Errant Thoughts on the State of the Sale & Purchase (S&P) Market

While a lot of attention has been given by the mainstream business press to the all-time lows set by the Baltic Dry Index (BDI) recently, the collateral damage on shipping asset prices has only been perfunctorily mentioned. Freight rates can fluctuate widely and driven by short term considerations, while asset prices take a bit longer to catch up with the newly expected revenue stream.

Freight rates for dry bulk, containerships and offshore assets have been anemic for some time now, meaningfully below cash operating levels at present. Although the state of the market has deteriorated since last year, really it was coming off after the rough markets of 2010-2012, which were after the monumental crash in 2008. The only way for such ships to keep operating in the spot market is by having the shipowners accessing cash reserves and lines of credit, if and when available. Tankers have been doing better this year, the only bright spot, but again, they had a continuously terrible market ever since the market crash in 2008 until the turn of this year.

Cash has become a matter of survival for many shipowners in shipping. Earlier attempts to have JVs with private equity investors have not played out profitably, and access to funding from institutional investors come with a high cost. All along, the traditional funding source of the industry, shipping banks, have been ever more biased in favor of clients with balance sheets, and not just ships in need of financing.

As one would expect, prices for ships have been submerging fast, typically 10-50% since the beginning of 2015, depending on asset class and vintage of vessels. Even for the tanker market that has seen a doubling of freight rates since last year, tanker asset prices have disappointed miserably all those hoping for a quick asset play bet. The weak freight market in the dry bulk has overshadowed many prospects, either directly or by casting a long shadow over the while shipping industry, with buyers staying away from new opportunities.

Since vessels in most asset classes operate below cash operating break-even levels, any new acquisition of ships would entail an operating loss for the foreseeable future by the hopeful buyer. It’s a hard sell for many buyers, including institutional investors who typically buy with the prospect of instant earnings in mind, to take the additional risk of a lousy market. A cash-flow positive market not only allows for instant gratification and satisfaction, but it’s easier to justify and rationalize, easier to structure and finance, and frankly, sexier to talk about at the yacht club. There is always the risk that a positive cash flow market can become a negative cash flow market, such as life, but a negative cash flow market takes much more conviction and effort, and possibly time, to turn around. Thus, a negative market it’s easier to keep drifting than finding support to turn around.

Prisco Elena_Tanker_Statue of LIberty_WM

Lady Liberty and the US capital markets still have faith in the shipping industry…sort of… Image Credit: Karatzas Photographie Maritime

It’s not that weak cash flows alone take the winds off the buyers’ sails. As existing shipowners have been bleeding cash for some time now, one – especially a perspicacious buyer – has to wonder, what is their staying power. Losing money on operating basis daily will eventually force owners to sell and stop bleeding money, implying a lower asset market and likely a better buying opportunity tomorrow. Thus, buyers can afford to take their time before they shop; the time they wait for is the time that runs at the expense of the shipowners who carry the market to recovery. Case in point, one can see Scorpio Bulkers selling resale capes since late last year: they started selling at $45 mil and their recent sales have been at $38 mil. How would you like to be the buyer of the $45 million cape a year ago, having burn more than one million in operating losses and several million in interest expense, and now seeing you neighbor picking up a vessel at $7 mil less sans the operating aggravation. Probably, one of the few cases that procrastination has tangibly positive results.

Besides the weak freight market, shipping banks and other financiers have been highly differential to shipping these days. Shipping mortgages, even when they are available, come at a cost of proportionally high advance ratios, spreads over Libor, and much stricter covenants. Quite often, cost if financing is in the high single digits for straightforward mortgages. It’s hard for an opportunistic buyer to get excited about the market when financing is neither plentiful nor inexpensive, and when interest rates are just about to get on an ascending trend.

Rudder, Propeller, Red Hull_reflection LR

Unemployed and unloved… Image Credit: Karatzas Photographie Maritime

It’s an unbalanced market for now, with more ships for sale than to purchase. There are many actively marketed ships for sale, including newbuilding resales from China, but there are many more vessels for sale just for the asking. These are vessels in the dry bulk, containership, tanker and offshore markets. They are ships that could be developed for sale from operating shipowners, financial shipowners, shipowners in distress, banks selling shipping loans to sell the vessels, banks that ‘have the ear’ of the shipowner and can ‘motivate’ a ship sale. There are blocs of ships for sale and even shipping companies, with or sans management. It’s a buyers’ market.

And, as the market keeps soft for a prolong time, even more vessels can be shaken loose which could further pull asset prices lower.

“It’s tough to make predictions, especially about the future,” it was once said. World economies have been barely growing which likely would make for an un-inspiring freight market for a while. On the other hand, political and fiscal question marks keep popping worldwide which always spice up the shipping markets. Would such expectations carry the day and encourage buyers to step up their purchases?

It’s interesting to observe that although the few buyers – still active in the market – have been ever more choosy about the vessels they are willing to buy, asset prices have dropped universally across the market. Buyers demand good quality tonnage, and also inexpensive pricing. And, why not? After all, it’s a buyers’ market.

Given the state of the market at present and the overall negativity and pessimism, low asset pricing begs the question on whether there is a buying opportunity at all. Yes, the prospects of a recovery seem anemic for now, but again, waiting for the perfect time to buy a ship is an art mastered by few asset players and traders. One may not be prepared to bet the farm, but when ten-year-old, quality vessels sell at a small multiple of their scrap values, it’s hard not to get tempted. With some extra cash in hand to weather a rough market for a year to come and cover operating expenses, it seems that selectively asset prices at present offer a fairly favorable asymmetric bet: bit rewards if one is right but small downside risk if the investment is poorly timed.

After all, it’s better to buy cheap ships in weak markets and have the cash to see the market recover than to buy expensive ships in a market pricing great prospects; much to earn in the case of the former, much to lose in the case of the latter.


The article hereadove was originally published under the title ‘The State of the Sale & Purchase Market’ on the Global Maritime Hub, Getaway to the Global Shipping Industry, website on December 8th, 2015. Please feel free to visit them for insightful aggregation of articles on shipping and other useful information!


 

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