The ‘Asset Appreciation’ Play has yet to Leave the Port

The so-called ‘asset play’ investment strategy, buying low and selling high, is a well-known way of generating outstanding profits in shipping. In an industry as volatile as shipping, where freight rates can expand or shrink by a multiple in a matter of months, asset prices can fluctuate substantially over time.  In the last decade, when the market was moving in one direction, asset playing was almost a guaranteed way of making obscene money in shipping.

Not to be held back by the market crash in 2008, the gospel of buying ‘cheap ships’ was the rock upon which many business plans in shipping were based upon. There were so many ships to be bought cheaply from distressed shipowners, from distressed shipping banks, from bankrupt KG funds in Germany, from shipbuilders that got stuck with contracts in default and ships at their slipways.

The ultimate opportunity for establishing a position for a possible asset play took place in 2016 when the BDI reached its lowest point ever since the inception of the index in the 1980’s. In 2016, there were days that good quality dry bulk ships for sale could not get an offer or an interesting party to send an inspection for a pre-purchase inspection. Ten-year old dry bulk vessels in 2016 were selling at a multiple of their scrap value; and tankers and containerships, although better appreciated, were selling at comparably valuations.

There were not many shipowners in 2016 that were not pounding the table for the buying opportunity of the decade if not of a lifetime; a couple of shipowners called for ‘blood in the streets’ buying opportunities at a few conferences. 2016 indeed was a year that many a shipowner would wish they could put behind.

Thankfully, 2017 is a better year, for the most part for dry bulk vessels and containerships, although tankers have been experiencing a deteriorating market at present. The dry bulk and containership markets have improved compared to 2016, and when compared absolute bottom of 2016 to a relative high in 2017, the BDI was up by a four-fold. So enthusiastically and strongly the dry bulk market moved up, that many shipowners with plans to buy ships were crying that the market took off and they were left behind: too late to buy anymore as the asset play boat had left the dock…

There have been a couple of examples whereby dry bulk vessels that were bought in 2016 and sold in 2017 demonstrably doubled in price and fetched their shipowners the windfall of a few million dollars of a profit within a year. Not bad. Not bad, at all. In the last decade, lots of money was made by just flipping ships. As painful as it’s to remind, modern capesize vessels were selling in 2008 well in excess of $150 million and a shipowner missed on the opportunity selling a resale VLCC at that time at an unheard of $200 mil price because he didn’t want to pay a full commission of 1% to a shipbroker. Modern capesize vessels had been sold last year as low as $32 mil and VLCCs can still be had at $80 million. As sweet as the market is when shooting up, it can be brutally ugly on the way down; especially when the asset play is levered to the hilt with ship mortgages and OPM.

From a purely investment perspective, asset play is mostly a speculative vehicle since it’s an opinion that an asset will appreciate and will be resold in a timely manner for a profit. When an asset play takes with shares, it can be easily levered with a margin account in order to amplify the profits. When asset play takes place with currencies or commodities, the leverage (since these are futures contracts, mostly) is astronomical by a multiplier of 100 or even more. In shipping in the last decade, it was a similar investment as ‘investors’ (whether shipowners or speculators) could obtain 90% leverage on loose covenants to speculate, effectively. The sorry state of the shipping industry presently can partially be explained by the ability to immensely speculate in shipping in the last decade with borrowed money.

As said earlier, shipping is a very volatile (variance between peaks and troughs) and we have no doubt that serious money can be made by just timing the sale and purchase of ships.  As long as an investor or shipowner or speculator is right more times than they are wrong, and make more money when right than lose money when wrong, no objections to such a strategy. Risk management will have to be outstanding, and possibly helped with some good luck for one who is a bit superstitious, but an asset play has been known to make money. But, also losing fleets and fortunes when done improperly or not done at all.

We have seen several shipowners in different degrees of exasperation in the last few months about whether it’s too late to initiate an asset play position in the dry bulk market or how right they were last year when ship prices were at rock bottom. And, for the twisted part, how narrow-minded institutional investors have been by refusing to invest now in shipping, especially the dry bulk market.

There are many “loaded” statements in the last paragraph, but we think that when it comes to asset appreciation and asset play, the boat has really never left the port. Two charts based on data for five-year old vessels from the Baltic Exchange (Karatzas Marine has been proudly been member of, and having access to such data) are provided herebelow.

