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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Consolidation and Shipping: A Cure for All?

Since the initial collapse of the shipping industry in the second half of 2008, many remedies have been proposed for a market recovery, ranging from pragmatic (slow steaming, etc) to utopic (accelerated demolitions for older tonnage, shipowner self-discipline and abstinence from newbuildings, etc). Depending on the point of view, remedies proposed included M&A, market consolidation, selective financing from banks and financiers, etc

The consolidation theme has been particularly in the news for the last several years, and now that five years into the crisis there is no clear light at the end of the tunnel, consolidation once again has been commanding the headlines. At a recent shipping conference in New York City, eminent institutional shipping investor Wilbur Ross once again re-iterated the need for market consolidation.

Consolidation definitely has its usefulness as any investment bank can attest to. An industry with a relatively low number of companies controlling a rather large market share can have a better control of the cost structure, quality, product differentiation and more importantly better pricing power than an industry that is fragmented and controlled by numerous small players. Shipping, especially the dry bulk market, has often been offered as an example of perfect competition with minimal barriers to entry, minimal regulatory and taxation concerns (at least until recently), an internationally open and competitive market; in other words, a industry as antipodean to consolidation as one can get.

Many ship-lending banks have repeatedly raised the point of market consolidation: supposing that as a lender one has a portfolio of several similar vessels in default with several borrowers, it makes sense to consolidate the borrowers (shipowners) simply from a cost basis benefit: instead of having to deal with several borrowers and explaining, negotiating, formalizing the same ‘procedure’ several times over, there will be just one discussion with one counterparty; such an approach not only saves time, overhead and bank resources, but sometimes putting several problems together to form one big problem, the big problem can have solutions not available to many smaller problems of the same kind – critical mass is an obvious benefit of consolidated owner versus the one- or two-vessel special projects.

Still with the ship-lenders’ point of view, a consolidated owner can not only save resources for the lender, but also can economize for their own benefit by spreading the cost of running the business over a bigger pond of vessel ownership. IT, accounting, admin services are the obvious candidates for cost savings, not to mention that savings can be obtained from suppliers and third party providers based on greater purchasing power. And such savings can be detrimental to survival in a market where many vessels are earning at or below operating break-even levels.

A consolidated industry with fewer shipowners also has benefits when dealing with charterers in terms of maximizing revenue and obtaining favorable terms in the charterparty. Larger shipowners can have better control of the market and provide a better orchestrated approach when chartering vessels instead of having to deal on fixture at a time, one vessel at a time, one port at a time, one day at a time. The benefits of a consolidated market can best seen in markets that have been ‘sort of consolidated’ based on their nature, such as the markets for large vessels like VLCCs and capes, and niche markets with few players like asphalt carriers, cement carriers, heavylift vessels, etc Typically in such consolidated segments, not only broad market trends are identifiable – just like in the commoditized shipping industry – but also the cargoes themselves can be identified and accounted for: i.e. Saudi Arabia’s crude oil production is known or very well expected (barring macro-, political events, etc) and since most of crude oil our of major exporting crude oil countries is on VLCCs (each holding two million barrels of oil), chartering VLCCs is a game of chasing specific cargoes at specific points in time; thus, an owner with fifty VLCCs under control can optimize the fleet position to access those cargoes versus a shipowner of one VLCC who has to be satisfied with what the market would bear each time their VLCC reaches a loading port in Saudi Arabia.

So far, so good. Consolidation then it seems makes great sense and it almost looks like panacea for an industry of distress.

There are more than six thousand and five hundred (6,500) handymax and handysize dry bulk vessels in the world, with more than one thousand (1,000) shipowning groups active in this segment worldwide. The top one hundred owners control only two thousand of these vessels (appr. twenty vessels per owner) or less than 30% of the world fleet, with an apparently very long tail of ownership. As much as consolidation may make sense, it’s impossible to ever get close to a consolidated market from a practical point of view in this market segment. Lots of these shipowners will fail to see any economic benefit from getting consolidated, amalgamated, merged, acquired or otherwise voluntarily get off of their present equilibrium; not to mention that most of the shipyards can build handymax / handysize vessels for anyone who can afford them (and sometimes cannot afford them), thus the market could not stay consolidated for long, even if forced into a consolidation due to poor present dynamics. Further, handymax / handysize vessels effectively can trade any type of dry bulk cargo in the world and can access all the ports of the world, thus there is an infinite number of cargo and port permutations. And, we have not talked yet about the charterers of these vessels, which is an equally impressive of long tail of charterers, with the common denominator among them their desire for the lowest transport cost for their cargoes, condition of the vessels, well-being of seafarers, regulatory environment be damned by a great deal of these charterers – the sorry state of the truth, politically correct or not [this statement is not an opinion or comment in any way, just a sharp-tongued observation]. In certain markets, consolidation seems it is not practically doable given the existing dynamics of the market and the prospects that such dynamics can change in the long run.

And for the markets where consolidation can be feasible, the argument’s prime mover is that larger fleets call for efficiencies, efficiencies ad infinitum according to certain presentations. We all know that life and business is not a straight line, and a fleet of forty uniform vessels is not twice as efficient as a fleet of twenty vessels which is not twice as efficient as the fleet of ten vessels, etc Clearly fleets of fewer than five vessels are completely inefficient, but where the marginal benefit of adding more vessels to a fleet stops being worthy the additional consolidation? We are not aware of any academic studies but empirical evidence from many markets concentrates around the number of thirty vessels. Some publicly listed companies want us to believe that fleets of one-hundred vessels are the most efficient, but we are not convinced that the magic number one hundred is the result of business amalgamation rather than a convincing coherent business strategy.

There are so much in savings from IT and admin to be derived and so many synergies and discounts to be obtained, that a lousy freight market can save. A shipping company in a consolidated market segment may have a higher probability of survival in a bad market, but the law of gravity is universal and when gravity exceeds buoyancy, the result is a downward movement.

Consolidating or not, the shipping industry has proven that it’s not always like other industries; what has worked in other industries is not always applicable to shipping, at least not for the broad ocean of vessel ownership in all markets and corners of the word.


© 2012-2015 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.