Private Equity’s Black Ship

Since the beginning of the shipping crisis, it seems fewer topics have drawn more attention than private equity (PE) funds interested to invest in shipping. When capital markets and shipping banks were frozen while freight rates and shipping asset prices were in a precipitous fall, lots of hope was placed into the institutional investors as both equity providers to provide financing for new projects and also white knights for restructuring legacy deals.

Fast forward a few years later, and the topic of private equity funds still draws lots of attention, mostly heated attention, for the deals they have done and mostly the deals they have not done. There is lots of blame that PE funds are behind the recent wave of newbuildings and therefore for the continuing market malaise and fairly anemic prospects of a market recovery. Also, there is subdued optimism that there will be better days to get PE funds still interested in shipping, disappointment that the best days of PE investing in shipping are behind us, and outright happiness that PE funds got their investments wrong, and that they will be the next wave of players in shipping who will be realizing big losses (after the shipowners buying ships in 2007 and banks lending 120% of peak phase of cycle).

As a quick disclaimer, for those hoping that private equity (and by extension institutional investors, in general) were interested in investing in shipping to solve other people’s problems for the good of their souls or the general good of mankind, probably they were daydreaming. Typically, PE funds have a five to seven year horizon and high return hurdles and they are industry agnostic or indifferent, thus shipping was an attractive proposition to them given the state of the market. Funds are money machines, at least that’s the business plan, and they specialize at solving problems in industries or with companies, but at a very hefty cost. Thus, consideration should be given whether PE has so far approached shipping in a productive way for the many stakeholders involved.

M:Y RADIANT 7For the widely-circulated blame that PE funds are behind a tremendous part of the tremendous orderbook outstanding in this still trough phase of the cycle, it’s true that PEs have ordered many vessels directly (i.e. Wilbur Ross and Diamond S.’ suezmax tankers early in the crisis and recently more orders in the same sector in a different JV arrangement), in JV with certain shipowners (mostly private, bi-lateral deals), and many more were ordered by hedge funds investing in publicly traded companies (i.e. Scorpio Tankers and Scorpio Bulk are the blaring examples to name in this category). On the other hand, one has to mention that the tremendous outstanding orderbook has also been the handiwork of many independent shipowners, small and large, looking to exploit lower prices for newbuildings and mainly efficiencies of new designs. And, the strangest thing of all is that many orders have been placed in second- and third-tier shipbuilders in China, on speculation, and no financing in place beyond the downpayment requirement in the progress payment process. Thus, putting the blame for the newbuilding orderbook solely at the PEs door may be a bit presumptuous, and rather more introspection is required on why shipowners tend to be their worst enemies by flooding the market with more ships at bad times. It has been said by a pre-eminent shipping executive (of a company with a tremendous orderbook) during a shipping conference that ‘shipping is not a team sport’, but still there has to be a better explanation on this.

Since the beginning of the shipping crisis in 2008, it is estimated that more than $30 billion has been invested in shipping by institutional investors (although all these type of investors are summarily classified under ‘PE’ in most discussions today). Oaktree, Apollo and KKR have been the largest investors of all in shipping, with many more funds having done deals, and many many many more looking into doing deals in shipping. Although the Oakree-s of the world get most of the attention, it has to be noted that many of the PEs interested in having invested in shipping are small or very small and most of the transactions have remained well at the below $50 million equity investment mark. In most of the cases, the PE is providing almost all of the equity but takes the driver’s seat, with often the ‘shipping partner’ relegated to an employee or a very junior partner in the arrangement (although often the ‘shipping partners’ have been exaggerating their involvement, equity participation, sharing of upside potential, and compensation). Truth of the matter is that for many of these partnerships, it has taken a lot of time and effort (and legal fees, due diligence, etc) to agree on the partnership agreement and usually the ‘shipping partners’ had to give up the most to get the partnership agreed to. We suspect, in a sideways moving market, many of these ‘shipping partners’ have been experiencing ‘buyers’ remorse’, and, to a certain extent, are percolating the market with their disappointment inviting PEs to their companies, etc