Shipping Asset Prices since 2010 (selective data). Credit: The Baltic Exchange and Karatzas Marine Advisors & Co.

The first graph shows asset prices since 2010, just after the shipping market started finding its footing from the 2008 collapse. There has been volatility in asset prices since then, and money could have been made if the timing was perfectly correct and prompt. However, there has been no clear trend of asset appreciation, despite the great debating that 2010 was still one of the worst years in shipping ever.

Shipping Asset Prices since 2016 (selective data). Credit: The Baltic Exchange and Karatzas Marine Advisors & Co.

Paying closer attention to the graph with asset price since January 2016, the asset value curves are practically as flat as any highway in the great state of Texas (we lived there for fifteen years!), despite the minimal improvement in prices in 2017. It’s correct that older dry bulk vessels (appr. ten years old) experienced most of the volatility and appreciation in asset values in the last twelve months – and not five-year old vessels, but again, two points are clear: a) when it comes to asset appreciation and playing the market to benefit from increased asset values, the boat – it seems – has never left the port, actually – the lines are flat, more or less; and, b) when it comes to asset playing in shipping, it’s easier said than done in times when there is no clear market trend, and a strategy best left to professionals in the market, especially to those able to be playing with their own money or substantially own equity or their seed funding, which would have to be substantial, in our opinion.

There are many more fine nuisances when it comes to asset playing, and given our expertise and line of business as shipbrokers to banks and institutional investors and independent shipowners, and as vessel appraisers and investors in shipping – on our own right, we have seen first hand what has worked in the past and keeps working over time and business cycles, and what ‘asset play’ projects act as a people’s exhibit that ‘a sucker is born every minute’ when it comes to ‘buy cheap ships now’.

But again, the volatility in shipping and its ‘saltiness’ are what they make this industry so easy to be passionate with. And, yes, the saltiness of the seawater is added bonus of what it makes this industry loveable, too!

There are many good reasons and ways to be invested in shipping at present; the ‘asset play’ boat has not left yet the port, in our humble opinion, though.

Idling harbor tugs hoping for a market whereby ‘asset play’ is an investment strategy! Image credit: Karatzas Images.


This article was first published on July 6th on the Splash 24/7 website, a well-respect shipping news portal with original content under the title “The asset appreciation play has yet to leave the port”. We are grateful for their trust in hosting our article!


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

Credit is due to Shipping Finance

The freight market has been disappointing recently, for dry bulk, tankers and containerships, while asset prices too have been on a softening trend, especially for tankers. As one would expect, traditionally the freight market gets most of the attention in shipping, for signs of strength with the hope that asset prices would be lifted too; however, we are of the opinion that shipping finance may be the key for successfully navigating the shipping markets going forward.

Having traveled extensively recently and having closed several S&P and structured, financial transactions, we can only be more convinced by the day that shipping finance is where the real battlefield lays for shipping nowadays. Access to finance, whether based on own funds or access to financing from third parties, is what sets shipowners apart in terms of survival and growth.

Shipping banks are done with traditional shipping and first preferred ship mortgages. Yes, we have seen a couple of occasions where European banks are still lending at 300 bps spread over Libor, but they are so selective and have such a limited capacity that effectively such lending activity only confirms the fact that shipping banks are not active for most practical purposes. Thus, cheap debt financing is no more.

Shipping credit funds have made lots of noise in the last year, and we estimate that they have deployed close to a billion dollars in the last eighteen months; still, they are too afar from financing the average shipowners, notwithstanding the temptation in this desperate market for debt financing. Credit funds typically look for 8% minimum yield before any fees, equity kickers and other incentives, which limits their applicability to only second hand vessels that are priced at a multiple of the collateral’s scrap value; financing the acquisition of a resale capesize vessel with excess $30 mil acquisition price and paying 8% yield, one may as well try their luck in Las Vegas and try to have a good time while they are at it. Thus, credit funds can have parodical application.

Private equity funds having made ill-timed “bets” in 2011-2014 in shipping (and we consciously use the term “bets”), now they stand licking their wounds and trying to devise ways to cut their losses short. Never mind grandiose plans for IPOs, market consolidation and bringing turn-around expertise and making a commitment to the industry; we have been the busiest we have seen with advisory, market intelligence, valuation, industry expertise services for disputes, arbitration and litigation between shipowners and financial investors. So much for hopes that private equity could feel the funding gap left in the wake of shipping banks leaving the industry.

