Shipping’s Best Hope of Forgettable Years

By all accounts, 2017 was a forgettable year for shipping – which it may be the best characterization the industry could possibly have at present. Recent memorable years in shipping have not been very uplifting. Probably many people in the industry are still struggling to forget 2016 and its 296 BDI and 161 Capesize readings in March of that year, the lowest ever readings by the Baltic Exchange.

2017 was rather good for dry bulk (pleasantly great if one opts to compare it to an abysmal 2016) while tankers, containerships and offshore were mildly disappointing markets. Shipping segments are not often in sync with each other and segment gyrations are to be expected. Although the fundamentals driving each segment differ nominally, there have been a few common underlying trends across segments at present: the outstanding orderbook has been low in each and every segment, actually the lowest in recent memory. Tonnage demand keeps increasing on the strength of global economic growth. Tonnage supply keeps growing but at lower levels, so much so that tonnage demand hesitantly exceeds tonnage supply growth in certain markets. And, lack of shipping finance negatively affects all segments of the industry, further curtailing the possibility for an exorbitant wave of newbuildings. When one examines shipping closely, as a pure tonnage supply and demand equilibrium, 2018 and the near future seem rather promising.

However, shipping is an industry known to get people by surprise and looking forward there are reasons for a market participant to be concerned. Several factors, complimentary to the industry, are cause for concern; probably not as bad as to make the proverbial list “what keep’s you awake at night” but again, not an era of assured smooth sailing.

The shipping finance market has been dysfunctional for the last few years, but at present, the dislocation in the market is reaching unprecedented levels. As traditional shipping banks keep leaving the industry and institutional investors have lost any interest in private equity investments and some public market investments as well, the cost of capital keeps increasing steadily. It’s not unheard of for independent shipowners to be borrowing at 8% spread for first preferred ship mortgages with tight covenants and terms these days. For a capital intensive industry, the high cost of capital is an accident waiting to happen for shipowners and financiers alike. Also, lack of debt financing is shifting the market, even forcing smaller players to shut down and slowly driving a consolidation wave. Probably too soon to notice any immediate effect in 2018, but watching the Greek and German markets over the last few years, one can note the trend forming.

Many hopeful shipping business plans and corporate presentations pride on the industry’s low outstanding orderbook. It’s absolutely marvelous that shipowners have shown self-discipline in the last few years and abstained from speculative orders; however, the counter-argument is that shipbuilders are immediately ready for new orders and can deliver new ships as soon as within nine months. Low outstanding orderbook implies plenty of spare shipbuilding capacity. And, while there has been talk about inconsequential Chinese shipbuilders getting weeded out in the last couple of years, the truth of the matter is that shipbuilding capacity is highly elastic and all those now defunct shipbuilders would be entering again the market the minute that hot new orders start arriving. It’s a good thing that institutional investors and shipowners have lost interest in “speculative” newbuilding orders, but a strong freight market could likely incite many new orders that can start flooding the market very soon and thwarting a full market recovery. Barring an exogenous stimulus such as export credit incentives or materially lower newbuilding contract prices, a “forgettable” and un-inspiring freight market may be the safest way of navigating these narrow shoals.

While when talking about shipping the focus is on freight rates and asset prices, one cannot neglect the regulatory and operational nature of the business. The ballast water treatment management plants (BWMS) have already been costing the industry additional capital, and new emissions regulations are fast afoot. New regulations are costing the industry billions of dollars when the industry can poorly afford them, and one would expect even tighter standards going forward. Higher standards for vessel performance, tighter standards for safety and security, likely soon IT security to make ships relatively secure from hacking and ransomware, and all these, before one takes into consideration technological obsolescence factors: if for instance natural gas bunkering is the way of the future, what would happen to today’s modern world fleet? We do not want to be the Cassandras and the pessimists of the business, but one has to think about the long future very hard when ordering vessels that have twenty-five years of design life.

Further, while the vessels themselves can be the subject to higher standards and technological obsolesce, how about the cargoes and the underlying trading trends themselves? The cost of producing solar and wind energy has been dropping precipitously and jeopardizing the importance of coal, and possibly crude oil, as the world’s primary energy sources. Electric cars have slowly been passing the “novelty” phase of new products and becoming mainstream that would further impact the energy transport market. And, as shale oil and natural gas keeps improving lowering its production cost, likely to be less need for transport. Probably an isolated example, but the current polar wave of freezing weather in North America barely registered on the crude tanker market; there was a time when crude tanker rates were shooting skywards as charterers were scrambling to import more oil to the US to cover increased energy demand every time there was a cold front in North America. Energy trends take a long time to materialize, but on the other hand, one cannot dismiss that a new baseline that’s forming for the immediate and distant future.

