Shipping’s new dislocation: the banking system’s ‘safety trap’

Times for most shipping sectors are very tough, by many standards, even if one takes a long-term historical perspective. The Baltic Dry Index (BDI), the proxy for the broader shipping industry in many ways, is almost 100% up in the last forty days – and still, dry bulk vessels barely achieve operating break-even rates on the spot market.

Dry bulk asset prices, despite the recent rejuvenation of the last two weeks, are very low; bulkers older than ten-year-old typically change hands at multiples of their scrap price. The dry bulk freight market has taken most of the blame, since what kind of buyer would like to buy a vessel – irrespective of attractive pricing – and start losing money from the minute they touch them when the closing and delivery of the vessel is in effect.

No doubt the weakness of the freight market deserves lots of the blame. But, anyone, who has been involved with vessel valuations and shipping investments, knows that vessel asset prices are also materially influenced by several more factors, availability of cheap capital being the primary driver among them.

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Shipping’s Old Model. Image Credit: Karatzas Images

Financing for shipping projects at present is typically rather very expensive. Most shipping banks have already left shipping and a few more have been divesting shipping loan portfolios as fast as practically possible. For the banks still active in shipping, very few and precious, they mostly stay away from soliciting new clients – since their existing clientele can absorb their curtailed availability of funds, and without having to undertake the always challenging KYC approval, etc. For new clients to be considered, they have to be “strategic”, with critical mass of fleet of vessels, sound prospects of business success, and sometimes, already recognizable names from the bank’s private wealth departments. Lending against dry bulk vessels is of no interest to the shipping banks now, tankers older than typically eight years of age are too old to lend against, crude tankers are too risky to touch, containerships need to have long term charters, and offshore is off a cliff for now. In short, for a shipping project to obtain new financing from a shipping bank these days, the ship will have to walk on the water, not just keep afloat!

Obtaining equity for shipping is no much easier, as most funds have lost billions and billions chasing a market recovery in 2013 that never came – or was run over by their exuberance optimism and newbuilding contracts, and now they stay away from the industry. Also, equity funds often invest pro-cyclically, when the market is in recovery, and thus the dry bulk’s negative cash flows are a serious deterrent. There are many funds (credit funds) that provide lending in the shipping industry, and they often charge 6-10% interest rates plus some degree of equity participation. And, the market is so constrained for debt financing, that we know several owners (and actually our firm has arranged such financing for a few more), where shipowners are borrowing at such high terms in order to be able to expand and exploit the present state of the market and the historically low asset prices.

The difficulty of obtaining financing for shipping projects has to do with many factors, some originating from the shipping industry but some not. The excesses of the shipping banks, for example, of the pre-Lehman credit boom still have not worked their way through the banking system. There is still an amazing amount of shipping loan portfolios that are priced close to original cost basis, allowing for little else for the banks but to play for time and hope for a market recovery. There are cases where the ‘non core’ bank is not allowed in any way to assist a potential, legitimate buyer of assets with the ‘core’ department of the same bank – forcing many times deals to be scrubbed or consummated at terms clearly inferior to what could had been achieved if the ‘core bank’ could be engaged; the legal limitations and other considerations for need of lack of coordination between ‘core’ and ‘non core’ are appreciated, but one may be tempted to say that regulators have been overshooting in order to compensate for their undershooting a decade ago.

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A newer, better model… Image Credit: Karatzas Images

Another interesting observation on misplaced actions by banks (shipping banks in our case) due to regulation is that at a time of low or even negative interest rate policies (NIRP) and still extensive quantitative easing (QE) by the European Central Bank (ECB), banks go for few, selected, concentrated credit risk, especially when such risk is perceived to be superior that would lead to no losses for the bank. As a result, banks (shipping banks) end up chasing a handful of accounts, whether super-major independent shipowners or top-tier corporates, at razor thin margins. Banks these days would rather lend US$ 1 billion at no more than 150 bps spread to an account they deem superior rather make originate several mortgages of US$ 20 mil each, to solid accounts that do not tick all the boxes, at spreads of 500 bps. For the sake of being optically correct and allegedly minimize the probability of originating a loss-making mortgage, banks concede to cut their margins to the bone and accept concentration on a handful of accounts, while 90% of the lending market remains virgin territory. It’s amazing that our office, in our capacity of advisors and private placement agents, habitually is fielding calls these days from American and European and Asian banks desperate for new projects, but always for deals where credit is superior and always at increments of hundred millions. No project finance, no small or medium owners, no private companies: oil companies, large corporates, stand-out clients of private wealth, substantial end users.