True, there are still shipowners with deep pockets who have kept buying vessels well into 2017, despite the asset price bounce compared to all time lows in 2016 for the dry bulk market; however, there are few shipowners that indeed still have deep pockets. German owners may feel sick that they lose ships to other markets and especially to the Greek market, and this can be true to an extent, but on the other hand, few shipowners have been buying and can keep buying on a sustainable basis; most shipowners with ‘seed money’ are almost maxed out and looking for third-party money if they were to keep buying.

Shipping finance is really the battleground for modern shipping these days, the industry’s ‘soft underbelly’. While one can keep projecting on tonnage demand growth and developing trade patterns, shipping finance will be the field that will make or break shipowners. Shipping finance is getting to be ever more challenging and there is no realistically any reason that the picture will get brighter in the future. Yes, for few publicly listed shipping companies with critical mass, real business plans and solid corporate governance, capital markets can still be the way to go. But for most of the independent shipowners and several of the penny-stock listed shipping companies, shipping finance would be the critical link in their survival and / or success.

Based on reports from a recent shipping conference in New York – which purposefully we did not attend, we have seen that “M&A” and “consolidation” were the buzzwords of the day. But again, in a market that is as dead in activity as a coffin floating after the sinking of the „Pequod” in Moby Dick, whether for IPOs, etc (even a SPAC sponsored by the blue blood Saverys’ shipping family has failed) or follow-ons, hopes for “M&A” and “consolidation” have to do. And, statements that shipping and commercial banks ought to be considering shipping again, given that the industry is “low volatility”, humored us for reminding us the proposed “Hamburg Formula” for vessel valuations  of almost ten years ago where the shipping industry was suggested to be an industry of low volatility and risk and the suggested cost of capital was a whole of 50 basis points over the T-bill, then.

Solving the shipping finance riddle is really a critical point for most of the shipowners to address going forward, the direction of the freight and asset pricing markets.


This article first appeared on Splash 24/7 on June 23rd, 2017, under the title “Credit is due to Shipping Finance”.


Manhattan, New York City: An ever more critical place for shipping finance. Image credit: Karatzas Images

© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

Looking at Shipping’s Crystal Ball for 2017

We are pleased to reproduce an article that Karatzas Marine Advisors & Co. was invited to contribute for BMTI’s annual review earlier this year. BMTI is an independent research firm which produces daily and bespoke reports in the dry bulk market with special emphasis for smaller tonnage, MPPs, and other specialty assets. Their website can be accessed by clicking here, please pay them a visit! To read our article, please click on the icon herebelow.

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© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.


IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

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A Thanksgiving for Shipping

The shipping industry, whether for dry bulk, tankers, containerships or offshore, has ridden a monumental wave in 2016, a wave as impressive as Kanagawa’s Great Wave – metaphorically speaking. The dry bulk market first experienced the worst ever freight market in recent memory but then tripled in a matter of months. Tankers have seen their rates halved, and limited interest for secondary market acquisitions and relatively weak prices. The containership market saw a government-blessed entity (Hanjin) go belly up, which pretty much by itself sums the state of the market; also, seven-year old panamax containerships these days are heading to the scrapyard. Finally, the offshore market has seen brand-new, top-tier drillships idling while another huge oil discovery in Texas has made offshore drilling an even more precarious proposition.

However, with the spirit of being thankful upon us, for the ‘harvest’ the industry has had this year and the overall results accomplished (mostly intangible results), one has to be hopeful and even thankful for the shipping industry’s prospects.

The drop of the market, especially in the dry bulk, has been the first time that people have gotten scared. Any other in the past, between 2009 to mid 2014, any dip in the market was considered a buying opportunity. Each time that rates would pull down asset prices, shipowners would generally use such an occurrence as an opportunity to buy vessels in the secondary market and also to order more newbuildings. The dismal state of the industry at present is partially the result of such an attitude. In 2016, for the first time, at least in our experience, one would see shipowners and operators being scared. Dry bulk vessels burning cash day in and day out for more than a year has caused cash reserves to dwindle. On top of it, many owners had capital investment obligations due with their newbuildings. And, of course, no bank was in a mood to entertain new clients or lend to projects that didn’t perfectly fit their ‘box’.  We are of the opinion that being scared (and possibly throwing in the proverbial towel) is medicine that the market had to taste some time ago in order for cooler decision-making to prevail. Still, now that the market has been improving, we have seen many generous souls (with mostly shallow pockets) buying vessels with all they can put together; in the stock market, this is called a ‘sucker’s rally’.

