Independent Greek shipowners over the last century have fine-tuned a business model in shipping – mostly focused on ownership and management of vessels – that’s enviably unique in the sense that it is an efficient and agile model that plays best to their comparative advantage over other types of shipowners. The preferred example of the ‘standard case’ to make money in shipping as a Greek independent owner is to wait for the low mark of an ebbing market, choose good quality vessels (usually older panamax bulkers) and negotiate a good price (‘cheap ships’), invest about 30% equity from their own seeding, borrow the rest in the form of a first preferred ship mortgage from a shipping bank based on their handshake, expertise and solid prior record in shipping (OK, sometimes there may be more to it), trade the vessels on the spot market (and making sure to be in the office themselves every day and staying on top of the charter market), manage the vessels efficiently and keeping operating costs down (OK, on rare exceptions compromising vessel standards), make some operating profit, when the market improves make some more operating profit, when the market takes off sale most of the fleet for a multiple of what they paid, invest some of the proceeds in real estate (diversification or ‘taking chips off the table’), and wait for the bubble to burst to do it again.
The example above is obviously too simplistic, but, with variations on the theme, it is true and it has served well the community. Taking a deeper look into the ‘Greek shipowning model’, one can distinguish several business concepts taught at business schools on how to build and manage businesses and companies effectively. For instance, by having the shipowner contribute meaningful ‘skin in the game’ (both equity and reputation), there was also a meaningful alignment of interests for the lenders. Further, shipowners managing the vessels themselves through the affiliated vessel management company, the agency issue has been effectively muted: there was further alignment of interests as the manager looks to optimize value for the owner by keeping vessel operating expenses low, maintains active involvement in the charter market and executes on un-conflicted decisions on capital matters (buy or sell vessels.) [In sharp contrast, in the German KG market, the shipowner (retail investors) and manager had and still have their interests completely mis-aligned, which partially contributed to the cause of the KG ‘problem’]. The fact also that Greek shipowners do not have a competitive advantage in terms of financing (Greek shipping banks – in general – are a small part of the international shipping banking market) or of access cargoes preferentially (no major oil companies, miners, refiners, traders, industrial conglomerates are based in Greece), Greek shipowners had to stay nimble, flexible and focused, which may also have made them good market timers and traders. Six years after the market crushed and with the belief that the market is in a recovery phase, the Greek shipowning model has proved to be better than others as the Greek shipowning community has weathered the crisis better than most in the western hemisphere.
What are the prospects of the Greek shipowning model looking forward? Will be a viable model for the days to come? Should be left to its own (‘if it ain’t broken, don’t fix it’)? Would have to be adjusted, amended, extended to fit the times?
We do not pretend to be smarter than the people who made fortunes in shipping while ‘writing the book’ about the ‘Greek shipowning model’, but it seems that at least a re-assessment of the situation may be warranted; and, whether the crisis could make us wiser in any ways with any lessors to be analyzed and learned. Just this week, we had the 25th anniversary of MT „EXXON VALDEZ” grounding which was the cause of major changes in shipping such as OPA 90, the mandatory use of double-hull for tankers and early phase out of (otherwise often perfectly great) single hull tankers. The anniversary of the accident has been a good reflection point about ‘unknown’ events that can force a change of course.
There are many variables and ‘known unknowns’ in shipping and access to capital is just one of them. Shipping is a capital intense industry and access to funding (effectively and competitively priced) is crucial, and it’s clear in the discussion so far, that access to shipping banks has been imperative to the success of the ‘Greek shipowning model’. We wondered whether the collapse of ‘Bear Stearns’ in 2008 have been the ‘Exxon Valdez’ moment in the shipping finance industry, and Basel III may be the equivalent of OPA 90.
Several traditional shipping banks have seen their shareholding structure change since 2008, with several banks now owned by the taxpayers (notably, RBS, Lloyd’s, HSH, etc) and thus their objectives as corporates entities have changed. Several more traditional shipping banks have formally announced that they are exiting the shipping industry (most notably, Commerzbank.) For all banks however going forward, based on new regulations, shipping will be a hard industry to serve; there will be high requirements for liquidity ratios and cash reserves (‘Risk Weighted Assets’ (RWA)), which do not make shipping a very desirable industry to be in when Return on Equity (ROE) has to be pari passu with other industries for the bank. Shipping banks could opt to provide corporate financing (as compared to traditional asset based financing or better now ship mortgages), which is more favorably viewed under Basel III and the current regulatory requirements. And there doesn’t seem to be a national mandate in any of the countries with significant shipping presence in the west to support shipping or the banks to be given motives to remain or keep lending in shipping t preferential terms. The banks have been vocal at resisting Basel III since it adversely affects their returns – among other things, and it will be difficult having a full assessment of whether Basil III may be eventually watered down to a level that would have enough buoyancy to keep shipping finance afloat. To the extent that shipping banks in the new phase of the shipping cycle will be active in the future (first hurdle), and do not shift their lending practices toward corporate finance (second hurdle), then, expected interest rates in shipping – expressed as spread over Libor – likely will be several hundred basis points, likely five hundred (500) or more, a very high rate and definitely a rarely seen before phenomenon in the last decade. Under such a scenario, bank lending in shipping will not be anything similar found in the past.
There has been a lot of coverage about alternative sources of capital and especially private equity funds entering the shipping space. Several big deals have taken place, but when one looks closer at the details, most of the funds have opted to partner with publicly traded shipping companies (i.e. Euroseas, Teekay Investment Limited, etc), private shipping companies sponsored or affiliated with publicly traded companies (i.e. Ocean Bulk, etc) or private companies well versed with the capital markets (Rickmers, etc) or on their way to going public (Prime, etc). To the extent that some funds have preferred a more controlled or smaller scale investment in shipping assets, they either set up the vessel management in-house (Principal Maritime, etc) or hired professional third-party managers to manage the vessels (V Ships, etc). As discussed in previous article, private equity funds have to ‘check certain boxes’ when partnering in joint ventures (JVs) – and independent small owners, despite their agility and market expertise and track record, do not easily make it to the partnership table.
There has been a trend toward an institutionalized vessel ownership where vessels are held under a corporate umbrella and financials are proper and audited; such arrangements have not been the preferred set-up by many independent owners, as this adds to bureaucracy and cost structure. However, it’s getting ever clearer that being a shipping expert with a flexible and cost efficient structure will not suffice in the present environment. The ‘Greek shipowning model’ has been effective, successful, profitable and resilient, but now shipowners will have to make an effort to bring the financial expertise up to par with the shipping expertise. Since traditional banks will not be granting easily loans, and institutional investors and likely capital markets will be replacing banking, independent shipowners will have to depend more on shipping finance advisors experts, accountants and auditors and strategy consultants. Probably none of these functions are as exciting to a self-made Greek shipowner as running and trading vessels, and likely a poor use of resources in their opinion; on the other hand, getting more sophisticated in shipping finance is likely a small price to pay in order to a successful business model evolved; shipowners in other countries or with different business models have seen their models collapse altogether, after all.
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