the financial methods used by ship owners to manage their finances. The issues of costs and cash flow are discussed as are the basic methods of financing used by ship owners. Problems in addressing the specific needs and wants of the various investors simultaneously are then identified. The basic structure of the securitized dry bulk shipping company is next discussed. Firstly the distinctions between the mortgage-backed securities and the intended shipping securities are discussed in order to show why the recent failures of the mortgage-backed securities would not apply to these securitized shipping companies. Then the players and instruments of the shipping security structure are listed and explained. A concerted effort is made to cover the establishing of market value and default process of the securitized dry bulk shipping companies as to complete the picture of the securitized shipping companies and its tranches. To give clarity to the practical workings of a securitized vessel or company a hypothetical case study is given. With a clear picture of the workings of the securitized dry bulk shipping company a discussion is then begun on the effects of securitization and the possibility of its addressing the problem of financing in dry bulk shipping companies. It is proposed that the segmentation of investment opportunities would have a dampening effect on the volatility in supply of capacity. It is also estimated that the tranches would offer other beneficial effects as hedging opportunities to shippers and others who are adversely affected by high freight rates. The segmentation of investment opportunities could also open up dry bulk shipping to many different types of investors, from conservative pension funds to hyper active derivative traders.