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An idling market. Image credit: Karatzas Images

The continuously bad market has been forcing many shipping banks to get more active with their portfolios; some have been arresting vessels, some have been forcing their clients to consolidate, a lot more banks have been selling shipping loans to institutional investors and even more banks have stopped lending to shipping altogether. We think that we all have to be thankful for such activity; maybe not a perfect solution, but at least it curtails the extent of the ‘zombie-ness’ of the market, where ships and companies were being kept afloat by life support; at least now, some of the weaker hands start washing out. Private equity funds buying shipping loans will also be expected to be active and keep the pace of ‘natural selection’ on course. However, we all have to be thankful to shipping banks for stopping lending (this is the general truth, in spite of some banks claiming otherwise) as this has curtailed excessive enthusiasm in the market, and allow people to have a chance to let sink what’s really the state of the market – shipping banks are not and will not be what they used to be. Lack of debt financing has also brought up of the cost of financing for shipping, which we think is a healthy development; shipowners had gotten accustomed for too long to cheap and easy money at terms which were not commensurate with the industry’s risk profile.  We now see that shipowners have been adjusting their expectations that debt financing in shipping cannot be had for less than 6-9% for the majority of the shipowners, much higher than other lower tier owners and projects. Thus, we all have to be thankful for the shipping banks forcing a proper pricing of the market, which is a sign of a market sailing toward the right direction. (Incidentally, shipbrokers and other service providers are clearly not thrilled with the state of the financial markets as this has cut down on volume of transactions and commissions, but again, proper pricing and service have to be re-based anew for a functioning market.)

Investments in shipping by institutional investors have set a bad precedent, and at least on paper, losses from PE and public investments in the shipping industry of the few last years should be topping $15 billion, again on paper. Some funds have lost big money, and they have been written about in the press. However, there have been many more smaller funds with relatively short track records and marginal Assets Under Management (AUM), often in the $1-2 billion range (yes, $1 billion is a small amount of money in this world); for such funds, any losses in shipping, even small ones, can be ‘life threatening’. All in all, PEs have not been doing well as a low interest rate environment and hot stock markets have forced them to compete for same strategies and investments in a crowded market, thus allowing for paltry returns – often much lower than recent returns in liquid stock markets. However, the point that we all have to be thankful is that there is little appetite for newbuildings by institutional investors, which we think it’s a very crucial point. There is plenty of spare shipbuilding capacity, and in general good appetite by shipowners to order more vessels (but again, when owners didn’t like more vessels)? However, with institutional investors shying away from newbuildings, shipping banks shying away from shipping altogether, and export credit offered prudently to serious players, we find this point )of no new money coming to the industry to expand supply) seriously worthy of being thankful about.

Despite the decent state of shipping at present, comparatively speaking to earlier in the year, we believe that there is still a long way until the light at the end of the tunnel. Certain factors have been developing favorably for the market, and we shortlisted three of them above to be thankful about; however, in many more respects, the market is in bad shape. There will be many more bankruptcies and defaults – whether for companies or projects, consolidations and merges, companies leaving the industry, professions and functions forced to change business models. Some people will be thankful but for many, it may be a thankless industry in the next few years in many ways.

But it will be a better industry serving the supply chain in a more thorough and efficient way based on economics and technology instead of gut feeling and speculation.

Probably we ought to be thankful for that, too.


The article was originally published on Splash 24/7, timely for the US Thanksgiving celebration.


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

When Ship Scrapping is an Industry’s Best Hope of a Favorable Wind

Holy Scrap!

When one wants to express strong astonishment, ‘Holy mackerel!’ is a nautical expression that does the trick well. We heard this expression (in British English, that is) many many years ago by a Brit who had beached on the Louisiana coastline in the US Gulf a few decades earlier.

There are a couple of theories for the origin of the expression, but the most plausible holds that since mackerel is a fish that goes bad very fast, fishermen in old England were given extraordinary permission by the church to sell their mackerel catch on Sundays. ‘Guests and fish stink in three days’, the wise Benjamin Franklin astutely once observed, but mackerel is worse than that. And if the church is willing to grant permission to do business on the Lord’s day, there has to be a sacred excuse, and thus the expression.