We do not want to be pessimists and do not want to be the ones who are pointing to a half-empty glass. 2017 has been a respectable year, and, with a bit of good luck, 2018 would be equally fair. After many years of persistent fireworks in the industry, some “forgettable” years would be a welcome change. But just like navigating in unchartered waters, one has to keep paying attention to the dangers lurking in the ambient environment and under the surface of the sea.

A Happy New Year to all, especially the seafarers in the middle of the ocean an away from their families!

Happy Shipping and Happy New Year! Virginia Beach, VA. Image credit: Karatzas Images


An edited version of this article first appeared on Splash 24/7 on January 3rd, 2018, under the heading “A forgettable year is our best option”.


© 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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Topical Insight and Current Developments in the Maritime Industry

Basil M Karatzas and Karatzas Marine Advisors Quoted in the News

We are delighted that Karatzas Marine Advisors & Co. and its founder Basil M. Karatzas have been the trusted and insightful source of market knowledge and intelligence for all things maritime; with prompt and accurate access to market information, a vast network of resources and paramount access to senior executives worldwide, in the shipping and complimentary industries, the company and its founding partner have had a front row seat to today’s developments in the maritime industry.

We always thought that we have had a strong advantage over the competition and nothing gives us higher pleasure than seeing our expertise appreciated beyond a constant deal-flow and boardroom discussions with our clients, and in the pages and the trust of the international business press.

Recent media quotations for Basil M Karatzas & Karatzas Marine Advisors:

– China, Flush With Cash, Sets Sights on Shipping, The Wall Street Journal, December 23rd, 2017                                                                                                       On Chinese leasing and Chinese financing going aggressively after the international shipping finance market where western banks are retreating                                                                                                                                                                                           – Euronav to Buy Gener8 to Create Oil-Tanker Giant, The Wall Street Journal, December 21st, 2017                                                                                                       Consolidation in the supertanker (VLCC) market at a time of weak freight rates and soft asset prices with a transformative acquisition where a storied company goes from a consolidator to being a target                                                                                                                                                                                                                                           – Is the Dry Bulk Tramp Trade at an Inflection Point? The Maritime Executive, December 1st, 2017                                                                                                        Article penned by Basil M Karatzas for The Maritime Executive on the challenges the dry bulk market is facing and a blind repeat of the past and “buying low, selling high” dry bulkers may be more complicated this time around.                                                                                                                                                                                                         – Dry bulk: Why the Year of the Dog can wag its tail, Lloyd’s List, November 23rd, 2017                                                                                                                                  2017 has turned out to be a decent year for the dry bulk market; although it’s hard to see how it could be worse than 2016 (worst year in living memory), shipowners seem to got their faith back that the industry is not completely dead                                                                                                                                                                                                   – A Specter Is Haunting Europe’s Recovery: Zombie Companies, The Wall Street Journal, November 22nd, 2017                                                                                        Many chronically loss-making companies in Europe are kept alive because of the kindness of the banks. Shipping companies are part of the landscape.                                                                                                                                                                                           – JPMorgan making big profits by flipping cargo vessels, The Globe and Mail, November 19th, 2017                                                                                                        In a weak freight market leading to soft asset prices (“cheap ships”) some financial players see opportunity of buying ships at low prices, and occasionally flipping them soon thereafter for an easy profit

Manhattan from afar. Cruiseship MS ‘Queen Mary 2″ can be seen moored at the Brooklyn Cruise Terminal (right of the picture) in between the Empire State Building and  the 432 Park sky-scraper. 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.

Sailing the Seas Depends on the Helmsman

Once upon a time, there was an independent shipowner with, let’s say, ten modern product tankers. Three of their tankers were mortgaged with a major European bank, a very well-known name and with proven past commitment to the shipping industry. And, the shipowner themselves, have been in the shipping business for more than a couple of decades and enjoying a solid reputation in the shipping community and with charterers. These, being legacy shipping loans, their terms were highly competitive in this market despite some success of the bank to tighten the loan terms since the market collapse a few years ago. Actually, the terms of these loans were exceptional, by today’s standards, as the spread was just 300 basis points. And, of course, the shipowner had watched these loans like the apple of their eye, and they were current with interest payments and principal repayments and the loans were comfortably meeting the loan-to-value (LTV) covenants.

