German Branch chairman Marc Buchholz delivers his layman’s guide of the country’s world-revered ship financing system

Buchholz : a ship investment offers the possibility to invest in a ship and to participate in its commercial success

During the 1990s, the German government amended part of its tax law in order to attract private investors to merchant shipping. Then, in 1999, a German tonnage tax system was set up and private investment in the German shipping industry grew rapidly.

For the investor, a ship investment offers the possibility to invest in a ship and to participate in its commercial success during the operational period under an entrepreneurial investment into a, usually, single ship-owning company. A GmbH & Co. Kommanditgesellschaft (KG) is usually set up, offering shares to private individuals. These private investors purchase shares in newly created funds to invest money in new or secondhand ships and in doing so they participate as co-owners to one or more ships in the continuous growth of world trade and the shipping market.

Nowadays, a growing number of finance houses specialise in developing such KG investments in ships to attract private investors, but what is the speciality in such closed shipping funds? The idea behind it is simple: different shareholders bundle their capital to finance a special investment. Individuals who are not able to finance something alone join forces with others and share the profit later. By doing so, high investment costs and risks are distributed to more than just one investor.

This system has also been successful in the German shipping market. A closed shipping fund bundles the capital of its shareholders and finances a fixed investment object, for example, a containership. The shareholder participates, analogue to his shares, in the commercial and tax results of the investment. As soon as fundraising for the required share capital is completed, that is all shares have been sold, the fund is closed. New participations will only be possible via the secondhand market.

Typically, a private individual is a limited partner in the, usually, single ship-owning company. The total shares of the limited partnership are normally between 30% and 40% of the purchase costs of a ship, with the remaining share financed by a bank through a shipping mortgage. This mortgage and the corresponding interests will be redeemed by the continuous charter hire income until the ship is completely owned by the fund. Parallel to this, the shareholders usually receive dividends from the operational surplus funds of the ship. When the ship is sold, shareholders also receive the earnings from the sale.

 

Tax takeaway keeps investors coming back for more One of the specialities of closed shipping funds lies in the tax treatment of the realised income. Partners of a shipowning company are co-owners and earn income revenues from a business enterprise, whereas investors of open funds, like equity funds, earn only standard investment income, which is treated differently according to the tax law. This enables investors of closed tax law, independent from the realised profit of the shipowning company. Under the tonnage tax scheme, profit (assessment basis) is set as a flat rate according to the ship size. Due to this procedure of taxation, the shareholders can pay tax every year for nearly the same profit share. Therefore the tonnage tax delivers an obvious tax relief for the shareholder compared with a concrete profit assessment of the investment object.

Partner work

For many interested people, the often complicated chain of participants in a ship investment project might be difficult to get to grips with. Who, for example, are the shipowners or shipmanagers, the charterers, the initiator, the finance house, the trustee and the shareholders/limited partners? The following explanation should shed some light:

The shipowning company/shipmanager

The starting point of the whole investment is usually the shipowning company or shipmanager, who likes to earn money by employing ships in the world transport market. The principal duty of the shipmanager is the commercial and technical management of the ship, the employment of proper crew on board the ship, the arrangement of typical shipping insurances for the ship and possibly the conduction of charter negotiations. Before the shipowning company can buy the ship they will have to know the earning potential of the investment.

The charterer

The charterer is the partner in the investment project, usually committing long-term time-charter employment for the ship. For a containership, the charterer might commit to operating the vessel in his liner service for example. For other types of vessels, voyage employment can also secure income. The earnings from a charter contract usually ensure the repayment of the mortgage and the distribution of dividends to shareholders.

 

The initiator

Nowadays, either the shipmanager or the finance house initiates the shipping funds. Either the shipmanager decides to develop an investment project and looks for a way of financing the ship, or a finance house initiates a fund for its (usually) private investors and seeks out other partners.

The limited partners

Having taken the decision for the type and size of a ship, the initiator has to determine the financing of the investment object. Instead of financing the ship on his own, he looks for partners to invest in a ship. And this is where a GmbH & Co. Kommanditgesellschaft (KG) is usually set up. The shareholders invest as limited partners into the ship via the single ship-owning company. The liability of the investor is limited to his own share value and maximum to the total share capital of the fund.

 

The finance house

Containerships are popular KG investment tools.

If the initiator of a ship project is the shipowner or shipmanager, he usually addresses himself to a finance house, which specialises in raising funds and has a broad investment scope in the market. The finance house reviews the ship project and the commercial aspect, and calculates the investment in more detail. If the finance house calculates that the project is viable, it creates the finance concept, the marketing documents, such as the prospectus, and arranges the marketing of the share capital. The finance house arranges the share capital from the investors, usually private individuals, who participate on a trust basis to the ship.

The trustee

A trustee company holds the shares typically on a trust basis for the shareholders. They manage the share capital, set up the control of the shipmanager and shipowning company, and inform the shareholders about the development of the ship and the commercial success of their investment. The shareholders receive detailed information about the commercial progress and particulars of the dividends from the trustee.

 

Marc Buchholz FICS is chairman of ICS German Branch and fleet manager for Hamburg-based shipmanagers DS Schiffahrt GmbH & Co. KG, Quadrant Bereederungsges. mbH & Co KG and GHS Global Hanseatic Shipping GmbH & Co. KG

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