We cannot name names but one can peruse the list of serial buyers of modern tonnage, often tonnage unloaded by publicly listed companies and private equity investors, to get an idea who are the clients the banks (shipping banks) want these days as clients. Rumor has it that such names have billion dollar lines with banks at barely higher than 100 bps spread; a ridiculously thin margin and a ridiculously low cost of funding given that interest rates by central banks are at almost all times lows.

Banks seems to have been boxed not by a “liquidity” trap but by a “safety trap” where regulators and central banks demand high credit assets as collateral, pushing banks to do business for what it is considered safe and not necessarily economic (at a price); some say that present policies have even been contributing to stagnant growth overall. Taking a narrow-focused group on shipping, one may wonder whether the banks (shipping banks) are shooting themselves on the foot and whether they are laying the ground for the next bubble: banks prefer to lend US$ 400 mil to one lender for the purchase of ten modern cape vessels at excess 80% leverage and at 150 bps spread, while will not even contemplate doing forty (40) mortgages at 50% leverage at 500 bps spread for ten-year old bulkers priced at 3x scrap value. Over-concentration on one account and asset class and trade at historically low margins (that likely to hurt the banks when interest rates increase) are clearly preferable, in bank’s point of view today, to broader diversification at robust margins that offer better prospects in the long term but also support the shipping market (including the shipping banks themselves in the short term).

In our humble opinion, the shipping finance market is highly dislocated at present (offering many investment opportunities), but more crucially, it seems that the elements of the next crisis are already incipient in the waters.


Article was originally published in the Maritime Executive Newsletter on May 2nd, 2016, under the title: “The Banking System’s “Safety Trap”“.


© 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.

Shipping Lending’s Good, Bad and Ugly

Six years into the shipping crisis, the debate still rages whether there is light at the end of the tunnel. There have been market gyrations among market segments and asset classes that have been performing better on occasion, but still many doubt whether we are anywhere closer to a structural market recovery. There are factors to flame a doubter’s soul under any circumstances (large outstanding orderbook, excess shipbuilding capacity, equity and debt investors still seeking to enter the market, etc) but there are also artifacts of the excesses of the industry that are still present in the market.

While on an extensive European tour and after having talked to many financial players, shipowners, bankers, vessel managers and shipbrokers, we have noticed a few trends that have been permeating the shipping industry.

It’s well known that the shipping finance seascape, especially as traditional shipping lenders are concerned, has tectonically changed since the inception of the crisis. Many shipping banks have straightforwardly sold their shipping loan exposure and many more are well into their process of divesting their remaining shipping positions. There are a few banks that still have a mandate to lend in shipping and selectively do so (despite that many more bankers would say that their banks are still actively in shipping).

So far, so bad.

Many of the traditional shipping banks (primarily in Europe) have been preoccupied with their capital ratios and the so-called Asset Quality Review (AQR) until very recently; capital ratios will keep being of constant concern going forward, especially given the new regulatory environment expected to come into place (Basel III, etc). The European Central Bank (ECB) has aggressively been working on ‘motivating’ European banks to stop hording deposits and cash, and rather utilize ECB’s ‘liberal’ state of policy of low (possibly negative interest rates) to start lending and stimulate local economies. Given the circumstances, therefore, one would think that European banks would be selectively forthcoming with new shipping business, at least with corporate clients, ‘balance-sheet-lending’ supported by cash flows and that smaller owners seeking asset-based-financing (ship mortgages) would have a harder time to access financing. At least that would have been a rational assumption to make.

While discussing with traditional shipping lenders, we have noticed an increased concern about ‘spreads’ (margins over LIBOR) and maintaining market share or relationships with shipowners versus maintaining proper, healthy margins and return on equity for the banks themselves. We have heard stories of a French bank in Greece providing asset based financing (ship mortgages) to good clients at 190 bps spread, and many Greek banks (and certain UK or German banks) feeling obliged to provide competitive debt financing at no more than 300-400 bps for clients ranging from good in quality to long term in reference to the relationship. Again, we are barely out of the crisis, if at all, with the ink on the AQR still wet, and many of these banks fighting for market share today were bailed out by their governments, had their original shareholders highly diluted, and, quite frankly, a few of these banks were left for dead at the rage of the European banking and sovereign crisis a few years ago. And fighting for market share over spreads probably it’s an uncalled-for price war, as many shipping banks have left the industry thus there is less competition effectively, and the few remaining banks do not have the capacity to lend as much money as the market demands (actually much less than that) thus supply is much lower, and, also importantly, a great deal of the bankable borrowers in shipping are realizing (and prepared to pay) higher interest rates as a result of the developments in the banking sector over the last few years. Probably that’s ‘bad’.