Eighteen months ago, the shipowner got a note from their mortgage bank that since they (the bank) were exiting the shipping industry, the shipowner was given notice to make arrangements to pay back the loans (there was a small discount offered) or the bank would had to take matters in their own hands. Since these were performing loans, the mortgage bank could sell the loans at close to par, likely to a credit fund or an institutional investor, or possibly even to another bank if there were still banks out there buying shipping loans – not a likely cozy prospect under any circumstances.

It took a few months for the shipowner to recover from the first shock, having a brand-name bank giving them notice on performing loans. And, it only got worse from there. The shipowner’s shock got greater as soon as they started “shopping” the market for new financing: few shipping banks had interest in new clients or business or the capacity to finance a three-vessel package. While approaching institutional investors, the strategy was modified to squeeze the mortgage bank for a hefty discount of the loans, but with the institutional investors sharing (a great deal of) the economics of the transaction and not just to provide new loans. Almost a year passed since the mortgage bank had given notice and the shipowner could not find a new “deal” good enough. But again, having to replace shipping loans priced at L+300 bps in today’s market, one feels like they have been punched in the stomach.

And, while the shipowner was taking their sweet time to find the perfect financing they thought they deserved, the product tanker freight market started deteriorating: first freight rates dipped and then halved, and, as one would expect, secondary market product tanker sales started taking place at lower price levels. While the shipowner had a few million in cash in the bank, dry-dockings and other expenses started chipping away on the balances. And, the lower asset prices triggered LTV defaults now, giving much more leeway to the bank to sell the vessels themselves, and not just the loans – an even worse prospect for the shipowner.

And, lower freight rates and lower asset prices were making financing the original loans more difficult: cash flows now would only support lower financing, and institutional investors lost appetite since any discount now had less value in a weakening market.

All being told, the shipowner managed to finance just two of the vessels at today’s prevailing conditions (lower leverage, tighter covenants and cost in excess of L+600 bps.) And, the third vessel was let go and was sold (at a small loss) since no financing could be found within the parameters of a weak freight market and limited “sweat equity” from the shipowner.

This is a real story (unfortunately) and no names or other details can be divulged; but, such details do not matter really. If there are lessons to be learned is that first, in this market, shipping finance is the “determining factor” of the shipping industry, the independent shipowners. Shipping finance is the new battlefield where shipowners will be called to fight; if they cannot sort out their shipping finance game in the new market, they will be driven out of business – as simple as that. Second, in this difficult market, it’s not only “bad shipowners” who have problems; if your bank is not committed to shipping or you or they are having higher priorities unrelated to shipping, that’s the weakest link in the business, even if the loans are good and performing. Third, it pays to be pro-active in this market and tie loose ends as soon as possible; looking for the perfect financing at the expense of time, one can lose much more than a few hundred basis points – not arguing that two hundred basis points are not worth fighting for, but again, this is not a time when banks and lenders can bend much, if at all. And, lastly, independent shipowners had become a substantial part of the industry based on their shipping and operational expertise and efficiencies and not on their financial expertise (shipping banks were lending in the past liberally and just on the basics of how to extend credit); the present market is much more sophisticated than that and hiring competent shipping advisors may very well be warranted; trying to avoid paying an advisory fee can cost one whole ships.

“Sailing the Seas Depends on the Helmsman” was a revolutionary, patriotic song for Mao Zedong’s Red Guards in the 1960’s and 1970’s exemplifying the Chairman’s leadership skills, metaphorically speaking. For an independent shipowner these days, sailing the seas depends on the helmsman navigating the new reality of the shipping finance markets.

A long shadow over one of world’s most important shipping cluster. 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.

Is the Dry Bulk Tramp Shipping Industry at an Inflection Point?

As punishingly brutal as the shipping industry can be in bad times, it’s fulfillingly rewarding in good times. Who can forget the days from a decade ago when capesize bulkers were earning $250,000 per diem and the ships themselves were changing hands in excess of $150 million? We are a long way from those good old days but memories of and even hopes for prompt arrival of great times keep many a shipowner persevering in this business. It’s known that sweet memories and often hopes have on occasion been used to spruce up many “investment theses” in investment presentations.

The dry bulk tramp trade – whereby ships do not sail on a fixed schedule or published ports of call – has long been considered a textbook case of perfect competition in economics with its low barriers to entry and exit, minimal government and regulatory interference and taxation, an international market of price-takers for an un-differentiated product where no individual player – whether shipowner or charterer – has controlling influence on the market.