While most of the investments by PE in shipping so far have been concentrated on equity investments, there seems to be an ever-growing trend of funds looking to provide credit to shipping, and in our practice with Karatzas Marine Advisors, we see an ever-growing trend of shipowners looking harder and harder to obtain debt financing, sometimes senior, but often junior, second lien, mezzanine, work capital, etc Probably it makes more sense to invest in ‘credit’ rather than ‘equity’ in a weak market at present with rather anemic prospects looking forward in shipping, but many of these PEs funds have built their models around industries in distress with little customization for the shipping industry and flexibility on structures or adjusting returns to fit the risk. Most of the funds are looking for at least 8% return for their LPs (Limited Partners), and thus for all projects they see, irrespective of risk, they are sending out term-sheets with at least such threshold or meaningfully higher for ‘deals with hair’. Ten-year old Japanese-built aframax tanker with $23 mil FMV and $10 mil loan (less than 50% LTV and loan just $2 mil in excess scrap value) and employed in major, well-reputed pool, seeking senior loan (first preferred ship mortgage) gets L+850 bps offer (and hefty origination fees), despite the low riskiness of the project. Four handysize bulkers built at 1998 seeking financing, they are offered advance 70% of current scrap pricing at 9%. 2004-built MR1 tanker freshly drydocked seeking 70% leverage while assigning solid two-year charter is offered 11% interest. These are typical projects that there would be no issue obtaining ‘normal’ financing in an average market; however, PEs looking to provide credit in shipping are looking for very high single digit returns, irrespective of risk. Often working on structures like these, shipowners / borrowers / vessel managers come to the conclusion that ‘PEs don’t get shipping’, where ‘one size fits all’ model is applied.

Shipping has not been recovering as many people’s ‘gut feeling’ said or ‘model’ projected. There still is pain in the market, and the prospects looking forward are not as rosy. It’s only natural for people to complain, to allocate blame, to feel envy for the parties having done deals or having second thoughts on deals already done. Private equity funds have been center stage for a long time, but often their website and brochure and their claim to flexibility on structures and access to the different sources of capital seems to be an illusion or in disconnect with reality. Whether for equity or credit, whether for low risk or higher risk projects, whether for new projects or legacy projects, whether dealing with shipping banks or shipowners, whether for tankers, dry bulk or containerships, some counterparties think that all funds have the same term sheet to send around.

Some think that such term-sheet may be for a ‘black sheep’ or for a ‘black ship’.

Some, even they may agree on that.

Ship of Fools - An Old Story!

Ship of Fools – An Old Story!


© 2013-2014 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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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.

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.

A Porthole of an Exit Window for Shipping Investments?

Momentum and, to a certain extent, freight rates and shipping asset prices have improved meaningfully since last year; while this time last year most vessels – including large vessels such as capesize bulkers and supertankers – were earning barely cash break-even freight, there have been a few windows of opportunity here and there since then.

After a rather prolonged weakness in the markets – that actually has tested some market players like shipowners, bankers, brokers, etc. – it was great just to see the freight market hitting $40,000 pd on occasion and the BDI topping the psychological level of 2,000 points at some point, actually tripling in less than a year. To the extent that the second-hand market for vessels is reliable, all shipping asset classes – across all vintages – have improved by 10%-40% in the last year, with older capesize vessels showing the strongest performance (admittedly, some of the ‘market’ sales of last year were textbook cases of ‘motivated’ selling.)