Of course, a great deal of borrowers and shipowners are not highly bankable any more, having burnt much cash reserves in the bad years or having to restructure on their super-expensive tonnage. For many of such owners, traditional lending from banks is not effectively an option, and thus they have been looking for alternative sources of capital, such as borrowing from private equity and hedge funds, credit funds, etc usually at interest rates ranging from 8% for relatively plain vanilla mortgages to as high as 12% and possibly equity participation (convertible) for any ‘projects with hair’. There is an active market for such financing where our firm Karatzas Marine Advisors has been highly active, as there are borrowers needing working capital to drydock vessels or cover operating expenses or some time to buy. This is true for projects in traditional shipping countries like Greece and Germany, where paying interest rates close to the double-digit mark were an anathema even a couple of years ago. How times change when there are borrowers in shipping (often with legitimate projects) prepared to pay 8% interest for a plain vanilla ship mortgages! Probably, that’s the ‘ugly’.

And of course, there are the major shipowners with consolidated financial statements, economies of scale by owning an operating more than hundred vessels, and having access to cargoes and strategic charterers. Usually such owners have access to the capital markets and also can borrow at slim thin interest rates, fully exploiting the strength of their balance sheets in a low interest rate environment. Usually such borrowers can access the international banking system, including international US and UK banks (not always traditional shipping lenders), but also borrowing from Norwegian lenders, who have been traditionally in the market, but they have more and more focusing on corporate and balance-sheet lending, with a preference for offshore and energy associated shipping projects, and preparing for the new regulatory banking framework (Basel III, etc). Probably, that’s the ‘good’.

In a bifurcated market where big, solid shipping companies can access debt inexpensively, there is a debt funding gap in shipping for the vast part of the industry including the competitive local markets (Greece and Germany). However, a great deal of concern is about spreads and pricing, when really there should not have been an issue. As good, bad or ugly as all these seem, one has to question whether the artifacts that generated the crisis are still in place even at the trough of the market.

After all, one of the biggest Greek shipowners during a Posidonia panel discussion in June 2014 placed the blame for the shipping crisis squarely at the door of the shipping banks! Too much cheap money made too many shipowners buy too many ships! Simply just that! And, a banker from a major bank admitted during our recent European tour that in 2008, the bank’s cost of funding was 35 bps and after including 15 bps overhead, any loan (irrespective of covenants, leverage, asset class, credit, etc) was fair game.

Money! Shiploads of it!

Money! Shiploads of it!


© 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.

 

 

 

Changing Seascape in Shipping Finance and the Vessel Ownership Structure

Karatzas Marine Advisors & Co. has published an essay in the current issue (2014 Q4) the Cayman Financial Review (CFR), by the Cayman Compass publishing house, with the title ‘A Changing Seascape in Shipping Finance, and the Capital Structure of Vessel Ownership’.

To visit the online version of the article in the Cayman Financial Review, please click here!

To download the pdf version of the article, from the quarterly magazine, please click here!

Cayman Turqoise Waters_Karatzas MAR2014

Changing Seawater Colors and Seascapes in Shipping! The turquoise colors of the waters of the Cayman Islands (image source: http://www.basil-karatzas.com)


© 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.

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.

The Rise and Fall of German Shipping

German shipping with its traditional focus on the ‘KG Model’ (short for “Kommanditgesellschaft“) whereby wealthy retail investors were contributing the equity while German banks were providing generous lending conditions – at the peak of the cycle, has been very much in the news in the last few years. An article in the current issue of the well-regarded Shipping Watch Magazine discusses the practices that allowed for market overcapacity and the present ‘hangover’ in the system. Former President of shipping bank DVB Mr. Dagfinn Lunde and Mr. Basil Karatzas with Karatzas Marine Advisors in New York contemplate on the causes and consequences in the article.

Full article can be read herebelow, while more news and information on current maritime events and developments can be found at the home page of Shipping Watch.

The Rise and Fall of German Shipping by Shipping Watch

The Rise and Fall of German Shipping by Shipping Watch

 

© 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.

Selling Shipping Loans

With half-a-decade loose monetary policy, with interest rates kept at historically very low levels by central banks and overall corporate defaults rate at very manageable levels, investors seeking yield have been investing in ever higher risk credit instruments expecting ever lower returns. For instance, Triple C corporate bonds – the lowest credit rating possible, at present yield 7.75%, down from 9.8% from a year ago, and there has been a great demand for them, to the tune of $38.1 billion so far this year (vs $37 billion for the whole calendar 2012.)

