Repainting the mailboxes
TWENTY-five years ago, Nick Sims joined by chance what was then the British Bank of the Middle East in London because it offered £10 a year more than other banks recruiting at the time. Its operations were later merged with those of the Hongkong Bank, which has since undergone a rebranding programme to emerge as HSBC.
Nick has been in Hong Kong for the past ten years and says, "Yes, there have been changes as far as the skyline is concerned, but not a lot else has changed on a day-to-day basis since the handover." The most tangible change has, in fact, been the repainting of the mailboxes, from red to green. Otherwise, it has been business as usual, Nick says, despite the subsequent crisis in the Far East financial markets.
Wayfoong (Cantonese for 'Hongkong Bank') Shipping Services was set up in the early 1980s as a separate subsidiary of the bank in order to act as an agent in arranging ship finance. But Wayfoong later became a shipping division of the bank. It operated an office in Hong Kong, effectively dividing the world into east and west at the Suez Canal. (The western hemisphere is looked after by the shipping group in London, a division of Midland Bank in the City, now also rebranded HSBC).
Fundamentally, both offices will do exactly the same job as before, staffed by the same people, only operating under the HSBC banner.
In terms of the current financial crisis in the Far East markets, the shipping markets began to spiral down before the rest of the market turned. "The fall in bulk and the oversupply in the container market has had a compounding effect overall", says Nick, "and I hope we are now at the bottom. But there is not much on which to pin our expectations for 1999. The markets are very quiet and there is very little business going on. There will be an increase in activity once it is perceived that the situation will improve. Despite this, what we do at HSBC remains profitable."
Does this involve the restructuring of fleets? "We are happy to discuss financial rearrangements with our clients as part of a long-term strategy," says Nick. "This is entirely different to a situation when restructuring is imposed because an owner has not been repaying its debts."
"We are a relationship-based bank rather than a transactional one," says Nick. "We only finance owners who operate quality fleets and run commercially viable operations. We have actively managed out any bad pennies and are comfortable with the current owners on our books."
The shipping portfolio at HSBC is a small percentage of the bank's overall activity and profits. It can thus afford to commit itself to long-term investment rather than look simply for short-term returns.
What is the average age of the fleets financed by HSBC? "As a general rule of thumb we aim to have no vessels older than fifteen years at maturity of the loan, or older than eight years when we start financing them," Nick explains. "This is a general, group-wide guideline because there tends to be a higher risk of losing money on anything older."
"What we want to avoid is lawyers trying to score legal points over each other. These can assume greater significance between them than the overall commercial interests of the client."
By June 30 last year - the initial deadline under the ISM code - all HSBC-financed ships were ISM-certified. "We simply cannot lend to an owner who isn't compliant because it affects insurance and other related areas," says Nick.
But how else does HSBC manage its exposure to risk? "Through a conservative, cautious approach," says Nick. "We have a reputation for being the most expensive bank to borrow from which, by comparison, we are. This is because we are not prepared to shave margins. This hit hard two years ago when the market became very aggressive. Simple arithmetic shows that lending 80/85 per cent of vessel values at the top of the market must have led to what is now negative equity."
Because HSBC is not primarily a shipping bank, it doesn't have to be industry-led, unlike a bank whose raison d'etre is purely to lend money to shipowners.
The bank has had no involvement in junk bonds or other bond issues and Nick believes that this form of raising cash has not done the reputation of the shipping industry any good. "Junk bonds are an expensive way of raising cash," he says. "There are no repayment schedules, just bullet deadlines, and it has been said that junk bonds attract the type of owner who can't raise cash any other way."
Nick thinks that banks involved in junk bonds are not helping the shipping industry at large. This is why HSBC protects its one-to-one relationships with its clients and rarely gets involved in syndicated deals. "Generally, we do simple bi-lateral transactions," explains Nick. "We don't go into other peoples syndicates unless we have the top or equal lending position. We like to have some control."
The one-to-one ethos at HSBC follows through in relation to lawyers. For many years the bank has enjoyed a relationship that could be described as 'impenetrable' with heavyweight Hong Kong law firm Johnson Stokes & Master (JSM). This is due to a shared client base enjoyed over many decades.
In fact, look at the history of Hong Kong, and alongside it can be traced the relationship of JSM to Chinese and foreign merchants involved in China trade and investment.
A glance at the membership list of the Hong Kong Shipowners Association reveals the clients served by both HSBC and JSM. And Nick says that, whatever the competitive pressures, this bond is unlikely to be broken - a rare example of continuity of this sort in today's competitive legal marketplace.
"I know I can pick up the phone and get advice without clocking up huge fees," says Nick. "It adds value to the service on offer, and speeds up the documentation process, if your lawyer knows what you want and can provide it quickly."
What about relationships with the owner's own lawyer? "What we want to avoid," Nick concludes, "is lawyers trying to score legal points over each other. These can assume greater significance between them than the overall commercial interests of the client, which must remain the primary goal for us all."
Finance and litigation
WATSON, Farley & Williams opened its first office in the Far East in September 1998 when it bought out Sinclair, Roche & Temperley's operation in Singapore. The firm plans to focus locally on its traditional ship finance work with banks and shipowners, and to strengthen its shipping litigation capacity, which is currently approximately 85 per cent dry and 15 per cent wet work. "Whilst the shipping markets are volatile, we have a real opportunity to push forward our litigation practice," says Neale Gregson, head of litigation.
Stuart McAlpine, head of ship finance, explains that the new office deals geographically with everything "east of Piraeus", but has plans for expansion into North Asia and to double its fee-earners in the Singapore office over the next five years. Watch this space.
Business as usual in Hong Kong
THE legal landscape in Hong Kong has changed over the last twenty years. There are lots of relatively new arrivals these days in the skyscrapers of the business district, and plenty to attract them.
Alastair MacAulay, head of the ship finance team at Johnson Stokes & Masters, says, "China is our backyard and the fastest growing economy in the world." Many PRC contracts now insist on resolution in the Hong Kong court, or arbitration in Hong Kong. In this way, Hong Kong will increasingly become a bridge between Europe and China. Alastair foresees fewer conflicts being resolved in London but does not think that Shanghai is about to overtake Hong Kong. "For international lawyers," he says, "Hong Kong will continue to be pre-eminent."
Shanghai appears to be booming, experiencing levels of investment and growth parallel to Hong Kong in the 1970s and 80s. Businesses that left in 1949 are now returning - some, like insurance giant AXA, to the same buildings in the Bund it occupied before Mao Tse-Tung proclaimed the People's Republic of China.
JSM, having opened representative offices in Beijing in 1987 and Guangzhou in 1990, was authorised by the ministry of justice to open a full branch office in Shanghai in 1995, more than a hundred years after JSM opened its first Shanghai office.
Alastair says, "Chinese laws have tended to be statements of political intent which are then translated into legislation. This has created an unsatisfactory legal system for international contracts. But legal education in China has greatly improved in recent years and, in private practice, there has developed a more established system of lawyers who understand that their first obligation is to the client who instructs them."
Alastair confirms that, apart from the removal of the Privy Council as the final court of appeal, there have been no changes to the Hong Kong court system or in the judiciary since the handover in June 1997. He quotes Martin Lee, one of the most outspoken democrats in Hong Kong, saying that China has had a much lighter hand than expected in the day-to-day running of Hong Kong. "It is "business as usual," he concludes.