So much so momentum in shipping has improved since last year that the words Initial Public Offering (IPO) have come back to our vocabulary in shipping. While still ‘distress’, ‘restructuring’ and ‘bankruptcy’ are still part of daily life in shipping, it’s encouraging seeing that smaller shipping companies – even ones sponsored by smaller independent shipowners and ‘wet behind the ears’ – are lining up for the public equity markets; 2013 and the years before were ‘decent’ in terms of shipping IPOs offerings – given the circumstances, but absolutely all IPOs were focused on LPG, LNG, offshore, energy (rather than mainstream shipping) or had heavy-hitters as sponsors (Ardmore Shipping, a typical case) or both advantages (Navigator Gas with WL Ross as the sponsor in the LPG segment another typical example.) More than ten companies at present have filed or are actively exploring a public offering, at least half of them are smaller names, and one may be tempted to commend, with thin resumes or credentials.

Some of the IPO hopefuls are sponsored by big private equity (PE) funds that have entered the cycle relatively early and approaching the fund’s typical five-year investment horizon, and thus in need of exploring liquidity and gradual exit from their shipping investments; whether the PEs are reaching their investment horizons or not is irrelevant in a respect, as in any event, they have been eyeing for the exit and the public equity markets from the time of committing money in shipping. The smaller PE funds that have invested in shipping on a smaller scale or on a project basis – and thus not ‘IPO-able, have also been discreetly ‘shopping’ the market to sell their vessels in the second-hand market at today’s pricing or ideally at a small premium, and thus exit for a quick and decent return without having to stay around for long to see how the shipping markets eventually will play out. In short, sooner or later, smaller and larger private institutional investors will be looking for the exit, which is great; it’s called capitalism and an efficient market.

MV GENCO AUGUSTUS - 180,000 DWT Capesize Bulker built at Koyo Dock K.K. in 2007

MV GENCO AUGUSTUS – 180,000 DWT Capesize Dry Bulk vessel built at Koyo Dock K.K. in 2007

This past week, Genco Shipping & Trading Ltd announced that they will be filing for Chapter 11 bankruptcy, a pre-packaged restructuring arrangement that hopefully will save the company.

Notwithstanding the irony that bankruptcies and IPOs can so naturally co-exist in shipping, the fact that caught our attention is that in Genco’s financial disclosures, the company is expecting a 30% freight revenue drop between 2015 and 2016. There is no fleet break-down or additional clarification, but it seems that projections are based on the company’s fleet remaining constant (about 53 vessels, of which nine capes, nine panamax, seventeen supramax, six handymax and thirteen handysize vessels); as such, based on constant fleet, voyage revenue is projected to drop from $302 million in 2015 to about $215 million in 2016; parenthetically, on the other hand, operating expenses are projected to keep growing at 2% annually. The primary reason for the drop in the company’s freight revenue projections between 2015 and 2016 is that freight rate for dry bulk market will experience a meaningful market correction caused by tonnage oversupply. [By association and anecdotal evidence, the same belief holds true for the commodity tanker markets as well, just to a slightly lesser degree.]  Most of the ‘smart money’ expect that the market will fall based on the delivery wave of vessels presently on order that will start ‘hitting the market’ in late 2015 (and early 2016 as likely several deliveries will be pushed forward into the following year.)  The projections in Genco’s filing do not divulge any ‘state secrets’, but they do put forward formally, and rather eloquently, the expectation that any shipping recovery during the present cycle will likely be weak, with no ‘higher highs’ or great volatility; more importantly, Genco’s projections imply that the window of opportunity will be rather very short-lived.

If the window of opportunity is expected to be short-lived, then it will have to be utilized to its maximum potential by likely selling assets and lining up fast on the IPO queue to obtain a public listing. If so, likely the present pool of companies mentioned or considered for IPOs will have to be more numerous than it meets the eye; not bad for advisors and investment bankers, but it will be interesting seeing whether the public markets – and second-hand buyers – will be hungry enough and for a sustainable amount of time to absorb tonnage and shares from all these promising companies.

But again, that’s capitalism.

Ship of Fools - An Old Story!

Ship of Fools – An Old Story!

 

© 2013-2014 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.