In shipping, freight rates in the last six months have moved above cash break-even levels in most market segments, and on occasion, the momentum of the increase has been impressive, i.e. capesize rates moved from less than $10,000 pd in July to over $40,000 pd by the end of September, and likewise for VLLC rates, when last week $40,000 pd spot rates were recorded for the first time in more than nine months. For right or wrong, the prevailing consensus at present is that shipping is in a cyclical recovery phase with the worst behind us, and, therefore, taking ‘long positions’ or ‘risk on’ is the right strategy.

While a few private equity funds and institutional investors have been setting up JVs with vessel owners and managers to buy actual vessels in order to benefit from the market recovery (the JV between Oaktree and Oceanbulk is the most quoted example), an ‘easier’ approach to benefit opportunistically from a market recover is to invest in corporate transactions in the public markets, whether in equities or debt.  For the former, the Oslo OTC market has been very hot this year, and the Scorpio Group (whether in the product tankers with Scorpio Tankers (STNG) or in the dry bulk market with Scorpio Bulk (SALT)) have been the most successful examples of riding the equity raising wave for all its worth. In the debt markets, there has also been activity for some time with the sale of shipping loan portfolios.  Lloyd’s Banking Group has gradually been systematically divesting their shipping portfolio since 2010, with their latest sale of a $500 million tranche taking place just two weeks ago to likely Bank of America (BofA), who where acting in an intermediary capacity and providing debt financing to the equity providers.  The transactions that really caught everyone’s attention however were the sale of DnB’s total shipping loan exposure to Genco Shipping and Trading (GNK) of $520 million (part of a $1.01 billion revolving credit facility), and the sale of Royal Bank of Scotland’s (RBS) entire shipping loan exposure of $720 million on Eagle Bulk (EGLE), part of a $1.1 billion term loan facility (after the restructuring in summer 2012).  The exact details of both these transactions are still sketchy, but it has been rumored that the Genco debt was sold for about 91% of its face value, while the debt for Eagle Bulk brought just shy of 90% of its face value; it is believed that in both cases Bank of America is the buyer and arranger of the sales, with Bank of America also providing debt financing to the funds eventually buying these loans.  There has been a long list of funds mentioned as the buyers, some known to shipping but some complete newcomers, but the names Oaktree and Centerbridge are most frequently quoted.

MV „GENCO CONSTANTINE” - 91% of the nominal value

MV „GENCO CONSTANTINE” – 91% of the nominal value? (Image source: http://www.shipspotting.com)

The quoted pricing of about 90% has been exceptionally strong both in absolute and relative terms, and it presumes that the borrowers will perform in every respect, an assumption that is heavily contingent on a market recovery.  As mentioned earlier, with interest rates very low, credit investors have to really search hard for deals, even in ‘obscure’ industries like shipping, and when they find them, they have to be very competitive in their terms and pricing, which has brought about the competitive pricing in these two transactions.  However, the fact that both Genco and Eagle Bulk are publicly traded companies in the US (from where a tremendous pool of institutional money is invested) with relatively modern, uniform fleets in the recently buoyant dry bulk market and with significant market exposure if/when the market recovers (a great deal of the original charters have expired or expiring soon) has called for very competitive pricing, which has surprised many market players, and likely the sellers themselves.  This is a recurring theme with institutional investors who would pay aggressively for ‘paper’ which they can trade from their screen rather than having to deal with potentially logistical and operational matters (buying vessels or arresting vessels); a year ago, Santander Bank, holding a small position in the OSG syndicate, attempted to sell their position, expecting a 60% related pricing; to their surprise, and everyone else’s in the syndicate surprise, the pricing soon got into the 90’s levels, again, reflecting that OSG was a US-based, publicly listed company and easy to trade on a computer screen.

The fact the shipping debt, very selectively of course, can fetch pricing in the 90’s is definitely a positive event for many shipping banks, who may find such pricing irresistible and start exploring their own sales. We are not sure whether there will be an upcoming avalanche of shipping loan sales, but there are many constraints: borrowers ideally have to be public companies (much less preference for private companies) with underlying assets in active markets (doubtful that loans on containerships would be as competitively priced and received) with governing jurisdiction English or US law and while there is this (short?) window of low interest rates, market stability with low corporate defaults and debt financing for shipping loan acquisitions is competitively available.

But again, seeing that 17% of the world fleet is still on order and many more newbuilding orders are getting placed on a weekly basis, paying aggressively for shipping loans presumes a substantial freight rate recovery (which presupposes tighter control of tonnage supply) and also better asset pricing as loan collateral (which again presupposes tighter control of tonnage supply).

It will be interesting seeing whether 90% pricing would make much sense. It also will be interesting seeing how ‘patient’ and tolerant of the corporate managements the institutional buyers of shipping debt will be, being ‘active creditors’ as part of their DNA of managing risk actively vs a traditional banker’s relatively passive and non-confrontational approach.

© 2013 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.