Shipping Bonds

In a historically very low interest environment, corporate borrowers of every sort and industrial flavor have been lining up to exploit such favorable conditions. At a time when the benchmark 10-year US Treasury notes yield about 2.5%, short duration sovereign bonds of industrialized nations are fairly close to zero, and the President of the European Central Bank (ECB) Mario Draghi contemplates lowering even further European interest rates in order to weaken a strong Euro, even companies like Apple, with about $150 billion in cash reserves and money being the last thing they need, are turning to borrowing in order to accommodate their corporate and financial needs.

It’s not only companies and sovereigns of stellar credit the only beneficiaries of low interest rates; with many funds in desperate need of achieving decent yields from their credit investments, borrowers of lower creditworthiness have seen an open window to access the markets.  Countries in the European periphery have benefited from such appetite with Spanish bonds yielding below 3% recently, whereas Greece, the enfant terrible of the EU, has been back to the capital markets with its bonds yielding close to 6%. Strong investor demand for bonds has been reaching as far away as into well ‘junk status’ corporate territory, with a glaring example of Numericable, a French telecoms firm, which recently issued bonds with yields as low as 4.5%; for the record, Moody’s rating for these bonds was ‘Ba3’, three notches into junk territory.

Better options in shipping finance these days...

Better options in shipping finance these days…

For shipping, a capital-intense industry at a junction where its traditional spigots of financing – that is shipping banks – are shut for all practical purposes, the strength of the bond markets and investors’ appetite for even low quality credit should be considered manna from heaven. In all fairness, it should be noted that shipping and bond markets have been having an awkward relationship when in the 1990’s more than $3 billion in junk bonds in shipping were issued and all but one (Ultrapetrol) of the issuers soon ended up in default. The volatility of freight rates makes it difficult to assure to investors always timely payment of the coupon, and when bonds are secured by the ships themselves, residual values can vary as widely as freight; as a result, bonds are not the natural way of seeking debt financing for mainstream shipping with commodity vessels fully exposed to market exposure. For shipping companies where vessels are employed under long term contracts, especially with bankable or energy companies, the prospects are more favorable due to earnings visibility, and from time to time, such companies have been accessing the bond markets; Seaspan, NYK Line, Navios Maritime Acquisition and Teekay LNG have been issuing bonds on such promises, while Jones Act and logistics companies can depend on the ‘service’ nature of their businesses to secure coupon payments: Hornbeck and Tidewater, Norwegian Cruise Line and Navios South American Logistics are examples of ‘shipping’ companies in niche market with regular runs to the bonds markets. Navios, originally on the strength of long term charters from Chinese end users on the VLCCs acquired from Univan, have been exploring bonds guaranteed by both the cash flows of the time charters and the residual values of the underlying fleet and in October 2013, Navios Maritime Acquisition issued $610 million bonds secured by first priority ship mortgages with B/B3 rating at a 8.125% coupon. The company issued $50 million additionally in March 2014 on identical terms with the October issuing.

For established companies in shipping, the bond markets seem to be more active of recent, with the Rickmers Group issuing a multi-currency $200 million bond in the European markets at competitive terms, and just last week, Rickmers Maritime Trust has issued in Singapore about $80 mil in bonds at 8.45% with 2017 maturity. State-owned shipbuilder China Shipbuilding Industry Corp has expressed their intent to raise about $1.1 billion in corporate bonds, which despite the ‘shaky’ ground of Chinese shipbuilding overall, their investment grade rating likely will assure for competitive pricing. In the US, even Scorpio Tankers with their spectacularly successful equity raisings could not resist the temptation of raising $50 mil in senior unsecured notes at 6.75% with 2020 maturity.

Money! Shiploads of it!

Money! Shiploads of it!

Interestingly, Ridgebury Crude Tankers, a relatively new US-based shipowner sponsored by the private equity fund Riverstone Holdings, issued recently in the Norwegian market $210 million in bonds secured by first priority mortgages on their modern Suezmax fleet. The vessels had approximately $300 million in fair market value so the LTV was close to 70%, and the coupon has been set at 7.625% with three-year maturity. The bonds were acquired entirely by US-based investors and there were heavily oversubscribed; actually, it has been rumored that just one institutional investor expressed interest in acquiring the whole transaction. Given that Ridgebury is relatively new company with their fleet employed in the spot market, traditional shipping banks were not keen to provide traditional debt financing, despite the firm’s substantial sponsor, and confirming the suspicion that ‘advertised’ shipping business by traditional shipping banks at 4% interest rates are really reserved for their few select clients. The bond has been trading well and the yield has moved lower, but traditional shipowners would consider that 7% interest for effectively first preferred mortgages to be exorbitantly high. It may be true in absolute terms, and especially to the terms shipowners got to receive during the boom years of the cycle, but one has to take into consideration that mortgages are amortizing while bondholders are looking to regular coupon payments and the return of the principal at bond maturity, in 2017 in this case, leaving the borrower with additional operating cash flows to be deployed in other ways rather than amortizing the principal borrowed and implicitly passing part of the residual risk to the bondholders.

Given the state of traditional lenders in shipping, the bond market likely will be an active venue for shipowners to access capital. As long as interest rates remain low and demand by investors for yield products in the 5-10% remains strong, at the trade-off of lower credit or collateral, there will be plenty of activity from established shipowners and also for relatively newcomers in their ongoing pursue of alternative financing. The days of 200-base-point spreads with high leverage are gone, and new times required fresh approaches, whether in the form of private equity investors for equity or bond investors for new lending in shipping.

 

© 2013-2014 Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

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One thought on “Shipping Bonds

  1. Pingback: Shipowners see ‘manna from heaven’ in strength of low-yield bond markets - Crash Magazine Online

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