The expression came to mind while reading a market commentary on the fact that the just passed IMO regulation demanding 0.5% sulphur content in bunker fuel by 2020 will lead to a scrapping wave strong enough to bring a much wanted tonnage balance in the shipping market. In a lousy shipping market, this was a ‘Holy mackerel!’ moment, the way we saw it.

Or, ‘Holy scrap!’ to be more precise; nothing could be more sacrosanct than scrapping in the present market!

The IMO regulation has the potential to be a costly catalyst for the shipping industry, by as much as $40 billion by some estimates. For an industry in distress, additional costs and mandatory investments are the last news one wants to hear about. Complying with the new resolution, a shipowner would have to retrofit a vessel to burn high quality marine diesel fuel low in sulphur, install scrubbers to arrest pollutants and lower emissions or, thirdly, convert the vessel to be powered by natural gas or another low emissions fuel; all pricey solutions that will cost a couple of million of investment per vessel, a tough proposition for a shipowner in a weak market.

Scrapping however is a long shot as an alternative course of action.

Deciding to sell a vessel for scrap is one of the hardest decisions a shipowner has to make, and literally, this is the last decision they will make after exhausting every possible scenario. Selling a vessel for scrap is a terminal and irrevocable decision and quite often entails taking losses in today’s market. Even if there is a ray of hope and an alternative, the shipowner will decide to hold off selling the vessel for scrap. Old age, obsolete design, tonnage oversupply, new regulations, etc are not always definite reasons for scrapping.

With OPA 90, following the grounding of the infamous tanker ‘Exxon Valdez’, single hull tankers were given an expiration date for January 1st, 2015 to be totally removed from the trade. A long lead-time indeed for shipowners to plan for that resolution. What effectively happened was that although there were no single-hulled tanker newbuilding orders since the late 90’s and publicly listed and politically correct shipowners divested off of their single hull tonnage soon thereafter, almost 14% of the world’s tanker fleet was still single-hulled in January 2010, twenty whole years after the new regulation came into place and five years before the final ‘drop dead’ date. Regulations or not, shipowners, worldwide and collectively, effectively kept ‘obsolete’ ships in the market much longer than anybody would had anticipated.

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Scrapping activity is an inverse relationship of the freight market. Credit: Karatzas Marine Advisors & Co.

The first decade of our century experienced once-in-a-lifetime freight market on the back of China’s expansive growth and easy credit by lenders, which partially explains how single-hulled tankers were kept afloat for so long. Actually, all being equal, the strength of the freight market is a best predictor of the level of scrapping and tonnage withdrawals from the shipping market. As long as freight rates are cash flow positive, ships are not getting scrapped; when the freight market is cash flow negative and prospects for a recovery are poor, then demolition levels pick up. The following graph of the Baltic Dry Index (BDI), the proxy for the dry bulk shipping market, clearly shows the inverse relationship between the index and scrapping activity. There seem to be a two-three month lag, but each time the BDI drastically moves, the scrap yards in Alang, Gadani and Chittagong get to hear about it, one way or another. Earlier in 2016, when the BDI was flirting with all time lows, demolition activity had spiked through the roof, approaching 10% of the world fleet. A few months later with the freight market barely above break even for the dry bulk market, scrapping has more than halved, to the disappointment of analysts and investors who were drawing straight line annual projections based on the activity of the first few months of the year. Scrapping is high still today, to be sure, and comes from many sectors, including containerships, but the moral of the story is that scrapping does not seem to be the convenient and sacrosanct solution that always seem to be.

There is a third case of disappointment in scrapping: after the shipping market collapsed in 2008, still cash rich shipowners and institutional investors were aiming at buying dirty cheap ships from shipping banks. When the banks held back from selling at any price, at least then, many a shipowner and especially an institutional investor jumped on the wagon of ‘eco-ships’ being fuel efficient that would make ships held by the banks obsolete. And, a massive wave of newbuilding orders was placed. Fast forward five years later, and we all now know that the fresh deliveries of better eco-ships failed miserably to force older tonnage to the scrap heap. Brand new ships, and modern ships, and older ship, and old ships have kept floating and trading and depressing the freight market for all. The wave of demolitions triggered by the eco-design deliveries crowding out older tonnage, shown in Power-point presentations to Wall Street, has failed to materialize and save the market. Holy scrap was not!