In such an individualistic market environment, fortunes have been made – and occasionally lost – when independent shipowners took timely risks and positioned their companies favorably on the dramatic upswing of the business cycle. Now that the dry bulk market is closer to the bottom than the peak of the cycle, there are calls to take risks for a market upswing.

Probably the timing is opportune for buying bulkers in expectations of an upswing in the market but one has to consider whether the dry bulk tramp market still is a market adhering to the rules of a perfectly competitive market. The last decade has seen many fundamental changes in the market that one has to wonder whether the old playbook is still working.

The greatest barrier to entry the shipping industry has been capital, given that this is a capital intensive industry. However, in past times shipping banks were providing generous financing in terms of financial gearing (leverage) and covenants, and even there have been cases of “name lending” and financing agreed on a handshake. Now that shipping banks have been departing the industry, and with the capital markets veering away from project finance and commodity shipping, private equity and other institutional investors have been depended upon to provide capital to shipping but at a much higher cost of capital, tighter terms and covenants and often for a share of the economics. The barriers to entry in terms of accessing capital have definitely been affecting the industry in an adverse way, in this respect.

In reference to government interference and regulation, for vessels having open registries (flags of convenience), the burden is still low in comparison to other onshore industries, but one can see the writing on the wall of higher regulation (and higher costs.) Emissions and the quality of bunker fuel have been making headline news in the last year resulting in both a higher financial component to the business and also technological and regulatory risk. Likewise for ballast water treatment plans, past the official deadlines, technology and approvals only now are getting sorted out. Likely, there will be higher risks for safety and security and ensuring that ships and the seaways supply chain are supported by hack-free systems (ransomware NotPetya have cost Maersk a few hundred million in losses in their last quarterly report, while the possibility of “hacked” ships became a prominent scenario in a recent wave of collisions involving US Navy ships in the Pacific.) And, while offshore registered vessels are taxed on the so-called “tonnage tax” system, many revenue-challenged jurisdictions and taxpayers have been taking a second look on the substantial differential in taxation in reference to domestically registered shipping companies and the potential loss of revenue. Taxation is a risk routinely mentioned in the prospectuses of all publicly listed companies in the US-capital markets and that the current favorable treatment by the IRS cannot always considered to be “a sure thing”. Thus, in an increasingly burdensome era of regulations (environment, safety, security, etc) and taxation, another of the legs of perfect competition seems challenged.

In theory, the “product” that dry bulk shipping companies “sell” is a “commodity” and “interchangeable” as all dry bulk shipping companies offer the service of transporting cargoes in bulk over the sea; as simple as that. And, although there are many charterers who only care for the basic good of cheap transport, an ever increasing number of quality charterers demand more than the “basic” service of transport: they demand quality ships and proper management systems and real time reporting and accountability, and also solid shipowners and managers free of financial risk of default. Thus, the “product” of the tramp dry bulk shipping slowly becomes less commoditized and more of a “service” whereby now ships and shipowners are not exactly interchangeable. Quality ships run by quality managers are preferred by charterers, but they still earn market price; and, in order to be profitable at market prices, critical mass of a fleet is required in order to access capital and also spread the overhead among a larger number of vessels. Thus, another tenet of the perfect competition model that dry bulk is a “commodity” good is slowly challenged.

At the end of the day, dry bulk shipowners in the tramp trade are “price takers” and will take what the market pays as there is little pricing power; again, a perfect competition characteristic. However, the case of just buying cheap ships and wait for the market to recovery will not necessarily hold true in this new market environment. One has to wonder whether the tramp dry bulk market, as a precursor to other asset classes – is slowly approaching an inflection point where “value added” services would be a differentiating factor.

“Hope is a good thing, maybe the best of things, and no good thing ever dies”, as the quote goes, but one may has to start thinking that just hope alone of a market recovery similar to recoveries in previous business cycles may not be the case.


Article was originally was published on The Maritime Executive under the title “Is The Dry Bulk Tramp Market at an Inflection Point?” on December 1st, 2017.


Dry bulk vessel about to go under a bridge. 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.

Topical Insight and Current Developments in the Maritime Industry

Basil M Karatzas and Karatzas Marine Advisors Quoted in the News

We are delighted that Karatzas Marine Advisors & Co. and its founder Basil M. Karatzas have been the trusted and insightful source of market knowledge and intelligence for all things maritime; with prompt and accurate access to market information, a vast network of resources and paramount access to senior executives worldwide, in the shipping and complimentary industries, the company and its founding partner have had a front row seat to today’s developments in the maritime industry.