Sourcing Capital in Shipping

It’s a well known fact that the shipping industry can be affected from many, many variables to the extent that creating business models and projections has been equated to ‘modeling the wind’. Since 2008, when the market went into a tailspin, many factors have varied and changed within wide bands. China and Chinese economic growth, shipbuilding and shipbuilding capacity, banking and shipping banks, etc to name a few.

Access to capital for a capital intense industry like shipping is tantamount to oxygen in the water to sustain marine life. Many banks – the traditional source of funding for the industry – have been leaving the sector and the few remaining would only lend on new fundamentally-changed terms; new sources of capital have been entering the industry, but it is to be seen for how long and whether such ‘new found love’ is strategic or just opportunistic.

Singapore-based with strong Asia and China focus reputable shipping publications SinoShip and Maritime CEO have recently posed the question of sourcing capital in shipping in two recent issues. We are delighted and honored to have been quoted in their articles and their search for shipping capital!

Please see these ‘investment grade’ articles herebelow:

2014, March: Where the taps flow, republished from SinoShip

SinoShip_logo_MAR2014

2014, March: Maritime CEO – Penny for your thoughts, republished from the Maritime CEO

Maritime CEO logo_JAN2014

© 2013-2014 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.

Shipping IPOs: Diamond S Shipping

This past week, the sponsor and primary shareholder of Diamond S Shipping Group, Inc., WL Ross & Co., decided not to proceed with the Initial Public Offering (IPO) due to unfavorable obtainable pricing. The company was planning to issue about 14 million shares at the $14-16/sh range.

Private equity funds have been the rage of the shipping markets recently. The present filing, it is indicative that private equity funds sooner or later will be looking for ways to exit their shipping investments, and the capital markets likely will be the most popular venue. Capital markets may soon be the ‘next big thing’ in shipping as there are already several filings in the US for shipping companies.

The ‘failure’ of Diamond S Shipping to go public at this stage is not a sign that the capital markets are not receptive to shipping companies. Some of the reasons for the ‘failure’ may have been due to circumstances pertaining to this company and issuing, especially concerns about proper pricing, valuation and expectations thereof. There are legitimate concerns that the MR tanker market is getting too crowed – which is affecting pricing; on the other hand, Ardmore Shipping Corporation (ticker: ASC) was successful offering 7 million shares in a follow-on equity offering and raising $90.2 million, still in the product / MR tanker sector, pricing that was in line with the company’s share price – which is at discount on a peer group valuation.

Please note herebelow three articles on the recent developments with Diamond S Shipping from different sources: Shipping Watch, a Copenhagen-based credible shipping trade publication, Bloomberg and the Financial Times. We have had the honor to be quoted in these articles.

2014, March 12: Lukewarm investors canceled IPO of Diamond S, republished from Shipping Watch.

2014, March 12: Wilbur Ross Suspends Diamond S Shipping IPO on Low Price, republished from Bloomberg.

2014, March 13: Ross upbeat after IPO cancelled, republished from the Financial Times.

Diamond S MR Tanker MT "AEGEAN WAVE"

Diamond S MR Tanker MT “AEGEAN WAVE” (Image source: courtesy of Shipspotting)

© 2013-2014 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.

Can Private Equity Save Shipping?

Private equity has been making ever more headlines in shipping. Their interest in the industry is not new, and neither the subject matter easily exhaustible. While reviewing our files in preparing for a conference presentation, we run into an almost year-old but still very timely and pertinent article published in late 2012 in the Maritime Executive. Senior Editor Mr Jack O’Connell discusses whether Private Equity (PE) can the savior of the shipping industry. A great and informative article, and not just because we are quoted in it!

Maritime Executive: Can Private Equity Save Shipping? (Dec 2012)

Maritime Executive: Can Private Equity Save Shipping? (Dec 2012)

2012 11NOV&DEC ME Can Private Equity Save Shipping?

© 2013-2014 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 herewithin 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.

