With half-a-decade loose monetary policy, with interest rates kept at historically very low levels by central banks and overall corporate defaults rate at very manageable levels, investors seeking yield have been investing in ever higher risk credit instruments expecting ever lower returns. For instance, Triple C corporate bonds – the lowest credit rating possible, at present yield 7.75%, down from 9.8% from a year ago, and there has been a great demand for them, to the tune of $38.1 billion so far this year (vs $37 billion for the whole calendar 2012.)
In shipping, freight rates in the last six months have moved above cash break-even levels in most market segments, and on occasion, the momentum of the increase has been impressive, i.e. capesize rates moved from less than $10,000 pd in July to over $40,000 pd by the end of September, and likewise for VLLC rates, when last week $40,000 pd spot rates were recorded for the first time in more than nine months. For right or wrong, the prevailing consensus at present is that shipping is in a cyclical recovery phase with the worst behind us, and, therefore, taking ‘long positions’ or ‘risk on’ is the right strategy.
While a few private equity funds and institutional investors have been setting up JVs with vessel owners and managers to buy actual vessels in order to benefit from the market recovery (the JV between Oaktree and Oceanbulk is the most quoted example), an ‘easier’ approach to benefit opportunistically from a market recover is to invest in corporate transactions in the public markets, whether in equities or debt. For the former, the Oslo OTC market has been very hot this year, and the Scorpio Group (whether in the product tankers with Scorpio Tankers (STNG) or in the dry bulk market with Scorpio Bulk (SALT)) have been the most successful examples of riding the equity raising wave for all its worth. In the debt markets, there has also been activity for some time with the sale of shipping loan portfolios. Lloyd’s Banking Group has gradually been systematically divesting their shipping portfolio since 2010, with their latest sale of a $500 million tranche taking place just two weeks ago to likely Bank of America (BofA), who where acting in an intermediary capacity and providing debt financing to the equity providers. The transactions that really caught everyone’s attention however were the sale of DnB’s total shipping loan exposure to Genco Shipping and Trading (GNK) of $520 million (part of a $1.01 billion revolving credit facility), and the sale of Royal Bank of Scotland’s (RBS) entire shipping loan exposure of $720 million on Eagle Bulk (EGLE), part of a $1.1 billion term loan facility (after the restructuring in summer 2012). The exact details of both these transactions are still sketchy, but it has been rumored that the Genco debt was sold for about 91% of its face value, while the debt for Eagle Bulk brought just shy of 90% of its face value; it is believed that in both cases Bank of America is the buyer and arranger of the sales, with Bank of America also providing debt financing to the funds eventually buying these loans. There has been a long list of funds mentioned as the buyers, some known to shipping but some complete newcomers, but the names Oaktree and Centerbridge are most frequently quoted.
The quoted pricing of about 90% has been exceptionally strong both in absolute and relative terms, and it presumes that the borrowers will perform in every respect, an assumption that is heavily contingent on a market recovery. As mentioned earlier, with interest rates very low, credit investors have to really search hard for deals, even in ‘obscure’ industries like shipping, and when they find them, they have to be very competitive in their terms and pricing, which has brought about the competitive pricing in these two transactions. However, the fact that both Genco and Eagle Bulk are publicly traded companies in the US (from where a tremendous pool of institutional money is invested) with relatively modern, uniform fleets in the recently buoyant dry bulk market and with significant market exposure if/when the market recovers (a great deal of the original charters have expired or expiring soon) has called for very competitive pricing, which has surprised many market players, and likely the sellers themselves. This is a recurring theme with institutional investors who would pay aggressively for ‘paper’ which they can trade from their screen rather than having to deal with potentially logistical and operational matters (buying vessels or arresting vessels); a year ago, Santander Bank, holding a small position in the OSG syndicate, attempted to sell their position, expecting a 60% related pricing; to their surprise, and everyone else’s in the syndicate surprise, the pricing soon got into the 90’s levels, again, reflecting that OSG was a US-based, publicly listed company and easy to trade on a computer screen.
The fact the shipping debt, very selectively of course, can fetch pricing in the 90’s is definitely a positive event for many shipping banks, who may find such pricing irresistible and start exploring their own sales. We are not sure whether there will be an upcoming avalanche of shipping loan sales, but there are many constraints: borrowers ideally have to be public companies (much less preference for private companies) with underlying assets in active markets (doubtful that loans on containerships would be as competitively priced and received) with governing jurisdiction English or US law and while there is this (short?) window of low interest rates, market stability with low corporate defaults and debt financing for shipping loan acquisitions is competitively available.
But again, seeing that 17% of the world fleet is still on order and many more newbuilding orders are getting placed on a weekly basis, paying aggressively for shipping loans presumes a substantial freight rate recovery (which presupposes tighter control of tonnage supply) and also better asset pricing as loan collateral (which again presupposes tighter control of tonnage supply).
It will be interesting seeing whether 90% pricing would make much sense. It also will be interesting seeing how ‘patient’ and tolerant of the corporate managements the institutional buyers of shipping debt will be, being ‘active creditors’ as part of their DNA of managing risk actively vs a traditional banker’s relatively passive and non-confrontational approach.
© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co. All Rights Reserved.
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