We do not want to discount the importance of scrapping to achieving a balanced market. Actually, at this stage of the cycle, scrapping seems one of the most promising drivers for the market; shipping is so bad, indeed. And the new regulations by the IMO for lower emissions will push some shipowners to the edge, and some ships to the beach. However, likely, in our opinion, scrapping will be a slow remedy that will be more drastic with the level of the pain of the market, that is the state of the BDI and the rest of the freight market.

As they say, pain is beauty!

Holy scrap!

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Never easy to say ‘Good bye’ in shipping. Image credit: Karatzas Images


This article was originally was posted on Splash 24/7 under the title ‘Holy Scrap’ on November 1st, 2016.


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

Hanjin’s History Lessons

‘Time is the longest distance between two places’ concludes the Tennessee Williams’ character at the end of the play The Glass Menagerie. For a large number of creditors, vendors, tonnage providers, and predominantly shippers – with $14 billion worth of merchandise packed in containers onboard Hanjin ships, this philological expression was a very hard lesson to put to practice when the company filed for receivership at the end of August.  At present, and with everything going well, the best estimate is that Hanjin’s vessels will be unloaded by the end of October. A very long time indeed for shipping containers ‘lost’ between ports at today’s age.

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In better days… Image credit: Karatzas Images

The developments with Hanjin are still work-in-progress that may take several months, if not years, to settle permanently. For now, it’s a logistical nightmare bordering a legal saga that, in turn, stands on the periphery of the self-feeding financial crisis. Each one of these three parallel worlds will have to run their own course and trajectory, but again, not too far apart from each other. Definitely many lessons beg be learned once all is said and done, and the containers get delivered and the bills get paid, eventually. The fact that Hanjin Shipping has been the largest containership liner company bankruptcy ever (the second biggest was that of the United States Lines in 1986, when the boxship world was still in its infancy) will provide plenty of lessons on where the ‘stress points’ are in the system and the supply chain, and would provide some insight on whether the containership liner industry is a ‘systemic’ industry to the world’s trade.  There have been numerous financial restructurings and bankruptcies in shipping since the crisis ensued in 2008, but almost all of them were in the dry bulk and tanker sectors, where the logistical head-scratchers were much easier to address: usually there is one charterer or cargo owner per vessel per voyage in the dry bulk and tanker markets and not the plethora of cargoes and shippers and vendors with their boxes onboard a containership.

While it will take time to know the fine detail of the numerous parts interacting together in the liner business, a perfunctory view of the case, based on info available so far, indicates that all the factors one would expect to see in the cause of a default in the shipping industry were present in the Hanjin case.

The company, going after market and trying to keep up with the main players in the market, had effectively became a house of cards in terms of over-leverage, financially and operationally. Almost one hundred vessels (out of the 140 vessels under management) were chartered in, effectively with off-balance sheet, non-recourse financing. When the banks and lenders stop lending when one’s balance sheet gets stretched, an ambitious shipowner can just turn to the charter market and can pile up abundantly on tonnage based on their ‘signature’ and their (unsecured) promise to pay. No more than that is needed. Just a ‘sterling’ name and a ‘first class client’, as the saying goes, can be of enough assurance for charter payments and place a tall house a cards in short order. This was once a big deal even back then in 2008, for those who recall.

And, there were plenty of companies and shipowners who had been just happy to offer their tonnage on long term charters to Hanjin, just to show to their own shareholders and lenders that they had cash flow visibility and they were not speculators. Nice long charters with juicy cash-flows that paid until they stopped, that is. It may be worth asking whether such business practice was the result of poor risk management or just a case when no-one really questions whether the emperor may be naked. ‘If so many other tonnage providers had found Hanjin to be a quality charterer, who am I to stop chartering to them vessels’, one almost may be able to hear in a boardroom discussion.

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When days were great… Image credit: Karatzas Images

And, Hanjin was not just any charterer. They had real substance since they were a liner company and had access to the end user. If things turned bad for the market, as they did indeed, Hanjin would have cargoes to move and keep the ships busy and therefore keep making the lease and charter-hire payments. They had access to their own terminals (at least partially), and they had preferential access to S. Korea’s promising and export-oriented economy, and thus, they were supposed to have a backstop if things were to get ugly. As we learn now, a bad market is a bad market and it burns cash for stand-alone owners but also burns cash for strategic owners, like Hanjin, too. Notions of an end-user charterer are great, but again, a bad market can pinch sharply enough to make the pain felt on the bone of an end-user.