Private Equity and Shipping: A Blessing in Disguise

With the banks having limited lending capacity for new shipping business, for the most part, shipowners have been ‘forced’ to look elsewhere for capital for the last several years now. While leasing and export credit may be capable addressing certain types of new projects on selective basis or for selected credit, when one is looking for substantial financing, either in the public markets or private terms, there are more credible choices.

Neither the public markets nor Private Equity (PE) are for the light-hearted as their prerequisites, modus operandi and future expectations are distinctly different than traditional shipping financing such as bank lending.  There is no doubt that in a post-Lehman world and with Basel III regulations surely ahead, even shipping debt financing will be much more ‘complicated’ and ‘structured’ and ‘disciplined’ in the future than many owners had been used to so far; however, capital markets and PE have already been trying to impose their ‘complicated’ and ‘structured’ and ‘disciplined’ approach to shipping and its way of doing business.

While the capital markets for equity have been taking a breather, PE funds have been on the prowl for shipping investments.  A lot has been said about PE funds and high expectations have been placed on them, even some parties have wondered whether PE funding can substitute bank lending. In our estimates, more than twenty billion dollars have been invested in shipping by PE funds in the last three years (one can assume forty billion in total investments when leverage is considered); not a negligible number by any standards, but definitely still a very small fraction of the capital needs of shipping; one may consider that debt in shipping used to stand at about five hundred billion dollars at the top of the market.

OLYMPUS DIGITAL CAMERAThere is no lack of appetite or equity, in absolute terms, to be invested by PE funds into shipping; in our opinion, the five hundred billion check of the banks could easily be supplemented by the PE funds. Would the PE funds provide the same terms like the banks for substituting capital in shipping investments? The short and the long answers to this question are an emphatic ‘No!’  First, by definition, PE funds usually provide equity investments that, by definition, have to have higher hurdles for return expectations. Even for credit investments, PE funds expect a substantially higher return than the bank’s ‘traditional’ spread on lending. Then, PE funds, expect to invest or co-invest along efficient and transparent platforms, platforms that are best prepared to fully benefit from market exposure. Banks would not care particular about transparent or efficient platforms since their primary consideration was principal repayment and interest payment; when freight rates were going through the roof, such hurdles were ridiculously easy to meet, and thus, never a serious concern for the banks which allowed to the extremes for ‘name lending’ and other lax arrangements. PE funds have not only to be positioned for sharing the maximum return by optimizing the cost structure among other considerations, but they also have their limited partners (LPs), often sophisticated investors themselves, to satisfy and report to and potentially explain –and they may also have legal exposure, for any shortfalls in transparency, due diligence and optimizing efficiencies.

In our experience and in our business practice, we have seen or have been engaged by several PE funds working on Joint Venture (JV) structures with shipowners, whether publicly traded or privately held. Frankly, most of the discussions and adventures ended in disappointment. It took a special approach by – usually smaller and nimbler and why not, owners in greater need of financing to be willing to work along the PE’s requirements.  There has been greater success also with German owners or funds; some of such German owners have been familiar working with outside investors under their KG system; other German owners or KG houses may have been in great need to capitulate the accept the terms of PE.

Wave_sunshine (2013)Despite all the noise about PE, and yes fanfare on occasion, they provide a valuable tool and the capital means for companies with ‘legacy issues’ to restructure and survive the cycle, but more importantly, they can make good partners for qualified shipowners; yes, they are equity and not debt investors, and accordingly will seek for more demanding terms of providing financing, but they can provide, besides the capital, the motivation for transparency and setting up the right corporate processes and procedures, and they can bring a strategic and disciplined approach to investing and growing a business. At the end of the day, in about four-five years’ time, the PE will be heading for the exit either by selling or liquidating the JV or preparing for an IPO. After all, shipping is heading toward a more systematic, disciplined and corporate way of doing things.  For better or worse, it seems that our shipping world is slowly moving toward a more ‘solid’ state despite its ‘watery’ nature…

 

Article was originally published on Shipping Herald on January 30th, 2014, and can be accessed by clicking here!

 

© 2013-2014 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 herewithin 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.