We always thought that we have had a strong advantage over the competition and nothing gives us higher pleasure than seeing our expertise appreciated beyond a constant deal-flow and boardroom discussions with our clients, and in the pages and the trust of the international business press.

Recent media quotations for Basil M Karatzas & Karatzas Marine Advisors:

Need help to buy a ship or jet? Credit Suisse looks to lure super-rich            (Reuters, November 6th, 2017)
This Reuters article explores Credit Suisse’s unique approach to shipping whereby only the top and wealthiest names in shipping that are worth of the bank’s prestigious private wealth management service can still obtain loans for commercial ships or a yacht or a jet… Smaller shipping clients of the bank, whether performing or not with their loans, are “encouraged” to take their business elsewhere.

Investment opportunities in shipping could perhaps be the best in over 30 years’ (Splash 24/7, October 17th, 2017)
“The prospects for dry-bulk have not looked so promising in some time now,” Basil Karatzas, a Splash columnist, said. However, Basil Karatzas qualified the statement by adding that “Hopefully the improved prospects for the market will not be another excuse to kill the market in the bud.”

How protectionism sank America’s entire merchant fleet                                            (The Economist, October 5th, 2017)
This year’s hurricane season and Puerto Rico’s predicament brought to the surface the politics and economics of the Jones Act market. Without necessarily taking a position on the matter, Basil Karatzas is quoted in the ever insightful and prestigious The Economist.

Shipping may gain from Mexico grain pain                                                                    (Lloyd’s List, September 22nd, 2017)
Anti-globalization talk is not always bad for shipping; counter-intuitive, but true. Just look at Mexico’s grain imports.

Shipowners Rejoice Over Rising Demand for Commodities                                      (The Wall Street Journal, September 22nd, 2017)
2017 has been good for the dry-bulk shipping industry. Not an exceptional year and actually the threshold was too low given the abysmal market in 2016. However, on the strength of commodities trading and importation, dry-bulk vessels, especially capesize vessels, have seen the market to quintuple.

Global Shipping Trends: China Cosco Buys Orient Overseas                                      (The Diplomat, August 16th, 2017).
An interview with Dr Mercy A Kuo and the esteemed publication The Diplomat, an international affairs magazine for the Asia Pacific.

China underlines shipping ambitions with $6.3bn takeover of HK group                (Financial Times, July 9th, 2017)
Commenting in the Financial Times on state-owned Cosco acquisition of Orient Overseas International (OOIL) in Hong Kong

China’s Cosco to Buy Shipping Rival Orient Overseas for $6.3 Billion                        (The Wall Street Journal, July 9th, 2017)
Commenting in The Wall Street Journal on state-owned Cosco acquisition of Orient Overseas International (OOIL) in Hong Kong

Trying to see through the fog…even from the shore, the sea can look overwhelming… but always a charmer and a generous giver to those who dare… Cape Cod, MA, USA 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.

Issuing Shares, yet Another Way to Loosen the Shipping Finance Conundrum

While most of the debate in shipping is focused on any recovery of the freight markets, the small world of shipping finance keeps living one day at a time, one long day after another that is. Freight markets have been moving up and down in the last year, and so have done shipping asset prices; however, for shipping finance, most of the news has been disheartening for the ship owners.

Shipping banks keep divesting of their shipping portfolios, whether those are consisting of bad or good loans. To the extent that certain shipping banks are still viewing the shipping industry as a “core” industry, a handful of big players – who check all the boxes for compliance, regulatory, strategy and value – soak up quickly any liquidity, leaving most of the remaining market as “un-bankable”.  Private equity investors have lost most of their faith in shipping by now, and the alternative funds that have been angling for a lending spot under the shipping sun, are getting ever demanding with each passing day.

The IPO market for shipping has been dead given the uncertainty with the freight market and the prospects of a recovery; and, the much advertised Mergers & Acquisitions (M&A) (a.k.a consolidation) wave has been surgically applicable. In the liner business, where there is ample reason for consolidation (latest example of OOCL’s acquisition by Cosco) there has been more hope, while in the dry bulk sector, a fragmented market is the preferred way of doing business for the foreseeable future.