And, Hanjin was part of a substantial industrial conglomerate with strategic access to the ‘system’, that is the government and the state banks; it had to, as being a chaebol company, they had the implicit ‘put option’ of the government itself. And beautifully this was played until when the cash burn topped US$ 2 million per diem, and all the constituents had to look for alternative solutions. You can support a company-in-need for so long, but again, all love in this world has to have some limits.  And with Hyundai Merchant Marine (HMM), the local competitor, reaching the restructuring altar in the summer first, there were one too many brides afterwards. There are still many more containership and liner companies that could be considered to have a quasi-government guarantee worldwide. Caveat emptor.

As much as we would like to believe that the Hanjin case will be an example to be held, one has to be doubtful. Time and again, defaults happen in shipping with almost metronomic frequency, and all the times, the same old factors drive those shipping companies to the ground, or the bottom of the sea for that matter: aggressiveness, over-leverage, poor risk management, over-reliance on fundamental assumptions that turn out to be fundamentally wrong, and wishful thinking.

But again, if it were not for all these surprises, shipping would be just any other boring industry. One-dimensional with ships floating beautifully over the ocean. Apparently, there is the dimension of time, at least until one gets their container delivered.


The article above was first published on Splash 247 under the heading ‘Hanjin’s Longest Voyage Yet’ on October 17, 2016.


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

Moral Hazard and Hanjin Shipping

Not a week has passed since we posted an article on the Maritime Executive’s website about moral hazard in shipping, and the shipping world got a big-proportions, real-life case study of the risks in the industry. We argued that when shipowners are over their heads in debt and with little promise of ever recovering any equity, there is precious little they care about financing, operations, trade, safety and even the environment.

Hanjin Shipping, based in South Korea and world’s seventh biggest containership company, filed for protection in S. Korean courts in late August, and subsequently started filing for protection in several jurisdictions worldwide, including in the United States federal bankruptcy court (filing for Chapter 15 restructuring in Newark, NJ). As of the end of second quarter this year in June, the company had outstanding obligations close to US$ 5.5 billion, approximately US$ 900 million of which due by the end of 2017. There were approximately US$ 700 million in equity on the balance sheet. Hanjin stands as the manager of appr. 142 vessels, 98 of which are containerships and 44 are tankers and bulkers. Only one-fourth of Hanjin’s fleet is self-owned, 38 of them owned and the rest chartered in from leasing companies and other financially-minded shipowners. The ownership mix of the tonnage indicates more of a light-asset, trading company rather an asset-heavy, ship-owning balance sheet. The current value of the owned fleet stands at appr. US$ 1.7 billion.

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Shipping crossing a bridge… Image Credit: Karatzas Images

Many details are still too opaque and covered by bilateral non-disclosure agreements, but where several of the counterparties have been publicly listed companies, one can draw certain conclusions: Hanjin had chartered in two 2010-built capsize vessels from publicly listed Navios Maritime Partners (ticker: NNA) MV ‘Navios Luz’ and MV ‘Navios Buena Ventura’ at a daily rate of US$ 29,356 pd each; the average spot capesize market was barely $6,000 pd during the last year, and presuming that Hanjin was trading the vessels on the spot market, they were losing $23,000 every single day for the last year ; of each of the two vessels. That is $16 mil down the drain for the two vessels in just the last year alone; each of the vessels had more than four years of employment remaining with the shipowner, and presuming that the spot capesize market would remain at present levels, Hanjin would had to suffer another $90 mil in losses for just these two vessels. Eight containerships chartered in from Danaos (ticker: DAC) had charter payment obligations of appr. $565 million. Similarly, three neo-panamax containerships from Seaspan (ticker: SSW) had outstanding charter obligations of close to US$ 370 million. These charter obligations add up to close to US$ 900 million, and under present market conditions, reasonable estimates would be for losses of more than US$ 500 million. And these are the calculations based on publicly available information for only thirteen of the 100+ vessels chartered-in, with only three counterparties. There are un-accounted obligations for more than eighty vessels that have been chartered in from other owners.

$23,000 losses every single day in the last year for each of the two capes chartered from Navios. Talk about destruction of value!

What options such a ‘shipowner’ like Hanjin (effectively a structured house of cards) does have under the circumstances? As one would suspect, very few. There is little in matter of equity, there is little in matter of collateral, there is lots of debt, and mostly, most of the debt is in relatively unsecured position since it’s in the form of charter obligations for the vessels that have been contracted on charter arrangements.

Playing the devil’ advocate and ask surreal but economically oriented questions: How much vested interest the shipowner has in the assets and the business? Precious little, at this stage. What are the odds that they will recover any equity? Probably better than hitting the jackpot in a national lottery, which we all know is not a fair proposition. What would any rational economic being would do? Briefly, either ask for the mercy of their creditors, or, having little to lose, just stop paying the creditors and pass the buck to the other side. What we called moral hazard in the previous posting.

Hanjin had been rumored (along with their co-patriot Hyundai Merchant Marine (HMM)) to be facing financial problems and was an accident waiting to happen. HMM, being slicker, and faster, and part of a big chaebol (traditional corporate conglomerate structure in S. Korea, strongly affiliated with family management style and running businesses deemed strategically important to the State, in exchange of the State’s preferential treatment), managed in August to find their way out of their financial ‘pickle’. When Hanjin tried to secure the consent and more financing from their lenders (mostly Korean banks and the state-owned Korean Development Bank), there was little empathy. This would make perfect sense, as their lenders were in relatively preferred senior position, and any new financing would be considered either ‘throwing good money after bad money’ or diluting their position and getting lower on the seniority scale of claimants. It would make economic sense to refuse any new financing and let the un-secured creditors (that is the shipowners of the hundred vessels on charter to Hanjin, like Navios, Diana, Seaspan) accept a less demanding solution. Again, Hanjin and their prime financiers decided to drop the moral hazard bomb to the parties with a lower legal claim, the shipowners of the vessels.

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The good times left behind… Image Credit: Karatzas Images

Hanjin Shipping is the seventh containership company in the world but with only appr. 3% market, thus, belonging in the lower tier of containership companies as compared to behemoths like Moeller Maersk, Cosco, MSC and CMA CGM. A default by Hanjin cannot be expected to have a major domino effect on the overall shipping or containership world markets. The majority of Hanjin’s lenders were Korean banks, including the Korean Development Bank (KDB), and the Korean banking system (and the Korean taxpayer, if so required) can absorb the losses without posing a systemic risk to the Korean economy, at least at this stage. Hanjin had been a major carrier for LG electronics, but again, even Hanjin’s demise could not be detrimental to LG and the Korean electronics and manufacturing industries; not to mention, since HMM’s successful restructuring in the summer, now there has been an alternative, an alternative based in Korea itself (subsequent reports state the LG has already been shifting their shipment contracts to HMM). Thus, once the situation was ‘ring fenced’ and a fall-out was determined to be contained, Hanjin and its main creditors stopped paying to the lower standing creditors (other shipowners with charter-in tonnage). An example of moral hazard in all its glory.

Hanjin has filed for restructuring (and not for liquidation) expecting to find a way to save the company as a going concern over the long term. However, owners of vessels on charter to Hanjin, companies like Danaos, Seaspan, Navios and many other smaller, private owners, stand to lose the most. In an oversupplied market of low freight rates, it will be difficult to withdraw their vessels from Hanjin and seek equally profitable charter rates elsewhere in the present market; likely, they will have to accept lower and extended rates that Hanjin will offer them, and possibly some equity upside if and when the company recovers. Otherwise, the shipowners will have to seek legal remedies which are costly and time consuming, and always risky on whether there will be a chance to ever collect. After all, the events of last week have shown that Hanjin is not a systemically important company to the Korean economy, there is little the Korean constituents that can lose, there is little left for Hanjin’s management and shareholders to lose. Heads I win, tail you lose.

A case of moral hazard of the highest caliber.


A better edited version of this article was originally published on The Maritime Executive website on September 6th, 2016 under the title ‘Moral Hazard Case Study: Hanjin Shipping’.  This article builds on our essay on the dangers of the moral hazard in a weak freight market posted in early September in this post, when market participants were left with few options and little to lose, so much so that they care little for the outcome or the interests other constituents of the shipping industry.


© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.