There have been, however, a few recent transactions in the M&A front in the tanker and dry bulk sectors that had gotten attention to the extent that the sellers opted to accept payment in cash and shares (in the buyers’ business or in the new business entity formed).  The newsworthy point is that shares have been used as currency in order to make the deals happen in the first place, and also in a manner that could allow for more value creation for both the buyer and the seller if there is a market recovery.

Lower Manhattan and Financial District (FiDi) skyline, home to many shipping financiers and shipping finance companies. Image credit: Karatzas Images

A few cases in point: a few months ago, Golden Ocean acquired Quintana by assumption of debt and by issuing of shares valued at appr. $110 mil. to the seller. Hard cash is a valuable commodity for most shipowners these days, and thus the lack of transaction activity in the market to a certain extent; the purchase of Quintana by issuing shares (or “paper”, in the investment lingo), had been the key to the transaction, a key that only publicly listed companies hold. The Quintana shareholders exchanged their stock of a privately held company (Quintana) for shares in a publicly listed company (Golden Ocean); seeing through the transaction, in a circumventional way, Quintana accomplished their long aspired goal of going public; in this case, not by having an IPO but by selling to an already listed company. In a similar way, earlier this year, the BW Group sold their VLCC business to DHT for appr. $540 mil, $260 mil of which were in the form of newly issued DHT shares.  Again, it had been rumored for a while that the BW Group had explored the IPO venue for a public listing; however, a sale for cash and shares partially accomplished the goal of a public company, allowing not only for liquidity for the BW Group shareholders but also preserving for all the equity benefits, especially those emanating from a recovering and booming (VLCC) market.  Also, in a weak tanker market, Tanker Investment Limited (TIL) – a purpose-set public company sponsored by Teekay and private equity funds to exploit tanker asset appreciation, was folded into one of the Teekay companies (Teekay Tankers) in exchange of shares payable to the institutional investors, while Navig8’s aspirations for a monstrous IPO in the tanker space had to materialize in the form of a sale and payment in shares to Scorpio Tankers.

Issuing shares for the acquisition of assets or companies is standard procedure in the M&A world. By issuing shares, the buyer can lessen the burden of taking on too much debt and jeopardizing the transaction and the overall outcome of the transaction by overleveraging. For the seller, accepting, at least partial payment, in shares provides for a better alignment of interests and ensures that they will work hard to see the transaction through; also, it indicates that the seller has faith in the buyer and the market and that they take a position to benefit from an improving market.  Quite frankly, none of the four transactions above would had happened if the buyer was not able to issue shares, and vice versa, none of these transactions would had happened if the seller was not agreeable to a partial payment in shares. And, in our opinion, all these transactions happened since payment in shares was the closest the sellers would have gotten to obtaining liquidity and/or public status, given the IPO market is closed shut at present.

Issuing new shares and paying in shares is a distinct benefit of being a public company. Privately held companies (shipowners) have to pay in hard cash for any acquisitions but publicly traded companies can offer their shares as currency, too. Of course, paying in shares is not always indicated (such as when the shares trade below NAV), and not always the buyer is prepared to accept payment (total or partial) in shares – among other considerations, the shares have to have some “value”. In a world that’s getting trickier for shipping finance, for a shipping company to have the luxury to issue shares and transact with own shares is a distinct advantage that publicly listed companies have over the privately held ones.

Too bad that many of the shipping IPOs of the last decade have degenerated into “penny stocks” with their shares of little or no value that no-one would accept as payment. Too bad that quite a few of the shipping IPOs of the last decade were no more than quick “cash grabs” that have deprived their shareholders of the optionality to presently be able to thrive when the market and competition is stuck in the low shipping finance lane.

Paying in shares is not panacea and it has both practical and financial, and also regulatory, limitations. Once again, in a world where shipping finance is in a bind, shipowners are  compelled to explore every option, and payment in shares is fair game. Actually, there may also be cases where the envelope seems to be pushed to the limit: in its latest announcement, Nordic American Tankers (NAT) announced that payment of the company’s 80th consecutive dividend will be paid in cash and in … shares of another company, Nordic American Offshore (NAO), a daughter company of NAT in the offshore space where the prospects have not played out very well so far.

The “sharing economy” seems to get a completely different meaning for the shipping industry.

Lower Manhattan and Financial District skyline, the World Trade Center and the Upper New York Harbor with its busy shipping traffic lanes…where money and shipping meet. Image credit: Karatzas Images


A version of this posting was first published on the shipping portal Splash 24/7 on August 14th, 2017 under the heading: “Issuing shares helps loosen the shipping finance conundrum”.


© 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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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.